The COVID-19 pandemic and its aftermath have produced both turmoil and great opportunity for automotive retailers. From shutdowns to resurging demand to semiconductor shortages to record-breaking dealership M&A activity levels to minimal vehicle inventories to maximum per-vehicle profits, the 2020-2021 period has been quite a roller coaster ride for dealers.
DCG Acquisitions has had a record year in 2022 thus far, and the whole industry has seen impressive numbers. As we sit here at the midpoint of the year 2022, let’s take a closer look at what is driving automotive dealership acquisitions in 2022. There are many factors, both positive and negative, that can affect the outlook for the current year and beyond.
Leading off with the positives:
Dealership and OEM profits are at record highs
As we review the effects of the two-plus years of the auto industry’s pandemic-era experience, it has been largely positive from the dealer’s perspective. Facing limited microchip supplies, automakers have chosen to focus on the production of their highest-margin vehicles. While the semiconductor shortage and other supply chain issues have cut production volumes, this has also resulted in higher per-vehicle profits for the OEMs, while also elevating the ATP (average transaction price) to $47,148 as of May 2022.
Dealers have shared in the bounty of the current limited-inventory reality. With scarce vehicle supplies combined with continued strong demand, manufacturer incentives are minimal and most new vehicles are being sold at MSRP and beyond. Many consumers have been willing to buy vehicles before they arrive at the dealership, just to assure themselves of one. It’s a seller’s market, which has produced unprecedented profits for dealers nationwide. Demand greatly exceeds supply, with pent-up demand likely to keep it this way for at least the next six to twelve months, even if production volumes gradually increase.
This exceptional level of dealer profitability cannot help but boost the outlook for continued activity in the automotive M&A market. Profits like these make auto retailing extremely appealing for prospective buyers, while also juicing valuations for potential sellers. This is a strong positive factor for robust M&A activity going forward.
Consolidation continues for auto retailers
The ongoing trend of the large dealer groups pursuing acquisitions to expand their footprints, offer consumers more choice, and gain increased economies of scale will continue in 2022. According to Automotive News, the top 150 groups in the US owned over 4,100 dealerships or more than 22% of the total, with the top 10 groups holding nearly 1,600 stores, which make up nearly 9% of the total.
In 2021, the six largest public dealership groups bought more stores than any other buyers:
In addition to the largest of the large, dealer groups of various sizes are similarly seeking to add more points that can offer a more diverse selection of vehicles at all price points, as well as broadening their geographic customer base to reach more potential car buyers. The strategic needs that all of these buyers have can lead them to justify and pay higher prices for dealerships that will fit precisely into their plans.
Smaller and single-point dealers are retiring and exiting the business
Selling out is becoming a very appealing exit strategy for some owners who are currently facing retirement age. Many factors have influenced dealership owners in this decision, whether it is the high cost of running a single dealership (or even two or three), the lack of a family member to take over, the challenges and costs of managing the upcoming switch to electric vehicles, the need to invest in a more online-enabled buying experience, or the record-breaking valuations currently being paid for rooftops. The buy-sell market offers these owners a lucrative way to get an excellent price for their businesses, letting them walk away and enjoy their golden years.
New federal tax legislation is unlikely
The capital gains tax increase that was proposed by the Biden administration has not received sufficient Congressional support to become law. The possibility of this legislation being enacted and going into effect in 2022 was a powerful incentive for many deals to get done by the end of 2021. Without this potential factor, the coast is clear for further high levels of dealership M&A activity in 2022 and beyond.
There are more buyers than sellers
It’s a simple fact of economic life: When there is more demand than there is supply, prices go up. The continued large number of buyers that are chasing a shrinking pool of sellers means that 2022 will continue to be a great time to sell your dealership. If you are in a particularly desirable location, you might even become the object of a bidding war!
Efficiencies can be gained from integrating smaller dealers
A well-run dealership or small group of dealerships can become even more efficient and profitable when they adapt to the upgraded technology, improved staff training techniques, and economies of scale provided by being part of a larger group. This is a factor that can justify a buyer paying a higher price for your store or stores.
