Scot Eisenfelder

February 06, 2018

Industry consolidation is a trend that will remain strong for some time to come. I get a lot of calls from investors, and one of their most frequent questions is about market capitalization; specifically, why market cap values for large, public auto groups are low (relatively speaking) to other retail models.

Carmax, for example, has a market cap of $12.8 billion with just over 180 locations. Compare that value to AutoNation, which has a market cap of $5.2 billion with over 300 locations; Penske Auto Group with a market cap of $4.4 billion and over 320 locations; Group 1 Automotive with a market cap of $1.5 billion and over 270 locations; and Lithia with a market cap of $3 billion and over 160 retail locations (all figures circa Feb 2018).

Large auto groups have several significant advantages over individual stores, such as economy of scale and negotiating power. Yet clearly, there is still room for improvement in terms of increasing value for shareholders.

A share re-purchasing program can help, but increasing value requires an emphasis on brand building along with a shift in how stores are managed. Carmax’s brand is based on the customer experience. It’s unambiguous—every customer knows exactly what they’re getting.

Carmax also manages its brand as a network, not as individual stores. For large auto groups to increase market capitalization, they’ll need to stop managing their business as a collection of stores and start managing them as a branded network of locations, similar to other retail models.

Some auto groups are already doing a pretty good job of this, but there’s more to building market value than economy of scale. Here are five strategies that large auto groups can try:

1. Lower operating expenses

Large auto groups inherently achieve some economy of scale compared to individual stores.

In an average, private dealership, Sales, General and Administrative (SG&A) expense as a percentage of gross profit is close to 88 percent, according to a recent Kerrigan Advisors Analysis. In public auto groups, SG&A expense as a percentage of gross profit is 74 percent. That’s nearly a 14 percent differential, which is significant, but there’s still room for improvement.

Many functions in dealerships can be shifted into a shared services model. Accounting, financing, information technology (IT) and human resources are the obvious ones. AutoNation, for example, has created a $150 per vehicle advantage simply by consolidating back office functions.

2. Leverage bargaining power

When I worked with AutoNation, it was the largest advertiser in the Miami Herald, which meant it got better advertising rates. As a group, are you leveraging your bargaining power across the board with all vendors? Getting all stores onto the same DMS, CRM and third-party service software can significantly reduce costs. In the same manner, you’ll be able to negotiate better prices with marketing vendors, parts suppliers and Internet and phone carriers.

3. Customer management

Large auto groups are in a stellar position to increase customer retention. As we know, all dealerships lose a percentage of customers to brand defection every year. Dealers can do everything right in terms of marketing and retention strategies, yet still lose a customer because the customer simply wants to buy a Toyota instead of a Honda.

As an auto group, you have the ability to funnel this defector to another store so you won’t lose the revenue. This requires the use of predictive analytics across all your stores to identify which customers are most vulnerable to defection, and to create marketing strategies designed to retain them within the group.

4. Asset Management

This is an area with a lot of upside potential. Even in large auto groups, many stores still make inventory management decisions on an individual basis. A Ford dealer takes in a Toyota on trade, then decides to sell it at wholesale or send it to auction. If that dealer is part of a large auto group, that vehicle can be transferred to a Toyota store in the same group. The Toyota store is better equipped to maximize revenue on that vehicle by selling it at retail, versus accepting the auction price minus the transportation expenses and auction fees.

5. Explore New Business Opportunities

 If your auto group has 20 to 30 stores within a metro area, start thinking about getting into the mobility business. Establish a fleet of vehicles and/or form relationships with Uber and Lyft. Start a subscription ownership model that fills the gap between short-term rental cars and long-term leases. You could run your own auctions. Start a rental car business or finance business. Find partners for new service opportunities; for example, AutoNation recently struck a deal with Google’s Waymo to service its self-driving minivans.

Large auto groups are primed to take advantage of a changing industry. There’s no reason to fear disruption; instead, embrace it. Increase market value by using the latest technology to lower expenses, leverage bargaining power, better manage customers and assets, and explore new business opportunities.