Top Dealer Groups Set New Records

Despite an 11% decline in new-vehicle sales over 2006 and 2007, the nation's top dealer groups continue to establish new records, both in total revenue and vehicles sold.

Publicly and privately owned dealer groups on the Ward's Megadealer 100 increased the list's overall revenue by $6.5 billion to a whopping $138.9 billion from 2006 to 2007.

The Ward's Megadealer 100, now in its 20th year, is a ranking of top automotive dealer groups of multiple stores and locations by total revenue, including new- and used-car, finance and insurance, parts, body shop and service sales.

Ironically, the total number of dealerships represented on the list declined for the first time in several years, falling from 2,092 stores in 2006 to 2,068 in 2007.

As a result, revenue per store increased by $3.9 million, taking it to $67.2 million. That's more than double the average dealership annual revenue, which, according to the National Automobile Dealers Assn., was $31.8 million last year.

The decrease in the total number of dealerships was mostly because public dealer groups either shut down or sold poor-performing stores. From 2006 to 2007, the number of dealerships owned by the public dealer groups dropped from 874 to 756.

Most, if not all, of those stores are ones selling domestic brands. In several cases, public dealer groups, such as AutoNation Inc. (ranked first on the Ward's Megadealer 100), whose portfolio favored domestic brands, steadily have been consolidating many of their dealerships where it is thought to make sense to do so.

For example, AutoNation has been combining Ford with Lincoln-Mercury stores or placing the appropriate General Motors Corp. brands together, such as Buick, Pontiac and GMC.

The Ft. Lauderdale-based company has reduced its number of dealerships from 287 in 2004 to 224 in 2007. AutoNation's revenues also have declined from $19.3 billion to $17.6 billion in that same time.

The other five public groups, however, have watched their total revenues collectively grow from $52.3 billion in 2006 to $55.7 billion in 2007 — mainly because they have been focusing on adding brands that perform better — such as luxury and high-line import.

The Group 1 Automotive Inc. rid itself of 15 poor-performing franchises but added 14 import and luxury franchises consisting of BMW, Mini and Mercedes- Benz stores.

The Houston-based company says it constantly monitors its portfolio of stores and will continue to eliminate under-performing dealerships.

Adding dealerships, though, seems to be getting tougher, and it is not just because of difficult framework agreements imposed by the manufacturers. Dealer groups are looking for the best stores, and, while everyone is expecting the asking prices to come down, it's not happening.

“We keep hearing that,” says a vice president of a large group. “But we're not seeing it. It would be nice, because we're looking.”

Chris Little, vice president for the Hendrick Automotive Group, ranked seventh on the Ward's Megadealer 100 with $4.4 billion in total revenue, says his company “is always looking.” The group did add seven stores in 2007, bringing its total now to 58.

Many analysts are predicting a large number of Toyota dealerships should be on the market in the next couple of years as their owners begin to reach retirement age.

Also, if Toyota continues its sales slide — the longest since 1982 — some dealers could be willing to sell. For now, it seems smaller dealers are hoping for the big payoff. But few groups seem willing to pay those high prices now.

Jeff DeBoer, vice-president for Lithia Motors, tells analysts his company is waiting for prices to drop. “We believe there is a recession on,” he says. “And certainly, from our view, in our business we've seen a recession.”

He adds: “I do believe the price of auto stores is going to drop, and I think we can find better buys on the stores we've targeted in the markets we want to be in.”

His father, Sid DeBoer, chairman and CEO of the Medford, OR-based group, told Ward's last year he would like Lithia to get to approximately 325 stores.

It had 110 at the end of 2007. While the 325-store goal might be out of reach because of current economic conditions, Lithia quickly is opening several used-car superstores.

Sonic Automotive, meanwhile, has dialed back its acquisition strategy. In an earnings call with analysts in February, Sonic President Scott Smith said the company has a disciplined acquisition strategy.

“We've stated all year that we wouldn't overpay for dealerships and that we'd only acquire dealerships that met our strict return hurdles,” Smith says.

“The results are four fantastic acquisitions that contributed significantly to our bottom line,” he says. “Land Rover and Jaguar Houston North sells BMW Mini, Mercedes of Calabasas and Long Beach sells BMW and Mini.”

Those additions generated $528 million in revenue last year for Sonic.

“While we had more acquisition opportunities, we found the market a bit expensive and wouldn't allow ourselves to stray from our spending principles,” Smith says.

“As a result we didn't meet our internal acquisition target but invested instead in an area where the yield was much higher. We invested in ourselves.”

The problems in the credit industry also are hampering acquisitions. It's not only the large public groups — who typically have little issues with raising capital — looking for premium stores.

Most dealer groups on the Ward's list say they are looking, but being able to pull the trigger on a deal isn't easy.

Although dealer groups on the list have stayed strong despite industry sales declines the previous two years, they aren't expecting similar results for 2008.

New vehicle sales could be as low as 15 million units — down by more than a million from 2007 — and that will take a big bite out of revenue and sales for the large groups.

AutoNation Chairman and CEO Michael Jackson predicted the downturn a few years ago.

“If you look at my statements starting all the way back in '04 and '05, we knew it's going to be 30 months to 40 months in a downturn of this cycle,” he says.

“And our plan was to manage cost very strictly, make sure we have variability, continue to invest in our initiative … so that when the cycle turns we come out of it stronger than ever,” he says. “That's been our fundamental plan; we've made it this far. We will not deviate from it at this point.”

Nevertheless, public dealer groups are finding Wall Street skeptical of the overall business model — stock prices that had been trending in the high $20s to mid- $50 range have tumbled.

Publicly owned dealer group executives say dealing with Wall Street skeptics has been a long-standing issue.

“It's not a growth industry,” one analyst tells Ward's. “The only real growth comes through acquisitions and that's not going to cut it now.”

All dealers are under increasing margin pressure. Group 1 CEO and President Earl Hesterberg told analysts in February margin pressures were among “the most damaging financial factors in our year-over-year financial performance.

“I just looked at the year-end grosses by manufacturer, and there were substantial decreases even in the strongest brands, the midline imports, and it was damaging to our performance (in 2006).

“What we're fighting is these lower-gross profit levels. There's more room for us to continue to cut expenses. But the fear is that there's still more downside in the new- and used-car gross-profit end of the business. And so we have more work to do … We haven't let up and we haven't finished.”

Says Little: “It's getting scary out there right now. We just have to get through the election this year.”

Although 2008 is proving to be as tough as dealers feared, the larger groups, such as the ones on the Ward's list, are expected to be in a strong position when the market rebounds sometime in 2009.

Several, such as Hendrick, are strengthening their used-vehicle operations and investing in inventory-management tools intended to take some of the volatility out of the used-car market.

Hendrick increased its used-car sales from 31,663 in 2006 to 42,905 in 2007. Much of that was driven by Web-based initiatives and better mining of its dealerships' databases for customers, Little says.

Additionally, larger groups have an advantage, in theory, because they have more resources to invest in honing their processes during the tough times; money to keep advertising and experiment with cutting edge technologies.

Likely, dealers on the Ward's Megadealer 100 will be enjoying the fruits of their investments in 2009 and 2010 — but there will be some tough pain to endure this year.