Is it Time to Hunker Down or Sell?
The automotive industry is changing fast. Covid shutdowns paired with tons of new technology are forcing an evolution -- one which many dealers are not equipped to handle.
Here’s a recap of the current condition of the auto industry from an “interrupter” standpoint.
Sales are on the decline. As inventory becomes more and more sparse, we’ve seen a reduction in sales, which started in April. While we’re still up compared to 2020 (not really a credible comparison), the trend is downward.
The Covid bounce and microchip shortage bounce (net profits) will cease in 2022. April had a projected growth of 110% year-over-year. May was 34%, and June fell to 12.4%. July numbers were projected around 3.7%, which means the inventory shortage is fast becoming worse than last summer. Industry “experts'' are of the opinion that this trend will likely continue as microchip production balances out in Q2 2022. As microchip production gets back to normal, we will see inventory return to more historically normal levels in 2022.
We saw consumer confidence return at the end of Q1 as sales sky-rocketed. Consumer confidence had increased by 6.1% in June, down just 4% from February 2020 before this whole mess started. As the Delta variant looms, we may see that number climb a bit, but overall consumers are feeling good enough to continue to purchase new vehicles, when they can find them.
The biggest change we’re seeing in the market currently though is the shift to electric vehicles. With the current administration's push for EV infrastructure and individual state EV mandates and incentive programs, the end of internal combustion engines is inevitable, and as we discussed in a recent blog, dealers will have to make a serious investment to prepare their stores for the future. We’re talking about big money here, and most manufacturers aren’t planning to help offset the costs.
An additional consideration with EV is the agency model. While traditional dealers remain ever-important, the sales model will likely change in some way as digital continues to grow. More and more buyers prefer to buy vehicles online, and manufacturers want to facilitate those sales quickly and easily through their websites. Some, like Ford, have created a dealer marketplace, but others, like Volkswagen, are taking a more hybrid approach. VW suggests the future dealership would follow a “bricks and clicks” model, allowing for direct online sales from the OEM, while keeping dealers highly involved in the process.
The point is that the way dealers do business is bound to drastically change over the next decade, and many stores aren’t ready to make that leap - maybe some never will be. Many dealers find these changes thrilling, and they’re excited to meet these new challenges and opportunities head on. But if you find yourself feeling overwhelmed at the idea of overhauling the entire way you do business, maybe now is a good time to get out of the game.
Large groups are itching to get into New England - the “final frontier for consolidation.” Additionally, New England has consolidated enough to create at least 4 more (aggressive) dealer groups of its own who want to BUY NOW. Selling now is a smart move. Let the “big guy” buy you out. If Mr. Big purchases several stores in your market, the competition will drive you out of business, and you will miss the opportunity to get anything close to top dollar.
Dealership values are at an all-time high. Selling while vehicle prices are increasing and blue sky values are between one and three additional multiples depending on the brand makes all the sense in the world. The consolidators are optimistic about the future. These high values won’t last forever, so now is the time to take advantage of the inflated price points!.
Importantly, we must not forget what is happening under the current administration with regard to capital gains taxes. Currently capital gains taxes are set to a max of 20%, but we can expect that will likely increase over the next three years, possibly to 40%. Sell before the government decides to take a larger cut of your profits.
Don’t wait to make a decision. It takes several months for the OEM to approve a buyer and for a deal to close. The market will change next year, affecting your dealership’s value, so get the ball rolling now.
It is absolutely the time to look in the proverbial mirror and ask, “Can I? Am I willing to deal with these very difficult changes?” You can no longer afford to ignore the changes that are staring you in the face. You must make a decision. The solution is to discuss your options with the most experienced broker in the country. Choosing a broker that knows the New England market and has 42-years worth of connections and experience, can create a smooth, hassle-free sales process for you and your buyer. We are available to discuss your options with you to see if selling might be the next step for you.
Contact us today to start the conversation.
