Pub. 59 2018-2019 Issue 1

31 SUMMER 2018 55Andonemorepoint:themorestoresadealerownsthemore careerpathssheorhecanopenupforhigh-performingmanag- ers. As one dealer put it: “Let’s face it, if I own just one store, the org chart is crowded with all my relatives. If I have a few stores, I can create growth opportunities for good managers, and so I can attract and retain better staff.” As one interviewee put it: “The public chains can scale purchases of motor oil, but they can’t scale leadership and entrepreneur- ship – at least not yet.” • Wall Street skepticism: in general, public markets are not happy with the cyclicality of car sales, and so periodically beat down the share prices of the Big 6, reducing their ability to buy stores. • Lack of strong scale economies: the limited evidence we have indicates that most chain economies (and the benefits of brand diversification) top out at 50-100 stores, so that growing the large public chains further than thatmay not bring themmuch benefit. • Schizophrenic OEM views: the factories like their stores being run by large professional organizations, but on the other hand they also like a local entrepreneur with a personal stake in the store (and an intent to stay around for many years)... and are not sure if they want ownership concentrated in the hands of a few large retailers. Thus the OEMs’ fluctuating views on public ownership, frompositive (encouraging buyouts of weak stores) to negative (imposing framework agreements limiting same-brand store counts). To be clear, we do expect the public chains to grow their share of the market over the next decade. But we are not at all certain that they will be the leading consolidating force. So who will the private buyers be? Of course, first and foremost, other dealers: if Town X has three stores, two owned by Fred and one by Linda, the likely best buyer for Fred’s stores will be Linda, who knows the territory well and who would most benefit from adding Fred’s stores. Further, as we will see elsewhere in this report, there is a strong belief among our interviewees that the gap between high- and low-performing stores will widen, as the former more quickly adopt new and more productive marketing, selling, and personnel policies. If this turns out to be the case, then stronger dealers will grow even stronger, and be able to more easily afford buying out weaker rivals. 55 But what about private equity, which has made some moves in this direction?We don’t think traditional private equity (PE), with its 5-to- 7 year buy-fix-sell model, will be a big player. As one PEfirm told us: • “We don’t like being at themercy of theOEM, both on theway in (“canwe buy this?”) and on the way out (“canwe sell this toX?”).” • “We have a cycle mismatch: our 5-7 year investment horizon cannot bridge automotive cycles, which tend to be about the same length. Someone with a 20-year horizon can ride out cycles. We are more likely to run into a downturn just at the time we need to sell.” • “Dealerships often are very dependent on key people for success, more so than other businesses we know. We’d rather be depen- dent on a team, or on standardized processes, or on structural advantages, than constantly worry if ‘the main guy’ will depart for greener pastures.” • “Our organic growth is capped.We can’t easilymove a store, close one, open one, or change brands. So the best we can do is try to outperform in new market share or service penetration. These are games of inches, of attrition: they are hard. Dealerships are profitable, but they are more like annuities than like equities.” That leaves the other flavor of private money, family offices. These investment arms of wealthy families have already made a few high- profile investments into dealerships, and we expect they will make more.Their investment strategy is well-suited to buying dealerships, as quotes from these groups reveal: • “Dealerships are family businesses, and so are we: we understand each other.” • “We like not having to compete with PE in buying dealers: [ as discussed above ] PE usually cannot get in, and that is good because they are otherwise our biggest rivals in investing.” • “Family offices tend to have long investment horizons, often decades, and so we can weather the cycle well. Especially, we can step up and buy more stores, for cheap, during downturns.” • “Family offices are as much about preserving capital as growing it, so we are pretty happy with dealerships, as they throw off a lot of cash pretty predictably…and if they don’t growmuch that is okay, though of course we always seek growth, too.” Sowe have an established trend of consolidation, some good reasons for it to continue, and buyers ready to snap up selling stores. What is our forecast for how much further consolidation goes, by 2025?  THE DEALERSHIP OF TOMORROW — CONTINUED ON PAGE 32