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Asbury Automotive Group acquired most of Park Place Dealerships this year.

Dealership Profits Tracking Toward Record 2020

Analyst Erin Kerrigan says some factors driving unusually high profits per vehicle won’t last indefinitely, such as lower-than-usual new-vehicle inventories – although higher volume next year would help offset that.

It sounds wildly unlikely, but 2020 is on track to be an all-time record year for dealership profits, and dealership brokers say that’s fueling a land rush of dealership acquisitions this year and next, and probably beyond.

“Not surprisingly, with record earnings, both public and private dealership valuations are exceeding prior highs,” Erin Kerrigan, founder and managing director of Kerrigan Advisors of Irvine, CA, says during a phone interview.

Kerrigan (below, left) says some factors driving unusually high profits per vehicle won’t last indefinitely, such as lower-than-usual new-vehicle inventories – although higher volume next year would help offset that.

Some factors probably will last, such as lower expenses due to leaner staffing, the move to more efficient online and multichannel selling, and the trend towards greater F&I revenue per vehicle, she says.

A competitor, Alan Haig, president of Haig Partners of Fort Lauderdale, FL, says high dealership profitability in the midst of a pandemic and a recession demonstrates dealerships are a good investment.

“I’m highly confident 2020 is going to be higher than any other year we’ve seen” for dealer profitability, he says in a phone interview.

Year-to-date through September, the average dealership pretax net profit was $1.3 million, Haig says, citing National Automobile Dealers Assn. figures. The prior-year record year is 2015, at an average pretax profit per store of about $1.5 million, and 2020 is a shoo-in to beat that, Haig says.

In the third quarter, according to the latest Haig Report, 95 dealerships changed hands, a 9% increase over third-quarter 2019. Year-to-date, Haig says buy-sell activity was at 222 dealerships, down 7% from 239, as the industry took a pause in the year’s second quarter. However, Haig says acquisitions of publicly traded new-vehicle retailers doubled to 26 year to date.

According to Kerrigan’s Blue Sky Report for the third quarter, year-to-date buy-sells were up about 16%, to 186 dealership transactions. “2020 is on track to be the most active buy/sell market on record,” the report says.

Big Moves

Kerrigan notes that unusually, four of the Top 100 U.S. dealership groups sold all or most of their dealerships this year: John Eagle Auto Group, Dallas; Keyes Automotive Group, Van Nuys, CA; Park Place Dealerships, Dallas; and Staluppi Auto Group, North Palm Beach, FL.

Asbury Automotive Group, Duluth, GA, which acquired most of Park Place in 2020, is on a campaign to more than double in size in terms of annual revenue, from about $8 billion in 2020 to $20 billion in 2025. That would include an additional $5 billion in annual revenues from acquisitions in the next five years.

erin-kerrigan.jpgLithia Motors Inc., Medford, OR, this year announced plans to add $3 billion to $5 billion in annual revenues from acquisitions every year for the next five years, part of a strategy to more than triple annual revenues to $50 billion.

Lithia recently announced it would acquire nine locations from Keyes Automotive Group, representing $1.4 billion in annual revenue. In separate transactions, Lithia also announced this year it would acquire a total of 10 John Eagle dealerships.

Inevitably, the demand for dealerships is driving up prices, but there also are some natural constraints on demand, the brokers say.

Importantly, only the biggest dealership groups can afford to acquire big dealership groups, Kerrigan says. “As we get bigger, the pool of buyers gets really small,” she says. “It’s a hard club to get into.”

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