Pub. 59 2018-2019 Issue 1

30 Why isownershipconsolidating? For various reasons, according to our interviewees: First, as stores have grown in absolute size, the tried-and-true suc- cession plan of allowing theGeneralManager to accumulate enough funds to buy out a departing dealer principal has become less viable: the stores are just too expensive for a singlewage-earner to accumulate the capital to buy one. Second, more owners seem eager to exit, than ever before. Auto TeamAmerica’s survey of just a few years ago 52 showed that some ¾ of dealer principals surveyed expected to cut back their time at the stores, or sell out entirely, over the next decade. We all know that dealers grumble about “throwing in the towel” more than they actu- ally act on their complaints, but the tendency is still clear. Dealers list various reasons why they are ready to call it a day: they have no children eager to inherit the business, the business is less fun than it was as OEMs exert more control, or they are just unwilling to tackle the wrenching changes needed to update their people and processes to the new ways of selling cars. Third, consolidation is a natural tendency in any industry that is experiencing generally flat revenues. For every dealer who may want to quit there is another who wants to grow, and since it is almost impossible to just open a new store on one’s own (like the owner of a restaurant chain could, for example), themainpath to growth is to buy someone else’s store. (This fact also acts to slow consolidation: since the selling dealer in Town X knows that buying his or her store may be the only option a growing chain has to expand in there, the seller can charge top dollar for the store, retarding the pace of acquisitions.) Fourth, passing the store along to the offspring is getting problematic. A first-generation dealer might have two children who could split ownership of the store. But then one of these children has 4 of his own, and the other 3.When it comes time to hand the store off again, things get complicated quickly and equity among family members becomes tough tomaintain. In this case, it is easier to sell the store and divvy up the money, than to share control and operation of the store. Fifth, and probablymost important, there is the issue of cost: smaller dealers were united in their view that the business was becoming too expensive to continue to invest in, and so the time may have come to sell out. We don’t disagree, but we need to make again (as we did in the Rural Futures chapter) the fundamental distinction here when it comes to cost: there are relative costs (expenses) and absolute costs (investments), and the problem for dealers is the latter: the rising investment burden. Financial analysis of dealerships, by this author, by NADA, by McKinsey, and by other analysts, shows that small stores can easily equal the net profit percentage (ROS) of larger stores. “Size doesn’t matter” (much) in this case. The trouble is, this equality of relative profit is not matched by an equality of absolute profit, which is what pays for required investments. That is, if a store needs to put $1 million into a new facility, a large store mak- ing a 3.5% net return on $30 million in revenue can swing it with one year’s earnings, whereas a small store making even 6% on $10 million in revenue cannot. 53 This is the problem for small stores: they cannot as easily accumulate (from retained earnings or from debt) the capital needed to keep up with OEM-requested investments in physical assets (stores) and virtual assets (IT systems). Thus we see an increasing number of sole proprietors not willing to “bet the family fortune one more time,” on a new or updated store, and so they start looking for buyers. Whoare the likely buyers? So if there aremany pressures to sell single stores or small chains, who are the buyers of these units likely to be? Generally, our interviewees expected them to be private companies. The public chains, despite their high visibility and impressive results, have not really been major net consolidators for some time now, and are expected to remain fairly quiet over the next decade as well. In fact, the “Big 6” chains have not increased their combined market share of new car sales from roughly 8%-9% over the last ten years. 54 There are various reasons for this stagnation, including: • Governance: as a chain gets very large it might gain scale econo- mies, but find controlling all its far-flung storesmore challenging. 52“2025DealershipVision:WhatLiesAhead!”byAutoTeam America, www.autoteamamerica.com 53Thesituation isevenworse ifthesoleproprietor isupagainst a chain of stores: each of the chain’s stores can be less profit- able than the solo store, but together they can raise a higher amount of capital. 54 This flat trajectory is certainly not what many observers expected, when the public chains first appeared. No less an automotive expert than Edsel Ford II predicted, back in the 1990s, that public companies would soon own 40% of all franchised dealerships in America, that manufacturers would own another 40%, and that only 20%would be left for family- owned, private capital ownership. (Cited in an essay on the New Jersey Coalition of Automotive Retailers website, www. njcar.org, “Looking Back to Look Ahead.”)