Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / Private Equity Is Quietly Buying Up Car Dealerships
Transcript
- Lucas: So Luna, here's a number that stopped me when I came across it this morning. Private equity-backed dealership groups now control about fifteen percent of all new car sales in the US. That's up from maybe five percent a decade ago. Luna: Fifteen percent? That feels bigger than I'd have guessed. And I assume it's not slowing down. Lucas: Not at all. In fact, the pace has picked up since 2020. Over the last five years, the big public groups like Lithia and Penske have been on a buying spree, and private equity firms have been right there with them, snapping up dealerships in clusters. Luna: So what's driving this? I mean, car dealerships always seemed like a pretty stable, local business. Why would a PE firm want to buy them? Lucas: Well, the first thing to understand is that car dealerships are incredibly cash-generative. The average dealership in the US does about seventy million dollars a year in revenue, and the best-run ones can have net margins of three to four percent. That might not sound like much, but it adds up when you're doing eight-figure deals. Luna: Right, and I guess the franchise system protects those margins. You can't just open a competing dealership next door. Lucas: Exactly. State franchise laws give dealers a sort of moat. Automakers can't just open their own stores or appoint a new dealer in a territory where one already exists. So owning a dealership is a license to sell a specific brand in a specific area, and that's a pretty nice asset to have. Luna: So it's a protected, cash-rich business. But what's the roll-up thesis? Why buy ten dealerships instead of one? Lucas: That's where the consolidation story gets interesting. The classic roll-up logic is that you can centralize back-office stuff — accounting, HR, marketing — and negotiate better terms with the manufacturer. But there's something else going on now that's even bigger. Luna: What's that? Lucas: Data. Big dealership groups are investing in software that tracks everything from customer interactions to repair history. That data lets them sell more parts, more service, more financing — and it makes the business less cyclical. The service side is especially attractive because it's a recurring revenue stream. Luna: So the pitch to a PE firm is basically, 'We're not just selling cars anymore, we're building a customer relationship for decades.' Lucas: Exactly. And the pandemic accelerated this. When chip shortages hit, dealerships had less inventory but higher margins per car. That gave them a lot of cash, and it also showed that you could make money even with fewer units on the lot. Luna: And I've seen some numbers suggesting that the big groups are getting bigger. What's the market share of the top ten dealership groups now? Lucas: The top ten groups now sell about a quarter of all new cars in the US. Ten years ago, that number was more like fifteen percent. And the consolidation is happening across brands, from mass-market to luxury. Luna: So when I walk into a Ford dealership in one city and a Chevy dealership in another, there's a decent chance they're owned by the same group. Lucas: More than a decent chance, actually. One group, Lithia Motors, has gone from a regional player to the largest dealership group in the country in just a few years. They've been buying up stores everywhere, and they're not done. Luna: And what does that mean for the buyer walking in the door? Is this about better prices, worse service, or just a more consistent experience? Lucas: That's the big question. On the one hand, bigger groups can invest more in training and technology, and they can offer a wider selection. But there's been a noticeable shift in how dealers make money — the front-end profit on the car itself is getting smaller, and they're pushing more on financing, insurance, and service plans. Luna: Right, I've definitely seen those 'dealer add-ons' — the paint protection, the extended warranty. It feels like a lot of that is driven by the need to hit profit targets that the manufacturer sets. Lucas: And that's the tension. The factory sets sales targets, and the dealer group has to meet them to keep the franchise. So there's pressure to move metal, even if it means discounting on the car and making it up on the back end. That's not new, but it's more systematized now. Luna: Is there any pushback against this consolidation? I mean, there are state franchise laws that protect dealers from automakers, but what about protecting consumers from dealer groups? Lucas: Well, the franchise laws are actually a double-edged sword. They protect the dealer from the manufacturer, but they also make it hard for new entrants to come in, because you have to buy an existing dealership. That means the big groups can buy up the small ones and there's not much anyone can do. Luna: So the system is kind of rigged in favor of consolidation. Lucas: In some ways, yes. And the regulators have been slow to catch up. The Federal Trade Commission has looked at some of these deals, but they haven't really blocked any. The concern is that as dealership groups get bigger, they have more leverage over both consumers and the automakers. Luna: And I guess the automakers are torn. They want the efficiency of dealing with a few big groups, but they also don't want to be too dependent on them. Lucas: Exactly. Tesla and some of the new EV startups decided to skip the dealer model entirely and sell direct. But the legacy automakers are stuck with the franchise system, and they're finding that the dealers have a lot of political power. That's