Dealership consolidation resembles the Pac-Man video game that was so popular when it was first introduced 32 years ago
The visuals created by the memories of this early stage video game are an accurate depiction to visualize what is happening in today’s Canadian dealership landscape. We have all heard the saying, “the big get bigger” or “go big or go home.” Nothing could be more descriptive of the dealership consolidation market currently in Canada today.
As the fall of 2012 unfolds, it is not just the squirrels collecting nuts to hold them over the winter. Dealer groups are in acquisition mode and are adding to their collection of stores and brands. Why has dealer consolidation become such a phenomenon in Canada? The answer is quite simple. Bigger is deemed to be better. Although I do not buy into this for one minute, many with power and influence do, and in the end, that is what matters. Lets look at this issue from the following perspectives: the vehicle brand owner (“VBO” or “OEM”), dealership valuation, dealer succession, under-performing dealerships and the finance community.
VEHICLE BRAND OWNERS
Most executives from the VBO ranks will tell you that they support the dealers that got them to where they are today. It’s the individual dealer, the standalone dealer that built the brand across Canada. Many will tell you that they prefer a standalone dealer to a dealer group since standalone dealers have their livelihood on the line each and every day. Nothing like permanently living with your back against the wall to motivate a dealer to sell more vehicles and be successful.
That being said, VBOs are often the first to seek out dealer groups to get them out of a jam. Whether it’s the sudden passing of a dealer principal without an approved succession plan or that under-performing dealer point that the VBO would love to upgrade, VBOs often turn to dealer groups to get the transition done quickly and properly.
Dealer development financing was used for decades to facilitate dealership network expansion and turnover. This has given way to dealer group acquisitions. Dealer groups possess the desire and financial backing to get the turnover job done without significant VBO financial involvement. Dealer groups also possess the ability to get the VBOs to make certain concessions. Concessions like per car subsidies or open point favouritism occasionally occur in return for these favours.
DEALERSHIP VALUATION
Dealership valuation is made up of two main components: real estate and operating companies. Over the past decade, dealership real estate value increases have far exceeded the Consumer Price Index and stock market returns. In certain markets, the highest and best use of real estate is not a vehicle dealership.
In other areas, the nature and make-up of some markets have changed based on commissioned market studies. As a result, some historical locations are deemed no longer suitable for the proper competitive representation of the brand. Still again, many older dealerships do not meet the VBO facility standards for size and image, requiring the dealer to further make significant investments in order to retain brand representation rights.
Real estate, viewed by many dealers as their pension fund, is changing. The long-term value of image is just not there. In many ways it only adds to the single purpose shackle. Therefore revolving image requirements serve as a catalyst for some dealers to sell.
The value of operating companies is also increasing. Dealer groups have figured out how to finance goodwill. No one likes paying goodwill but in today’s world of limited open points, goodwill has become the cost of expansion. Selling dealers, on the other hand are asking for goodwill to compensate them for the years of growing the business, no matter what condition the current state of the business is in.
Dealers in possession of high demand brands can do quite nicely on a sale and many are looking at today’s dealer group desire for expansion as a real opportunity to cash in the chips and move on to other aspects of their life.
DEALER SUCCESSION
As the CADA Year-in-Review survey found out, 43 per cent of dealers do not have a succession plan. Not having management or ownership succession options is stressful, especially if you are in your 60s or 70s. Cashing-in takes all the financial risk off the table. Many dealers are cutting deals where their sons and daughters become employed by the purchaser and still others are using a small portion of their new found nest egg to help finance a new venture for their sons and daughters. In all cases, however, the uncertainties of the future have vanished for mom and dad and they can now start enjoying the fruit of the years of hard labour.
Succession is also an important issue for VBOs. They want to ensure that each of their PMAs are continuously represented. VBOs often push dealers with no succession to seek a buy/sell and often present dealers with candidates. More often that not, these candidates are already a successful dealer for the brand.
UNDER-PERFORMING DEALERS
VBOs constantly have an eye on market share, sales penetration and competitive positioning. Be it below average CSI, sales penetration, market share, profitability, capitalization, etc. VBOs regularly try to rehabilitate and often cull those dealers they consider to be poor performers. VBO constant pressure creates a desire on the part of dealers to stop the pain. In many ways it’s like constructive dismissal where you treat an employee in such a fashion that you hope they resign. In many cases, VBOs terminate dealers under provisions of their DSSA. Although this process can take time, most often a new dealer is appointed and almost always this new dealer is an existing dealer with a proven track record.
FINANCE COMMUNITY
As we all know, dealerships are leveraged businesses. We need borrowed money to operate and grow and our customers need borrowed money to acquire the products we sell. Prior to the 2008 financial crisis, expansion funds were fairly easy to obtain. However since 2008, financing has been tight, and 100 per cent real estate financing is now largely gone. Higher credit scores and higher down payments are now the norm. Many single point dealers wanting to expand are finding it difficult to access the amount of capital they need. This often presents a significant dilemma and in some cases leads dealers to consider selling their store.
The finance community likes dealer groups. Good cash flow, high return of investment and acceptable risk levels are all appealing. Leveraging a broad portfolio of real estate and brand investments also appeals to the finance community. As such, dealer groups, although not a slam-dunk by any means, find it somewhat easier to obtain capital than standalone dealers. With the finance community behind them, dealer groups can make lemonade while the single point dealer can only see lemons. With a little nudge from the VBO on facilities and image renovations, many dealers could be feeling that their only alternative is to sell.
Dealership Pac-Man has strong momentum from many sources at the moment. This momentum is quickly reshaping the dealership landscape in Canada regardless of province, region, metro or rural markets. At issue in my mind is what comes next? When a dealer group wants to sell, who do they turn to? Will they sell all the stores or will the big just get bigger? Only time will tell. Unlike the original game, dealership Pac-Man is here to stay for while. All you have to decide is which buttons to push!
