Fewer Dealers, Higher Sales, Happier Survivors

Thousands of dealerships disappeared around the turn of the decade, victims of both the recession and automaker retail-network consolidations. Today, dealers who made the cut are enjoying the benefits of fewer competitors and higher vehicle sales.

Dealers may complain about some things, from regulations to either too much or too little inventory depending on the situation. But no one is griping about the prospects of selling cars in 2015. 

The National Automobile Dealers Assn. forecasts U.S. dealers will deliver 16.94 million new cars and light trucks this year.

“Rising employment and wages, continued low interest rates and lower gasoline prices all signal an increase in new light-vehicle sales in 2015,” NADA Chief Economist Steven Szakaly says.

The U.S. dealership count stands at just under 18,000. Throughput, or average sales per store, has steadily increased from a low of 564 units in 2009, says Urban Science, a consulting firm. Throughput was more than 900 in 2014.

That’s what happens when fewer dealerships meet higher vehicle sales. An active economy helps too.

“The economy will continue to build on the solid growth established in 2014,” Szakaly says of this year’s prospects. “Gross domestic product will grow at 3.1% in 2015, with the potential for growth to exceed our forecast.”

NADA’s 2015 forecast is partly predicated on interest rates remaining low. “The Federal Reserve is expected to raise interest rates in 2015, but the rate rise will be small,” Szakaly says. “The Fed policy rate will move to 1% by October 2015, with further movements in rates expected during the second half of 2016.”

NADA expects long-term rates on auto loans to rise in 2015, though not so much as to dampen its sales outlook. NADA expects rates on auto loans to increase steadily by about 125 to 150 basis points by the end of this year.

Battling Foes of the Franchise System

Although the expected high level of prospective sales in 2015 put dealers in a good mood, they cite areas of concern and reasons to stay vigilant against what they perceive as threats to the traditional franchised dealership system.

Dealers and their trade organizations continue to defend the traditional franchise system and take legal steps to preserve it against challengers, in particular Tesla.

The electric vehicle maker, where allowed, sells its products through factory-direct outlets and mall stores. But state trade groups say they will continue to thwart Tesla’s bucking of the system.

The dealer-franchise system “is not just a good deal for us, but for everyone,” says Forrest McConnell III, NADA’s 2014 chairman.  

Lexus says it is keeping an eye on Tesla’s mall-store model and may emulate it to better appeal to millennials. But Toyota’s luxury brand emphasizes that if it ever tries that approach, it wouldn’t bypass its dealers.

“We would keep our dealers part of the solution, no question about it,” Jeff Bracken, group vice president-Lexus says.

He adds: “But it’s intriguing if young folks are telling us they don’t really look forward to going to a traditional dealership, but they still have an interest in buying a vehicle or shopping for a vehicle.

“(If) that’s an outlet that could work for them, then we need to take a look at that to see if that’s something that could make sense for us.”

Dealers also continue to defend the way they traditionally profit from hooking their customers up with third-party lenders.

The Consumer Financial Protection Bureau advocates ending so-called dealer reserve, in which auto retailers typically add a point or two to an auto lender’s wholesale interest rate as compensation for facilitating an indirect car loan. The federal bureau wants flat fees to replace that.

But that could potentially mean consumers paying higher loan rates, says McConnell. “The bottom line is this: dealer-assisted financing provides car buyers with the ability to get a discounted auto rate from the dealer.

“And low rates mean lower car payments. But the government is trying to take away a customer’s right to get that discount.”

NADA wants the CFPB bureau off dealers’ backs. The trade group is garnering Congressional support, but McConnell declines to say how it will end up. “I don’t have a crystal ball,” he tells WardsAuto.

More predictable is a significant change that’s due to occur in auto retailing this year. Yet, it’s not expected to create a topsy-turvy situation. It’s the finalizing of Warren Buffett’s publicly owned Berkshire Hathaway investment company buying the 79-store Van Tuyl Automotive dealership group, No.6 on the WardsAuto Megadealer 150.

It’s a big deal in the dealer world, but Jeff Rachor foresees no major business-model change.

Rachor moves from president of Van Tuyl to CEO at newly created Berkshire Hathaway Automotive when the deal is finalized.

Rachor describes synergy between the Van Tuyl and Berkshire business philosophies. “We’re delighted we will be able to preserve the Van Tuyl business model founded more than 60 years ago,” he tells WardsAuto.

That model includes dealerships run by managing partners who have a stake in their stores.

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