why you see automakers like Ford walking a fine line, trying to modernize the experience without alienating their dealers. Luna: So what does this mean for the actual mom and pop dealer who's been in the family for three generations? Are they just being bought out, or can they survive? Lucas: I think a lot of them are looking at the demographics and saying, 'Maybe it's time to cash out.' The average age of a dealership principal is over sixty, and the kids often don't want to take over. So selling to a group is an easy exit, and the prices they're getting are pretty good right now. Luna: But there are some holdouts, right? There's a dealer in Texas who wrote a big essay about how he's refusing to sell. Lucas: Yeah, there are definitely some who are fighting the trend. They argue that the personal relationship with customers is the whole point, and that the big groups are just soulless machines. And there's some evidence that customers do care — surveys show that people are less satisfied with service at large group dealers than at smaller ones. Luna: But the economics are pretty powerful. I mean, if the big groups can do everything cheaper, the independent dealer is at a disadvantage. Lucas: It's a race to scale, and the independents are losing. One of the things that's interesting is that even the big groups are consolidating among themselves. Lithia acquired another large public group a while back, and there's speculation about who the next big target will be. Luna: So it's not just PE buying up small dealers, it's the public groups eating each other too. Lucas: Right. And the private equity firms are often the ones funding the buyouts of smaller groups, but they're also looking at the public groups as potential targets. That's a whole other level of dealmaking. Luna: One thing I'm curious about: how does this affect the value of a dealership? I mean, is the multiple going up as the big groups get bigger? Lucas: It has gone up. Ten years ago, a dealership might sell for six to eight times EBITDA. Now, it's not uncommon to see ten or twelve times, especially for high-performing stores. That's a significant jump, and it's reflecting the scarcity of the asset. Luna: And scarcity because you can't just build a new dealership, you have to buy one from someone who has the franchise. Lucas: Exactly. And that scarcity is what makes the roll-up so attractive. You're not just buying a business, you're buying a right to participate in a protected market. That's a powerful thing. Luna: So, given that we're talking about the value of these businesses, and the fact that this show is about the business of buyouts, I guess it's a good moment to mention that this podcast is supported by listeners like you. If you've found these episodes useful, and you want to keep it going ad-free, you can support us at buy me a coffee dot com slash fexingo. Lucas: Yeah, that's exactly right. It's a small gesture, but it genuinely helps us keep the lights on. And we appreciate every one of you who does it. Luna: Okay, back to the dealerships. One thing I want to get into is what this means for the consumer experience. Are we going to see more of these 'one-stop-shop' dealerships, where you can buy any brand under one roof? Lucas: That's already happening. There are groups that own multiple franchises on the same lot, or they create auto malls with several different brands. It's convenient for the buyer, but it also means that the dealership is more like a shopping mall for cars, with less of the traditional relationship-based selling. Luna: And I've heard that some of these groups are actually building their own used-car platforms, like online marketplaces. Is that a threat to the traditional used-car lot? Lucas: Definitely. The big groups are investing in digital retailing, so you can buy a used car entirely online and have it delivered to your driveway. That's putting pressure on the independent used-car dealers, who don't have that kind of capital. But it also means more competition, which could be good for prices. Luna: So what do you think the industry looks like in ten years? Are we going to see just a handful of mega-groups controlling everything? Lucas: I don't think it'll be quite that extreme, but the trend is clear. The middle is going to get hollowed out. You'll have a few huge public groups, some mid-sized private equity-backed ones, and then the small dealers will be relegated to niche or rural markets where the big groups don't want to go. Luna: And that could have implications for communities too, right? I mean, a local dealer is often a big employer and a sponsor of the little league team. Lucas: That's a real concern. When a local dealership gets bought out, the decisions get made a thousand miles away, and the local presence can change. But the counterpoint is that the new owners often keep the same staff and the same name, so the transition might not be as visible as you'd think. Luna: So the brand stays, but the ownership changes. That's kind of like what we saw with the veterinary clinics and the dental practices we covered a while back. Lucas: Exactly. The local name stays, but the financial engineering is happening at a corporate level. And that's the story of this whole wave of consolidation across so many industries. Luna: Well, I'm going to be looking at my local dealer a little differently next time I need an oil change. Thanks for breaking that down, Lucas. Lucas: Thanks, Luna. And to our listeners, if you're thinking about buying a car, it might be worth checking who actually owns the dealership. It might not change your decision, but it's good to know the economics behind the franchise.