On to the potential negatives:
Semiconductor shortages continue to limit vehicle production
The ongoing shortage of microchips has hobbled the OEMs since the start of the pandemic. We are still a long way from returning to normal. And while the limited inventories of vehicles have turned automotive retailing into a red-hot seller’s market with huge dealer profits, there is a downside. The increasingly high ATPs are driving large numbers of cost-conscious consumers away from the market until some acceptable version of business as usual returns. When that will be is a matter of speculation at this point in time – possibly sometime in 2023, or maybe even farther into the future.
Inflation and rising interest rates will increase borrowing costs
This could be a double whammy for both the buy-sell market and the car-buying public. For dealership buyers, the cost of capital will increase, which could lead to a reduction in blue sky and real estate values, potentially leading to lower purchase prices.
For vehicle buyers, this development will increase monthly payments at the same time that manufacturers are increasing vehicle prices to keep pace with inflation. The worsening affordability crisis could soften demand, directly affecting retail auto sales in a negative way. A recession during the next few years is also a possibility to be aware of. It would make things even worse.
The chronic shortage of used cars will continue
We are all well aware of what has been going on in the used car market. Sky-high prices are being paid for barely acceptable vehicles, new car dealers are selling cars with mileages approaching 200,000, sharp reductions in lease returns are limiting the number of CPO-quality vehicles, auction volumes are much lower, and people are choosing to keep their cars even longer. It all adds up to a less-than-ideal used car marketplace. The per-car profits are good, but volume is way down. Until the used-car pool is refreshed by several years of normal production, we are unlikely to see much change here.
The past, present, and future effects of COVID linger
The disruption produced by the worldwide COVID-19 pandemic continues to reverberate through our society. Plant shutdowns were followed by microchip shortages and supply chain woes. While demand stays strong, the virus continues to mutate in our partially-vaccinated populace, producing more contagious strains that leave us to wonder if this ordeal will ever truly be over. Many people remain fearful of the unknown COVID future.
One important part of the car-buying experience that COVID has changed for good is the consumer’s desire for more and more of the process to migrate online, reducing the time that is spent in the showroom. To remain competitive, dealerships of all sizes must make the investment necessary to offer their customers a smoother, more time-efficient way of purchasing their next vehicle.
Multiples may not hold up when production increases and profit per vehicle drops
Profitability for dealerships has never been better, but how long will it last? At some point in the near future, supplies will likely increase to the point where dealer lots will fill up, competition between dealers will return, incentives will grow, and buyers will drive harder bargains. Dealership buyers with this upcoming scenario in mind may be less inclined to pay multiples that reflect the two frothiest, most profitable years of the current era. Some negotiation may be needed to reconcile conflicting expectations in this regard, so that deals can get done going forward.
What is the overall acquisitions outlook?
Balancing the factors that are driving dealership acquisitions up against the ones that hold growth back, the near future looks positive. Consolidation looks to be a long-term trend that was merely spurred by temporary factors, and its momentum will continue. The federal tax legislation situation is not likely to change, and there are steps being taken to remedy the microchip shortage. While profit per vehicle will not be as dizzyingly high when inventory is more readily available, it also stands to reason it will remain somewhat higher than before. There are still plenty of concerns, and records cannot be broken into infinity, but there are lots of reasons to remain bullish.
Thinking of buying or selling? DCG Acquisitions will get you across the finish line!
Regardless of the issues that face us at this point in time, it’s important to remember that there are both buyers and sellers who want to get deals done. And that’s where DCG Acquisitions comes in! With over $1 billion in total transactions for 2021, our incredible team of experts is committed to deliver the absolute highest levels of performance to our clients in 2022 and beyond.
DCG Acquisitions is one of the country’s leading, fastest-growing automotive M&A firms. Our network of connections with automotive manufacturers, financial lenders, dealership buyers and sellers, and other key players lets us deliver a qualified, competitive environment on both sides of the transaction.
Contact DCG Acquisitions to speak directly with an Automotive M&A specialist and learn how our expertise can help you get the most out of your next dealership purchase or sale.