CHUCK SEGUIN LOOKS AT THE ASPECTS OF AUTO RETAILING THAT COULD SIGNIFICANTLY IMPACT DEALERS IN THE NEXT 12 MONTHS
With the start of a new year, many of us are wondering what will be in store for 2014. A new year promises optimism, hope and anticipation. Many are happy to sweep out the past year and prefer to look forward, not behind. Many dealers look forward to finally turning that corner and putting the past five years behind them.
I too share the optimism of 2014, however given my background as an accountant and business advisor, I can’t be anything else but cautiously optimistic.
INTEREST RATES
At some point in 2014 I believe that interest rates will rise, not by much, but they will rise. I see manageable interest rate levels that should not curb consumer enthusiasm to purchase new vehicles.
EMPLOYMENT
Canadians need vehicles to facilitate employment. If the employment rate increases and the effects of a recovering U.S. economy are felt north of the border, that will produce increased demand for vehicles.
NEW VEHICLE SALES FORECAST
At the time of writing this article, it looks like 2013 will be a record sales year. I see nothing on the horizon that will change this for 2014. The age of vehicles on the road is still high and I believe there is still much pent-up demand. The population of driving age Canadians will continue to increase. Monthly payments are manageable for most Canadians since even with a modest increase in interest rates, those payments will remain relatively low.
INCENTIVES WILL DECREASE
Our industry is hooked on incentives. Perhaps a better way of putting it is that the industry has trained the customer to expect incentives. That being said, I believe brands will slowly reduce their dependence on incentives. Some brands will do a better job at this than others. The impact on individual brand sales will be a function of inventory supply and competitive response. It’s a fine balance, but brands with short supply can decrease incentives more easily than those with large inventories. Overall, I believe 2014 will be a strong year for new vehicle sales.
USED VEHICLES
Used vehicles will continue to be a challenge. Supply of quality used vehicles will continue to hamper dealer inventory efforts. We all know that used vehicle success is based on buying the right vehicle at the right price. CPO programs will continue to increase in popularity with both consumers and dealers while providing franchised stores with a leg up in the competitive used vehicle market.
SERVICE AND PARTS
There is so much opportunity in the fixed side of the business. Dealers are doing a good job at attracting and retaining fixed customers but with the enormous size of the market, there is no reason why dealers should not all be bursting at the seams. This is where the serious money is made and I see 2014 as very positive for dealership fixed operations.
DEALERSHIP CONSOLIDATION
2013 was a very active year in the dealer consolidation arena. I see 2014 picking up the pace from a frantic 2013. The busiest guys these days at the OEM level are the zone managers and dealer development managers. They are overloaded with buy/sell transactions and can hardly keep up. Consolidators are on a real roll, acquiring dealerships, land and buildings and developing auto malls. The pace of real estate development is unprecedented. Many are playing the “he who develops the land gets the brands” game.
I see 2014 as perhaps a threshold year. What I mean is that, with few exceptions, consolidators have focused their acquisitions on single point dealers and groups with 2-3 stores. I believe very soon, perhaps this year, that one large group will acquire another large group. This will be driven by a few things: access to capital, strategic market opportunities and dealer group succession.
Up until now, the big have been getting bigger, one store at a time. Yes there have been some exceptions but by and large it is still a store by store game. I see that changing. Ownership opportunities will emerge, driven by the age of the founding dealer and the lack of professional management and group management succession. In order to be a successful group, you must have very strong OEM relationships. Many of these relationships have not been transferred to others in the organization. These groups are at risk. Some will survive but others will chose to partner or sell their interests outright.
SINGLE POINT FAMILY SUCCESSION
I have never had so many calls as I’ve witnessed in the last four months regarding single point family succession. Dealers are not getting any younger. Scenarios are all over the map, from wanting to understand value, to updating prior estate freezes and everything in between.
I am in a unique situation in that many dealers openly discuss their situations with me, with the hope that I might have a crystal ball answer for them. The process of talking through alternatives with a trusted confidential advisor — one that’s familiar with the industry and dealership transactions is appealing to dealers and I see that activity escalating. The point here is that lots of dealers are thinking about their future and that is a very, very good thing.
NEW PLAYERS
I have said for many years now that the retail automotive industry is ripe for outsiders to enter from an ownership standpoint. There is still lots of investment capital sitting on the sidelines earning little to no return looking for deployment. As we all know, dealerships can produce a lot of cash. Cash production attracts investors. I believe it is only a matter of time before some of the cash on the sidelines enters the auto retail space. This year could be that time.
IMAGE PROGRAMS
Even with the focus of the NADA and NADA/CADA studies on facility and image spending requests, private capital spending on the part of dealers will continue. This is largely due to the fact that older facilities now stand out like a sore thumb in some markets. Virtually all of the OEMs have a current program in place and some are coming back around again after only half a decade or so since the last program. Rent factors will continue to eat up more and more of the dealership gross profit, yielding a smaller net profit before tax. Increased volume with steady margins is the only answer — however for every winning brand there must be a losing brand. In many ways it’s a zero sum game in a market with single digit growth.
In summing up, I am cautiously optimistic about 2014. Many fundamentals will converge to continue the increase in new and used vehicle sales and increased fixed operations activity. Costs on the other hand continue to rise and net pre-tax margins, on average could come under pressure. Let’s hope that your dealership investments are poised for a great 2014.
