Industry consolidation, and why it's happening

The landscape of our industry has changed drastically in the last five years. Independent dealerships and small auto groups are being eaten up by larger groups left, right and center.

But, why is this happening?

How is it going to affect me?

What should I do?

Continue on concerned reader, and all will be revealed ...

1) Our industry has changed

The reach of the Internet and the way in which it has changed consumer behavior is a big part of this consolidation.

The Internet is a complicated and ever evolving challenge, and one that has really shaken the status quo up. Many dealers would rather sell out to a big dealer group than try to adapt to a shifting market that they no longer understand.

2) The economy has struggled, and oil has skyrocketed

It’s said that in tough times the rich get richer, and the poor get poorer.

When the economy struggles and car sales dip, some dealers get shaky knees and want to pull the ejection cord. This offers a great opportunity to the big groups out there that have the staying power and confidence to get through the tough times.

They know that the market will rebound, so they buy stores in times of desperation (i.e. when our oil prices recently went through the roof) and reap the rewards the market corrects itself in the months and years to come.

3) The first generation dealers are moving on

The dealership model is still relatively new in the grand scheme of things, and 90 percent of the dealerships out there were started in the last 40 years.

That initial wave of founders are now in their 70's and beyond. Their priorities are different, and often the appeal of cashing out and providing their families with lifelong financial security is just too great to resist.

4) Increasingly competitive

There are more dealers than ever before, and dealership advertising budgets are at an all-time high. The glory days have come — and gone.

As little as 10 years ago, having a strong franchise and a reasonable PMA was essentially a license to print money. A dealership would essentially have to try to fail, but this is no longer the case.

With the increase in competition from the big groups and better operators, the old-school independent dealers who have been on cruise control for the last 10-40 years are now being forced to reassess the way they run their business.

5) Higher operating costs

This one is pretty self explanatory. The cost of real estate alone has nearly doubled in most places of Canada over the last 10 years.

Everything from the office furniture we use, the software we rely on, to the gas we fill up cars with have escalated in price. Similar to the increase in competition, these higher operating costs force antiquated dealerships to either run a tighter ship or risk slowly sinking into obscurity.

6) Economies of scale

Medium to large auto groups generally receive a discount in the range of 10-20 percent from most of the vendors in the industry (note: if you are part of an auto group and you are not currently negotiating as a group and leveraging that power, you are doing it wrong). When most dealers have 10's of thousands of dollars in monthly costs, a 10-20 percent discount can provide a significant advantage.

Final Thoughts

 In a sense, what we're seeing with the automotive industry is just Darwin's famous theory playing out. The strong are eating the weak, growing stronger and evolving faster.

Most dealerships that are being purchased by auto groups are underperformers, often with aging and complacent ownership. The big groups then bring in fresh blood, better processes and modern tools. It's not uncommon to see an underperforming store completely turn around and double its numbers months after being acquired by a larger group/better operator.

Manufacturers award more new dealership locations to medium-large auto groups than to independent and small groups, largely because they believe that the store will do better under the larger umbrella.

If you are an independent dealer or small auto group, it's time to take a good look at your business for ways you can improve your operation. With the bar being continually raised in our industry, your choices are simple — evolve or fold.

Kevin Gordon is a co-founder of Convertus, a fast growing automotive digital marketing agency based out of Vancouver. Contact Kevin at [email protected] or call 888-354-6441 to see how Convertus can help you craft a winning digital marketing presence for your store.