The retail Game of Unknowns

The retail Game of Unknowns

Forget what the calendar says for a moment, and forgive the ubiquitous "Game of Thrones" reference, but in auto retailing, winter is coming.

There's a disheartening momentum building in the buy-sell world for franchised dealers.

The Game of Unknowns. Or groans.

As a soft year continues to soften, the themes are alarming in this tempestuous 2019: Dealership costs are increasing; there's a slide in new-vehicle margin; money is more expensive; and there's an emerging bulge in dealership debt that has more than a few folks alarmed.

Take Mark Johnson, for one.

From his perch as a 19-year adviser of dealer buy-sells, whose Enumclaw, Wash., company, MD Johnson Inc., just topped $6 billion in lifetime transactions, he's noticing a scary trend. It shouldn't be ignored by any dealer, automaker or affiliated company in this industry.

"We are really surprised at how many dealers we're seeing with cash-flow issues right now," Johnson told our Automotive News editorial team last week. "There's a fragility in the network."

If this sounds like a familiar narrative, or at least a drumbeat you've heard in the distance, the sound now seems louder.

Not that everyone doesn't recognize the tune.

Johnson and other buy-sell brokers we've talked to say store profits are now lower than expected, debt is rising, and there's an overinflated sense of store valuations resulting in a distorted view of the world. "Out of trust" — that phrase so common a decade ago — is now back in the conversation.

"Bad habits sneak back in," Johnson warned.

Alan Haig, president of broker-adviser group Haig Partners, in Fort Lauderdale, Fla.., echoed the view, saying recently that all deal momentum slowed considerably in the first quarter.

"There's more on the market than in previous years," Haig said. "The big guys don't have the appetite right now."

Of course, the franchise system seems shakier than we can remember — or maybe our own institutional memory has faded.

Johnson talked about a recent example of a dealership group with six luxury franchises on the West Coast. It met every incentive and stair-step target in a given month, only to realize a total front-end gross profit of under $50 per car. Fifty bucks.

It's comical if not cry-able.

Throw in a little private equity disruption, and life gets even more interesting — so much so that even the PE folks are now cooling to big deals, spooked by the risk of manufacturers flexing their collective muscles.

"Terms of trade and the capacity [for manufacturers] to circumvent will cool the desire to do business," Johnson predicts.

A tempestuous 2019 gets more turbulent.

The Game of Dealers is real. Winter is here.

Jason Stein is publisher of Automotive News. You may email him at [email protected] Keith Crain's column will return.