Dealership Numbers Drop, Potential Buyers’ Interest Stays High

Brick-and-mortar auto dealerships are here to stay, despite the growing popularity of online car shopping.

So says Ed Napleton, explaining why he’s on the lookout for good car stores to buy.

He and two other executives of major dealership groups tell what interests them as a potential purchase and what to avoid like it’s poison ivy.

“You can get rid of a lot of things, including your (spouse), but you can’t get rid of bad real estate,” Napelton, president of Napleton Dealership Group, says at a recent J.D. Power automotive conference panel discussion entitled “The Future of the Buy/Sell Market: Too Good to Last?”

Blue sky, or the future business prospects of a dealership on the market, is an intangible, he says. “Real estate isn’t. But you’ve got to know it.”

Fellow panelists agree.

“Real estate was the biggest factor in deals we didn’t do,” says Franklin McLarty, CEO of dealership group RML Automotive.

“Real-estate cost is critical,” says Mark Iuppenlatz, vice president-corporate development for Group 1 Automotive. “If you lock yourself into a high-rent situation, you can’t get out from under that. It really kills value.”

Some dealership buyers overleverage the acquisition, which is not ideal in general, but particularly not in auto retailing. Such purchasers often are forced to sell in a downturn because they can’t meet debt obligations. Prospective buyers benefit from that squeeze play.

“Overleveraging in a cyclical market creates opportunities for us,” McLarty says.

Lenders will finance a buy-sell deal, but “if you don’t have enough money to put into it, the banks will say, ‘Tap the brakes a bit,’” Napelton says. “I could say I want to buy the Empire State Building. It doesn’t mean I can.”

Dealership numbers are shrinking, he says. “When I started, there were 29,000 dealers. Now there are about 17,000. Eventually, there will be 12,000.”

Still, today’s market remains vibrant, Iuppenlatz says. “There are a lot of sellers and a lot of buyers.”

Joining the party is Warren Buffett’s publicly traded Berkshire Hathaway investment firm. It announced in October its plan to acquire the Van Tuyl Group, No.6 on the WardsAuto Megadealer 100.

George Soros, another billionaire investor, reportedly has shown an interest in dealership ownership. 

Publicly owned Group 1 is No. 4 on the latest WardsAuto Megadealer 100 with $9 billion in revenue and 148 stores.

Group 1 analyzes its portfolio annually, “looking for ways to enrich it,” Iuppenlatz says. That includes dumping dogs. “If we have an underperformer, we’ll sell and invest in another franchise or market with higher yields.”

RML Automotive does likewise. “We’ll redeploy that capital elsewhere,” McLarty says.  

Analysts don’t look at 1-time gains or losses in a dealership turnover, Iuppenlatz says. “They’re looking at recurring income, not buying low and selling high.”

As dealership consolidation continues, some prognosticators envision big-box stores decimating smaller competitors. Iuppenlatz doubts that.

“I don’t see one metro store putting everyone else out of business,” he says. “There’s the convenience of customer travel time, and automakers are concerned about customer convenience.”

Asked to name attractive brands, both he and Napleton cite Ford and Toyota.

“Ford has a lot of good product,” Iuppenlatz says. “Toyota is a perennial favorite that does smart things.”

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