Public retailers highlight risks

The publicly held new-vehicle auto retailers have the size and resources to adapt to digital retail and other disruptions better than smaller peers. But the public dealership groups aren't in denial about threats to their business model — and many of those risks are described in regulatory filings.

Many states require a franchised dealership network for new-vehicle sales, though Tesla and some startups have been granted the ability to sell new vehicles without dealerships through legislative agreements in some states.

Sonic Automotive Inc., like other public dealerships groups such as Asbury Automotive Group Inc., Penske Automotive Group Inc. and Group 1 Automotive Inc., cite in annual reports that some vehicle manufacturers, including those that sell EVs, are interested in selling vehicles directly to consumers — or, like Tesla, have already started doing so.

Manufacturers that are "permitted to circumvent state franchise laws of several states in the United States, such as Tesla," to sell vehicles directly to consumers could have a competitive advantage, Asbury said in its annual filing in February to the U.S. Securities and Exchange Commission. Asbury, the sixth largest new-vehicle retailer in the U.S., said that advantage could hurt its vehicle sales in those states and its overall business.

Group 1 and Penske articulated similar concerns.

"While the sales levels of these new entrants is small and we expect continued good relations with our manufacturer partners, should U.S. franchise laws be repealed or amended to allow our existing manufacturer partners to effectively operate outside the franchised system, our results of operations may be materially and adversely impacted," Penske, which ranks as the second largest new-vehicle retailer based in the U.S., wrote in its February annual report.

Penske noted that its franchised dealerships in the United Kingdom and the European Union "operate effectively without such protections."

Mike Jackson, CEO of auto retail giant AutoNation Inc., in an April call with shareholders and investors, said the franchise model is best for automakers and customers. He called the model "viable, sustainable."

Jackson, who was CEO of Mercedes-Benz USA before joining AutoNation, called Volvo "nuts" for its plans to sell its electric vehicles online only, adding that he didn't think that plan will stick.

For manufacturers that have said they want to sell vehicles direct to consumers, "when the moment of truth finally arrives, they end up with what is basically a reservation listing order bank, which you can't even specify in detail your vehicle with the manufacturer, and it gets turned over to the dealer and the retailer to take over," Jackson said.

One problem he identified for the direct-to-consumer model is the lack of facilities to service those vehicles. "It's an Achilles' heel and very expensive and difficult to build subsequently," he said.

Service departments — a bread-and-butter profit center — could be under pressure, however, by wide adoption of electric vehicles, Asbury and others warned.

Lithia Motors Inc., the nation's third-largest new-vehicle retailer, cited the rise of EVs as a risk because they generally require less maintenance than traditional vehicles.

"The effects of BEVs on the automotive industry are uncertain and may include reduced parts and service revenues, as well as changes in the level of sales of certain finance and insurance (F&I) products such as extended warranty and lifetime lube, oil and filter contracts," Lithia wrote in its annual report, filed in February.

Glenn Mercer, a consultant who has authored studies for the National Automobile Dealers Association, said in a 2021 update to his "Dealership of Tomorrow" report that he was increasing his plug-in electric vehicle market share prediction in the second half of this decade.

In the next decade vehicle sales will continue primarily through dealers, he said in the updated report, though he expects upscale EV startups will "make inroads" and automakers will "continue to extend their control: [leaving] dealers as privately-owned company stores."

Lithia also warned that its business could be hurt if new-vehicle sales are allowed over the Internet without dealers and if manufacturers are allowed to sell directly to customers in markets in which it operates.

Several of the publics also warn investors in annual reports about potential disruptions such as autonomous vehicles, ride-sharing, ride-hailing, car-sharing and vehicle subscription companies. Some say any of those disrupters could lead to lower new-vehicle sales.

Sonic also cited several potential risk factors to its operations as Tesla's business has grown and as other large technology companies have dipped their toes in the automotive sector such as Amazon, Apple, Google, Lyft and Uber.

Sonic, the nation's seventh-largest new-vehicle retailer, said in its February annual report that those companies could disrupt vehicle manufacturing, vehicle sales, maintenance and repair and transportation models in ways that could negatively impact its financial results.

"Because these companies have the ability to connect with each individual consumer easily through their existing or future technology platforms, we may ultimately be at a competitive disadvantage in marketing, selling, financing and servicing vehicles," Sonic wrote.

For AutoNation, the country's largest dealership group, it won't object to or protest the retailing plans of any new automaker, Jackson said.
"This whole campaign to block startup manufacturers from going direct, we are not involved in," he said. "It's really their choice, what they want to do."

Jackie Charniga contributed to this report.