As expansion continues, Lithia is looking north

Lithia Motors Inc. CEO Bryan DeBoer has long aspired to expand internationally, sharing his goal to buy dealerships in Canada as far back as 2018. But the fast-growing publicly owned retailer so far has kept its acquisition deals in the U.S.

That could be changing.

DeBoer signaled renewed interest in cross-border deal-making in April when he told industry analysts that Lithia's digital retailing platform, Driveway, could become the brand of choice for consumers "both domestically and internationally."

While DeBoer declined to discuss Lithia's progress on international expansion in detail, a company executive later confirmed that Lithia's store-buying team continues to look for deals in Canada.

By offering digital selling capabilities through Driveway, Lithia could significantly disrupt the Canadian market, which has just one public dealership group and where online vehicle sales remain nascent.

DeBoer has said that Driveway, an omnichannel platform launched in 2020, will generate $9 billion in annual revenue by 2025 — that's a little less than three-quarters of the company's entire revenue in 2020. Omnichannel refers to technology and processes aimed at providing a seamless buying experience for consumers whether they shop online, in-store or both.

Lithia would face little competition from online competitors upon moving into Canada.

Only a handful of companies are working to sell vehicles online at scale in Canada, and most are in the early stages of development, Canadian market analysts say.

Startup Clutch Canada Inc. launched in 2017 and has a 10-day return policy and nonnegotiable pricing on used vehicles. American automotive e-commerce startup Digital Motors, which sells digital retailing software to dealerships, expanded into Canada in March, just a year after going live in the U.S.

Lithia's expansive digital retailing strategy makes the public a contender for disruption in both the U.S. and Canada, said Doug Betts, president of J.D. Power's automotive division. The ability to standardize the retailing experience online adds value for both dealership and customer and lowers costs as the tool is scaled across a bigger group.

As digital retailing expands in Canada, the operational efficiencies will give groups such as Lithia an edge over smaller or less innovative operations, Betts told Automotive News.

"It's going to give rise to larger dealer groups being in a much better position to leverage these tools in these data feeds to automate the selling process," he said.

DeBoer said in 2018 that Lithia's ambitions for the Great White North could fund further technologies and expand the dealership group.

"We've spent a fair amount of time looking over the border," DeBoer said.

While Lithia has closed on some of the industry's largest acquisition deals in recent years, purchasing foreign dealerships poses different challenges.

Canada has few large groups for Lithia to acquire, and most large retailers in major markets are looking to expand themselves, said Farid Ahmad, CEO of Dealer Solutions Mergers and Acquisitions, based in Toronto.

He said Lithia's best bet would be to purchase one of those groups to act as an anchor, much like it did with its move into the Michigan market with the purchase of the 34-store Suburban Collection in April, and then work to make smaller deals over time.

"They would have to go after one of these sizable groups and pay a lot of money to get that scale," said Ahmad, who noted that he has introduced Lithia executives to Canadian dealership group leaders in recent years.

DeBoer addressed such a strategy back in 2018.

"It wouldn't change our return expectations by moving to something that's more risky, because it is more risky to move international when you're not there," he said then.

"We need to find a partner that has enough space to leverage their people and the culture they know about that country, to be able to grow from."

Still, the landscape for consolidation by a public group is sparser in Canada than in the U.S.

Canada has a much smaller population, roughly that of California — a state where Lithia has 47 dealerships, according to its website. Canada's vehicle volume also is a fraction of the sales in the U.S. New light-vehicle sales were 1.8 million in Canada in 2020 compared with 14.6 million in the U.S., according to the Automotive News Research & Data Center.

Automakers' Canadian operations also have more leverage over their dealerships than their U.S. counterparts — and are less accepting of public company ownership.

Until 2018, Ford Canada and General Motors Canada blocked public companies from buying dealerships.

Honda Canada has reversed its opposition to public ownership, saying it will now consider allowing a public retailer to purchase "ownership interest" in a Honda dealership.

A spokesman for Toyota Canada said the automaker doesn't have a specific policy about public ownership of its dealerships, and that the company evaluates each application on its own merits.

As for AutoCanada, the country's only public dealership group, incoming competition could be beneficial.

Executive Chairman Paul Antony said in May that the retailer would "welcome" direct competition from another public group but cautioned that newcomers from south of the border might encounter hurdles.

"The market in Canada is far more nuanced than many of the states in the United States. For example, there's no significant franchise laws protecting the dealer with lobby groups like they do in the U.S.," Antony said.

"But I think it will also be a huge vote of confidence in our thesis that dealership consolidation in Canada provides a lot of opportunity."