The Expected Decline in Dealership Profits is Underway - But the Demand for Dealerships Remains Strong
We recently released the Q3 2023 Haig Report?, the leading report in automotive retail that tracks trends and their impact on dealership values. We started writing the report in 2014, and if I could go back and recap how times have changed, it may require a dedicated report.
One thing I can say for certain is that the resiliency of dealers and the auto retail industry always stays the same.
We are experiencing one of those times and have been navigating it since 2020, when the pandemic hit. Although there are various items to discuss, I will focus on auto dealership profits.
Before the pandemic, dealership profits (based on public auto retail earnings) increased yearly without significant drops, with 2019 closing out at $2.0M per dealership per year (on average).
By March 2020, the world was mainly shut down due to COVID-19. To remind us of how quickly it all transpired:
In any typical business scenario, this would be disastrous. However, in 2020, dealership profits per dealership peaked at $2.9M (as published in the Haig Report?). Fast forward to the close of 2022 and profits soared to $6.5M!
领英推荐
In the Q3 2023 Haig Report?, we share that profits at the public retailers over the past twelve months have declined by 17% on a per-dealership basis, as compared to the full year 2022. The decline in public dealership profits will likely be higher by year-end 2023. Dealers and other respondents to our direct polling during webinars we have led this year say they are expecting full-year profits to be down around 20% for private dealers. Despite these declines, dealership profits remain more than twice as high as they were before the pandemic.
Demand for auto dealerships remains very strong. At least 385 rooftops have traded hands through the end of Q3 2023. If this pace continues, 2023 will be the third most active year for buy-sells, following 2021 and 2022. We are contacted weekly by dealers seeking acquisition opportunities. They understand that profits will likely continue to fall, but they have significant faith that the franchised auto retail system in the US will provide superior returns on investment when compared to placing their capital elsewhere. Plus, dealers have been enjoying such strong profits that their balance sheets are loaded with cash. Dealers are reacting to higher interest rates by simply putting more cash into acquisitions. We estimate dealership blue sky values have declined 12% from their record high in 2022, still 2.3x higher than they were before the pandemic.
One change we have seen over the past several months is that buyers are increasingly picky. They bid aggressively on prime franchises in highly desirable markets. We are seeing that on record-setting transactions for Mercedes and Toyota in South Florida, for instance. But we are also seeing buyers less willing to pursue domestic franchises in smaller markets due to concerns about their electrification strategies and the challenge of running low-volume stores. Another development is that reaching an agreement on valuation between buyers and sellers has become more difficult, as all are uncertain about how fast and how far dealership profits will decline. A seller wants yesterday’s price and a buyer wants tomorrow’s price. In these times, it is more important than ever for a seller to run a competitive sale process to make sure that the Most Motivated Buyer? has an opportunity to bid for their business. Also, running a process will allow a seller to reach an agreement with a buyer more quickly, an important consideration during a time when dealership values may be slowly declining.
One fact that buyers and sellers can agree on, is that life remains pretty sweet in auto retail.
Founder & CEO at Trusted Sale, Inc.
1 年Great read Alan Haig thanks.