Economies of scale, cost of capital position groups to buy small rivals
Maroone: "Cost advantage"
Picture it: A lone mid-sized dealership spends $35,000 a year on shop supplies. Across town, a rival store, owned by a large dealership group, spends $30,000 for the same supplies. The big group orders in bulk, earning a 10 to 15 percent discount.
That $5,000 difference and others like it add up, making it harder for the single-point store to compete. The big dealership group has operational advantages, too.
"There are a lot of things we do that allow us to take advantage of our size and scale," said Mike Maroone, COO of AutoNation Inc., the country's largest dealership group. "We have a cost advantage going forward. We have a skill set that we bring to the table that gives us an advantage."
Big dealership groups, for instance, have dedicated human resources and information technology staffs to deal with the increasing complexity of the business. The big players can borrow money at cheaper rates to fund facility improvements or to buy smaller dealerships.
Put those factors together, and big dealership groups are gaining an increased edge over single-point stores. For those reasons, many brokers believe that buy-sell activity by large dealership groups will increase.
"The bigger the dealership group is, the more it can absorb taking a risk to be competitive," said Sheldon Sandler, founder of brokerage firm Bel Air Partners in Hopewell, N.J. "It's more and more difficult for the small mom-and-pop dealer to make ends meet."
The top advantage of a large group is its cost of capital, says Brodie Cobb, founder of San Francisco brokerage firm Presidio Group.
"The larger the group, the more attractive the financing terms and the more competitive they can be in the marketplace," Cobb said.
Brokers still mediate deals in which one small single-point dealership buys another. But larger dealership groups bring advantages to an acquisition.
Most brokers define a big dealership group as having at least $500 million in annual revenue and owning six to 10 dealerships.
"It's around that level when owners decide 'I need to have a CFO, centralized accounting functions, human resources and legal,'" said Alan Haig, president of buy-sell advisory firm Haig Partners in Fort Lauderdale, Fla.
For established big players, such as AutoNation, their size brings the assurance that the deal will close and the manufacturer is likely to approve it.
"If you look at what capital we have available for acquisitions, debt repayment and stock buyback, it's $800 to $900 million," Maroone said.
"We can look at a seller of any size and say to them, 'We can close this deal.' Our offer is not ever subject to financing."
RML Automotive, formerly called RLJ McLarty Landers Automotive, grew to 24 stores from two in 10 years, says Franklin McLarty, CEO of the Little Rock, Ark., dealership group.
It sells about 35,000 to 40,000 new and used cars a year and earns about $1.4 billion annually in revenue, he says.
"We have a general counsel and a vice president of human resources, a CFO and a COO," McLarty said. "We do have a corporate infrastructure, and we grew that as we grew. We tried not to allow our revenue to outrun our infrastructure."
McLarty says having the added staff has made due diligence, negotiation and the ability to a close a deal easier than when the company was smaller.
RML's larger size also allows it to attract and retain better talent because it can offer career growth across its two dozen stores, McLarty says.
But there are challenges to size. One is a limit to potential purchases if RML has to invest too much in a too-small dealership to get a return, McLarty says.
Brokers say it is typical for a larger buyer to save on operating costs once it is running the smaller store.
Dealerships that buy in larger quantities will see a 10 to 40 percent savings for common supplies such as tools, paper products and uniform rental, says John Hackman, president of WISCO Cooperative Association in Marshfield, Wis. WISCO's 550 dealer members buy products through it to get bulk rates.
The cost for services such as Web site maintenance or lead generation software also is significantly less for a bigger dealership, says Pete Petersen, CEO of Dealers United in Sarasota, Fla. Dealers United is a consortium that helps single-point or family-owned dealerships get better prices.
One of the biggest expenses for dealerships is the overall cost of personnel. Big dealership groups often have staffing guidelines and training that deliver cost efficiencies, says Kevin Cunningham, director of 20 Group Operations for dealership consultancy NCM Associates in Overland Park, Kan.
At AutoNation, Maroone says, the company's ability to get lower costs for benefits, and to offer training and career advancement reduces turnover.
"When we acquire a store, we take their benefit plan and lay it up next to ours, and we can always save 20 to 30 percent on benefits by rolling it in with all our people."
At an acquired Chrysler-Dodge-Jeep-Ram store in Texas, for example, AutoNation slashed medical benefits expenses by 41 percent, Maroone said.
There are some cases in which a small store was already running at "a rock bottom cost," Maroone said. But that's the exception, he said. Most of the time, bigger players have the advantage.
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