Alert to dealers: Plan for your future, or plan to cash out

The toll that projected industry disruption and changing vehicle ownership patterns will take on dealerships now seems real.

So real, in fact, that even a prominent dealership buy-sell advisory firm is telling its clients to buckle down: Develop a 20-year plan that will enable you to thrive in a landscape with far fewer dealerships — or think about selling your stores.

It's advice that Brodie Cobb, founder of Presidio Group, of San Francisco, didn't come to lightly. But he deems it necessary in the wake of several studies and consultants forecasting a future with far fewer U.S. dealerships.

And while suggesting that dealers sell their stores could benefit the firm in the short term because it would lead to more deals, the advice may seem contrary to Presidio's long-term vitality because the firm also has an equity stake in auto dealerships.

"We're not particularly pleased that the world is changing the way it is. We would rather have it stay the same, because owning dealerships is a very nice return and profitable business that we enjoy very much," Cobb told Automotive News. "So when we talk about this, it hurts us, too. We, too, need to understand the future, form a plan and not just put our head in the sand and hope it goes away."

Presidio, which has handled nearly 90 dealership transactions totaling more than $5 billion since its inception in 1997, declined to disclose specifics about its investments. Cobb said the firm has not divested any stake in dealerships, but its principals will meet and talk in the coming months about how and when to do so.

Certain private dealership groups, some of the largest in the country, are studying and analyzing the forecasts, Cobb said.

And some progressive dealership groups are dabbling in partnerships with mobility companies and services such as vehicle subscription programs to set themselves up for the future.

Bill Cariss, CEO of Holman Strategic Ventures, agrees that dealership consolidation is likely. Cariss is tasked with identifying investment opportunities for parent Holman Enterprises, which includes the 34-store Holman Automotive unit. And while Cariss said last month that he sees a future with traditional dealerships, he also is bullish on vehicle subscription programs and sees mobility fleet management as the "holy grail of the future of our business."

Holman jointly funds Flexdrive, a vehicle subscription service with Cox Automotive, and owns ARI, a fleet management company that manages or leases some 1.8 million vehicles.

"We're trying to make sure we remain relevant for generations to come," Cariss said.

The timing and degree of the projected disruption is open to debate.

In a study for the National Automobile Dealers Association, consultant Glenn Mercer predicted the number of U.S. dealerships would drop to about 16,500 in 2025 from 18,000 in 2016. He also said in late 2016 that the number of dealers would fall to 6,500 owners by 2025 from about 8,000 in 2016.

At the end of 2017, NADA said there were 16,802 dealerships in the U.S. and 7,695 dealers. An NADA spokesman said the association has no dealership count forecast past 2025. NADA's figure is lower than the Automotive News Data Center's count of 18,327 light-vehicle dealerships in the U.S. as of Jan. 1, 2018, up 66 from a year earlier.

NADA Chairman Wes Lutz, president of Extreme Chrysler-Dodge-Jeep-Ram in Jackson, Mich., questioned some of the assumptions and predictions surrounding the disruption narrative during a speech last month at the Automotive Press Association in Detroit. Lutz threw cold water on the idea that people will stop buying vehicles for themselves, citing a study by the AAA Foundation for Traffic Safety that showed exclusively using ride-hailing companies such as Uber and Lyft is more expensive than owning a midsize sedan.

"People are going to continue doing exactly what they're doing now: owning a car or truck for day-in and day-out personal transportation and using ride-hailing services when it makes more sense than driving," Lutz said. "That's not a revolution. That's an evolution."

Presidio relied on several forecasters in its annual market report published in September.

Morgan Stanley analyst Adam Jonas said in November 2017 that he thinks the 10,000 North American dealers could eventually be reduced to "as few as 10 monolithic mega-fleet managers" amid technology disruption, regulatory changes and a future of shared autonomous vehicles. Jonas put the number of U.S. dealerships down to about 10,000 by 2035.

Global audit firm KPMG said in January that more than half of auto and tech executives surveyed around the world expect the number of dealerships to decline 30 to 50 percent by 2025.

Dale Pollak, executive vice president of Cox Automotive, suggested this year at a conference that the number of U.S. dealerships could fall to just 30 owners. Today he calls that figure "too extreme" though it's unclear why he adjusted his prediction. Pollak now says he could see the number of owners in 2034 dropping to 200 to 300 for maybe 9,000 dealerships.

For the first time in its annual report, Presidio warned clients about "profound" changes coming with more electric and autonomous vehicles. In addition to reducing dealership counts, the changes likely will cut into service and finance and insurance profits. The firm expects large fleets of corporate-owned autonomous vehicles that consumers essentially will rent instead of own.

"And you just don't need the big, huge auto retail channel that we have today with dealerships and consumers purchasing and trading and servicing cars because they're not going to own them," Cobb said.

That means some clients should prepare their dealerships to service vehicle fleets of the future, which will require long-term planning and capital investments, Cobb said. Those dealers should create a 20-year plan, the report advises, "involving a more fleet-focused distribution model utilizing 25-plus facilities in geographically concentrated areas to position the dealership group to capitalize on the transitional opportunity in the future."

Others may want to cash out, Cobb said.

"The rest we think should consider monetizing, selling these really valuable assets that in many cases, in most cases, have been built up over decades, sometimes generations," Cobb said. "Because at some point, when autonomy is more broadly accepted, the value of those businesses will decline sharply, because it will be a shrinking business and investors don't typically like to invest in shrinking businesses."

It's difficult for some people to grasp that the degree of auto industry disruption being discussed will happen in their lifetime, he said.

"But that's what Kodak said and Blockbuster said and on and on and on," Cobb said. "That's what BlackBerry said before Apple and Google decided to get into the smartphone business. And then all of a sudden things change."

For dealers on the fence, a signal may come when equity capital markets no longer want to invest in dealerships, or when those investors want to sell their stakes because they no longer see it as a growth business, Cobb said. And that will lead to drops in dealership values, he said.

With changes coming, dealers will need to evolve, Inga Maurer, a partner at consulting firm McKinsey & Co., told Automotive News.

How they do so may depend on their size and whether they are in an urban area expected to see more impact from mobility disruption, said Maurer and Ben Ellencweig, a partner and leader in McKinsey's automotive practice for North America. Technology and digital investment may be harder for one dealership vs. a dealership group because of the expense.

But, Maurer said, there likely will be opportunities for some dealership groups to offer fleet services or partner with a disrupter such as an autonomous vehicle company.

Morgan Stanley's Jonas wrote that to survive the expected decline in vehicle sales, dealers will need to invest in technology and convert to fleet service centers.

"We expect this transition to result [in] survival of a few players with huge economies of scale," Jonas wrote in his note a year ago.

That note followed AutoNation's multiyear agreement to provide maintenance and repairs for Waymo's self-driving Chrysler Pacifica hybrid minivan fleet.

AutoNation followed that Waymo agreement with a $50 million investment announced Oct. 30 in Vroom Inc., an online used-vehicle retailer. For AutoNation CEO Mike Jackson, getting ready for the future has long been in the works.

"I'm not afraid of disruption," Jackson said last month. "I don't worry about it, but you've got to think about it. You've got to have a plan. You've got to realize how you're going to take your company and position it to thrive in this dynamically changing environment."

Hannah Lutz and David Muller contributed to this report.