More dealer groups will be buying dealer groups.
For several years I have been advocating for the need for brands to allow public ownership within their Canadian franchised dealership networks.
The advancement of that thought has been painfully slow in materializing. Fortunately, times they are a changing. Recent months have seen significant positive movement. General Motors, Mazda, Mercedes-Benz and now Ford Canada have clearly defined their positive approach to public ownership within their franchised dealers in Canada.
To some, this might seem like no big deal. Let me tell you that it is a big deal. To some, it might manifest fear. In my opinion, it should not. To some, it presents a new opportunity. Canadian dealers are now much closer to finding themselves on a level footing with all other auto retailers in the world. I believe this is extremely important.
Over the past decade, and intensifying over the past five years, the capital required to remain a franchise dealership has skyrocketed. Dealerships are no longer small businesses. Even the smallest of dealerships has had to step-up their capital investment, merely to stay in the game. This has acted as a catalyst to the buy/sell activity in recent years.
Your customers are busy people and you can give them the peace of mind that their service needs will be covered, and customers who purchase service plans stay connected with you for years to come.
New vehicle sales in Canada have been on a record pace for the last five or so years, peaking at 2017 at approximately 2,038,000 unit registrations. According to DesRosiers Automotive Consultants, combined average new and used unit sales per dealer for 2017 amounted to 905 units.
As we all know, new vehicle sales are the engine that drives used vehicle, parts and service, F&I, vehicle reconditioning revenues and the like.
With new vehicle sales at a record pace, so are the other businesses within the dealership. Franchised dealerships’ increasing market share in fixed operations penetration of total vehicles in operation, has been creating fixed operations capacity issues.
Service bay counts at many dealerships cannot adequately meet the demands of fixed operations customers. Waiting periods of 2, 3 and 4 weeks for routine vehicle servicing is totally unacceptable to the consumer and a cause for customer dissatisfaction. This is especially magnified by the rapid increase in vehicle sales at luxury dealerships.
Enter the onslaught of brand image programs. I met with a multi-franchise dealer recently who has 50 per cent of his locations under some stage of upgrade, relocation and expansion program. This requires access to significant capital, just to stay in the game.
Many smaller dealers, those with one, two or three rooftops are struggling to keep up. According to DesRosiers Automotive Consultants, 16 per cent of Canadian franchised dealers sold less than 308 combined new and used units during 2017, representing 5.4% of total combined new and used vehicle sold at Canadian dealerships. Their costs are the same as everyone else’s but the gross profit pool they can produce leaves little net profit available for reinvestment in the business.
At the other end of the spectrum, Canada’s largest franchised dealers, on average sell 2,921 combined new and used units per store, collectively accounting for 18.2 per cent of combined new and used vehicles sold at Canadian dealerships even though they only account for 5.7 per cent of the Canadian dealer count.
Many of these larger stores have grown to well over 75,000 sq. ft. in building footprint size. All are recently upgraded and enlarged, I expect. Their facility costs as a percentage of gross is also growing, in most cases at rates much higher than the rate of increase on the dealership gross profits.
When these dealers complete a brand mandated upgrade, their net profit declines at an amount in close approximation to their increase in rent factor.
To mask this, many of these dealers do not charge the full costs of these upgrades to the dealer statement, choosing to bear the effect of their increased costs within their real estate holding companies.
In my opinion, not charging fair value rent is a fool’s game and only serves to mislead the brand by understating costs and overstating profits. This serves to support the brand’s image initiatives at the ultimate detriment to the brand dealer network.
The auto retail business, as I previously mentioned, is no longer “small business.” Raising capital is challenging. For the past few years, Canadian banks have been dealer friendly, providing the financial fuel to meet franchised dealers’ capital requirements. This will not last forever. In fact, I am seeing a tightening in credit terms as interest rates begin to move higher and fears of industry disruption cover the pages of industry journals and conferences.
Many dealer groups are highly levered with cross-guarantees covering virtually all of their operations. This strategy works great in low interest rate, steady business growth environments. It could however, prove challenging when interest rate tides rise and business environments change direction. Access to capital could become tighter and certain dealer groups may find it difficult to meet their bank’s financial and other covenants.
We have just entered into a period where dealer groups will be acquiring other dealer groups. This strategy has been developing sporadically over the past few years but the pace is now escalating. These initiatives require significant access to capital, both financial and human. It’s a very different business game, one that, quite frankly, presents challenges, many groups have not faced before. It’s taking dealer consolidation to the next level.
The acceptance of public company ownerships means that today’s larger dealer groups can gain access to equity capital to fuel their growth. It also opens up the all important exit strategy for Canadian dealers.
There are a sizeable number of Canadian dealer groups with revenues close to or exceeding $1 billion. These same companies provide their sizeable workforces with strong standards of living and are vital contributors to the communities where they operate.
Although Canada currently only has one public company, there is room for more. Canada has some significant dealer groups, some with inter-provincial presence that might benefit from access to public markets.
Some Canadian dealer groups have wandered into the U.S. for their expansion initiatives with some groups buying individual stores while others are buying dealer groups.
The recent public company momentum also provides private equity, family offices and foreign investors and others with the formal opportunity to support Canadian dealers by investing in the Canadian auto dealership industry. It presents opportunities for dealers whose time has come to exit the business and for others looking for financial partners to fuel business growth aspirations.
We have just entered into a period where dealer groups will be acquiring other dealer groups.
Although a few brands still formally acknowledge that they do not approve of public company ownership, the tide has shifted significantly in recent months, making it much more difficult for those unwavering brands to continue with their old ways. The pressure in mounting.
