Guest commentary: Opportunities for auto dealership consolidation

The U.S. auto dealership industry is experiencing a robust mergers and acquisitions market — and that consolidation is changing the industry landscape. The top 10 dealership groups now own 9.3% of the roughly 17,000 dealerships in the U.S., an all-time high, according to 2024 research by Automotive News. Further, the top 150 dealership groups together represented 24.1% of the industry’s total 2023 retail sales, up nearly a percentage point from 2022. 

Merger and acquisition activity slowed in 2024 after an active period in 2022 to 2023. Some of the large acquirers shifted their focus internally, ensuring they have the right labor pool, processes and expense structures in place, as sales and margins normalize. But demand is still strong, especially for the right franchises in attractive growth markets. Even still, there is ample room for consolidation. The dealership space remains vast and fragmented. Per the National Automobile Dealers Association, 91 percent of dealers still own between one and five locations, and this range is proving very attractive to investors.
 

The past five years have been volatile — dealers saw their sales and profits collapse early in the pandemic then experienced record margin and profit growth just months later. Fast forward to current times, the dealership industry is moving toward a more historical balance. This has led to a tale of two perspectives.

On one hand, dealers that chose to sell their business over the past couple of years at market highs, are likely looking back and celebrating. On the other hand, dealers that considered selling, but did not, may be looking back with some remorse. There is no right or wrong answer — it comes down to the owner’s circumstances at the time. Dealers that opted not to sell in 2021 to 2023 experienced record growth and profits.

We are currently back to pre-pandemic levels when the decision to sell was based more on personal situation than market drivers. More so, dealers that opted to sell typically had no logical successor to take over the business or had concerns that changes in the industry would require a significant investment in technology or an adjustment in the business model.

We are seeing that dealers who put their business on the market continue to find strong investor interest. There is a robust M&A market for dealerships, especially as industry inventories have rebounded and dealership financials have normalized post-pandemic and post-supply-chain issues.

There is still interest from the large national and regional dealership groups who are intent on expanding by looking for regional bases such as acquisitions that provide an immediate presence in a new market area or complement an existing footprint. 

In terms of potential acquisition targets, brand matters — as do geography and scale. Small to midsize groups with multiple rooftops in a single area are the prime acquisition targets.

Over the past five years, several of the top 150 dealership groups have been sold; we are seeing that further consolidation will involve not only small dealership groups, but also selected transactions among the top 150 groups as well. 

Buyers are coming from outside the industry as well. Private equity investment in dealerships continues to grow. In addition, many family offices have made auto retailing a vertical they’re interested in. A family office — usually a single buyer — can be attractive to a dealer looking to sell, because they often are “silent owners” who keep the existing management team in place. 

No matter when and to whom they’re selling, dealers should have a sale-and-succession plan in place. One key task is making sure the dealership’s financial records are in order, to make a sale proceed more efficiently. The dealer principals should work with their lawyers, bankers and accountants on estate and tax planning, to be prepared for an eventual sale.

As long as a dealership’s new owner continue to focus on the customer service and personal relationships that have been the hallmarks of the industry, the impact of consolidation will be minimal.

While consolidation has accelerated, it really has not significantly changed the competitive landscape, nor the ability of a single-point dealer or small group to prosper.

The three biggest costs of operating a dealership are people, inventory and real estate. Whether you are a big group or own one dealership, these costs are the same. While there may be some economies of scale, such as vendor costs, it comes down to the operator. Some single-point dealerships do just as well because they’re more focused on a single market, a single team.