As auto industry changes, longtime Detroit area car dealers change hands or cash out
Facing expanding competition and needed investments, auto dealers are increasingly putting their stores on the sales block — accelerating consolidation in an industry historically resistant to it.
Dealership values have increased over the past year, experts say. Low inventory following production shutdowns last spring amid the COVID-19 pandemic, and consumer demand pivoting from mass transit, fueled record vehicle transaction prices.
Now some smaller operations, often aging family businesses, see an opportunity to sell amid a historic transformation. Larger enterprises are seeking to build scale so they can invest in new technologies that offer more customer convenience and grow inventory that draws more business.
“Some people are selling, and some people are buying,” said Joseph Serra, president of Serra Automotive Inc. “One of the two of us are right. There is always going to be change. They still are vehicles: they need to be driven, purchased, and serviced.”
The Fenton-based auto group earlier this month acquired Buff Whelan Chevrolet in Sterling Heights for an undisclosed amount. Kerry Whelan reached out to Serra about selling, having grown the store to be the country’s top Chevrolet dealer following the death of her father, Buff Whelan. The dealership has rebranded to Serra Whelan Chevrolet.
Serra believes the group's more than 50 locations in seven states with 2,100 employees can better serve customers more effectively together. That includes tools to allow customers to research and buy vehicles online. He also likes how electric vehicles perform — even if they require less maintenance — and he is unsure automakers as of yet know how to produce them profitably.
Selling them, though, is his team's job. With increasing competition from online used retailers like Carvana Co., and automakers like Tesla Inc. that skip the franchise model, Serra sees a need for the capital that comes from scale to accomplish his goals.
“What I can offer to the clients is a larger inventory base with larger inventories,” he said. “We’ll expand inventory offering for new and used, bring in some new ideas and more conveniences to the customer base.”
Not everyone is as gung-ho on the digitalization of auto retailing and selling electric cars, said Erin Kerrigan, managing director of sell-side auto retail adviser Kerrigan Advisory Inc. There were more than 280 completed dealership transactions in 2020. That is up from 233 in 2019 and is the most in at least six years.
“The effects of COVID certainly has supercharged the consolidation efforts by many of the largest dealership groups in the country,” Kerrigan said, noting earnings on average were up 40% last year compared to 2019 thanks to the lower inventories that resulted in higher transaction prices. “The folks that are buying are well-funded, cash-loaded from operations. They have tremendous access to capital right now.”
An overwhelming majority of dealers continue to be privately owned and are small enterprises with one to five locations. There once were more than 40,000 dealerships in the country, but the ranks have thinned to about 18,000.
That number could continue to fall. About 150 Cadillac dealers are taking buyouts from General Motors Co. rather than invest tens of thousands or even hundreds of thousands of dollars to support sales and servicing of a broadening portfolio of electric vehicles.
“I think the key to the level of consolidation is that valuations are so strong," Kerrigan said. "It’s driving more families to sell — record valuations for their real estate and really for many of them, avoiding having to change their strategy as a business going forward. It is not appealing to some folks.”
Getting swept into a larger entity may offer new services and ease-of-use tools to customers and greater opportunities for dealership employees. But a more centralized industry also creates less rivalry and may take away from the community-oriented nature of the businesses that often make charitable donations, host blood drives and support local sports teams and organizations.
“The consumer has benefited from the dealer network structure,” Kerrigan said. “Competition has created really attractive pricing. The jury is out on what this (consolidation) means for the consumer.”
Traditionally, the business-in-a-box franchise model has been accommodating to multi-generational enterprises. That’s especially the case with dealerships, 50% of which have transitioned to their third or fourth generation, compared to estimates of about 4% in other businesses, Kerrigan said: “Auto retail has already defied the odds.”
Over the course of those years, though, many have grown into enterprises with half a billion dollars in revenue. Not all families have a member to take on that type of endeavor.
During that time, many common dealers have been resistant to change, said Lauren Donalson, a third-generation Texas dealership executive and senior director of accounts at PureCars, a dealership marketing consultant.
“You know what you know and do things as you have always done them,” she said, noting 10% of auto sales in 2020 were done on the internet. “Consumers want to interface with dealers online. They don’t want to haggle and be in the store for three to five hours.”
With large logistics teams and multiple rooftops, larger organizations may have an easier time offering increasingly demanded services such as at-home delivery.
“Individual dealers have to have a sophisticated digital marketing strategy,” said Alan Haig, president of auto dealership brokerage Haig Partners LLC. “It’s harder for them to hire more people, consultants, do trial-and-error that gets customers to purchase vehicles. That’s leading to the consolidation. Fewer people can afford to own them.”
Enter companies like Lithia Motors Inc., a publicly traded, Oregon-based dealer with 206 locations in 18 states, $470 million in annual profits and more than $13 billion in revenues. While consolidation has traditionally been regional, companies like Lithia are taking a national approach. Lithia has been on a buying binge, scooping up locations in Arizona, California, Florida, Iowa, and Virginia only since the start of November.
Lithia also is poised to acquire the Troy-based Suburban Collection, according to the trade publication CBT News. The Suburban Collection includes 33 brands represented at a few dozen locations in the U.S. and Canada, mostly in southeast Michigan. Suburban, a 72-year-old multi-generational dealership group, did not respond to requests for comment, and Lithia declined to confirm or deny the report. It noted it has $3 billion in transactions under letter of intent or late-stage negotiations.
“We’re seeing more stores coming to market and that’s creating the opportunities for us to expand,” Lithia CEO Bryan DeBoer said in a statement. “In some cases retailers sense a change in the business climate.”
He says a larger company is beneficial for consumers: “A larger network means convenience, cost advantages and competitive pricing that can only be achieved through having a physical network of locations in close proximity.”
Lithia has put extra focus on its Driveway service, an e-commerce platform offering 57,000 new and used vehicles from which customers can shop. DeBoer calls it “the largest and most diverse negotiation-free inventory selection of any retailer in the country.”
With that many options and the teams to offer at-home delivery and service, it is becoming increasingly difficult for small players, Haig said: “The larger groups that can get just about any brand to a consumer in any market around the country are pretty powerful versus one brand. How do you compete with those companies out there?”