Stephen Dietrich is a partner at Holland Knight, the preeminent law firm representing dealerships across the country in a number of matters, including Mergers & Acquisitions.
In this episode, The two discuss the current state of the dealership buy-and-sell market, with a focus on the impact of the pandemic, chip shortage, and supply chain shortages on the industry.
One of the challenges facing the market is the ongoing supply chain shortages, which have been exacerbated by the pandemic. Dietrich notes that these shortages are affecting the availability of vehicles and parts, which can impact dealerships’ ability to conduct business.
In addition to supply chain challenges, the relationship between OEMs and dealerships is also a concern. Some OEMs have announced plans to move to an all-electric vehicle lineup, which could have significant implications for dealership franchise agreements. Dietrich believes it will be necessary for dealerships to have open and transparent discussions with OEMs to address these challenges and find solutions.
According to Dietrich, while the public buy-and-sell market may have cooled off in 2020, the appetite for acquisitions among private buyers has remained strong. He notes that the success measures for public and private companies may differ, with public companies potentially being more interested in buying back shares rather than acquiring dealerships.
In the first half of 2022, the number of private buyers increased, and while there were more buyers than sellers, the number of sellers also increased. “As the share of the buy/sell market held by public retailers fell, the major private dealership groups remained committed to expanding through acquisition. In reality, the largest private groups expanded their share of the buy/sell market to more than double that of the public.”
Many folks in the auto space reinvest in their own business, either through improving their own business or buying other dealerships as they go forward. You could say the same for the public at some level; they might not be buying more dealerships at the pace they were, but they’re buying back their stock, and that’s a good investment. The result of those two decisions of wanting to invest their money is two different actions at some level. I see it as they’re bullish on their business. They show it in different ways.
The flip side is that the private dealers See a more aggressive or a higher ROI than the public folks do. The nature of the individuals folks in the private sector look at that and say, They likely can do a better job with it. Their view of return and investment may be more aggressive than the reality of the return and investment that public companies see.
The transition by several OEMs to a fixed-price agency model is the most topical subject in the new-car retail market. Brands such as Toyota in New Zealand and Mercedes-Benz in South Africa have adopted this approach, in which dealers no longer own inventory and facilitate the sale of a vehicle at a fixed price on behalf of the original equipment manufacturer. After rationalizing its network, Honda is slated to adopt an agency model on 1 July 2021, while Mercedes will adopt it on 1 January 2022. Details on how a trade-in will be valued have yet to be determined by the relevant manufacturers but are essential for the agency model to achieve its stated goals.
This is a significant change to the current approach, and long-term business partners request that dealers accept it. The emergence of scepticism over components of the agency model should be interpreted as something other than a sign that Dealers are resisting change. Dealers are not adverse to change, but after years of investment, they have a great deal at stake. In addition to their retail expertise, they anticipate playing a vital role in developing any future retail models in which they engage. This includes asking the essential questions that must be answered.
Dealers have questions about the model’s fixed price aspect. Will customers be unable to negotiate to walk across the street to a competing brand willing to negotiate? According to OEMs’ research, buyers do not wish to negotiate prices. However, according to a survey commissioned by the AADA, more than 90 per cent of consumers cherish the chance to negotiate a reduction. The Dealer will be responsible for explaining to the consumer why they can no longer negotiate a deal. The second big concern is whether a fixed-price model can operate effectively when nearly every new-car sale involves the trade-in of a previously-owned vehicle.
Another question that Dealers may have pertains to performance requirements, specifically sales goals. Will there still be compensation components tied to such objectives? Without the capacity to discount the product, the Dealer’s ability to influence the sale is substantially decreased, and as a result, sales targets would inevitably slip.
These are but a handful of the crucial concerns that inevitably accompany the transition to a new business model. It is alarming that several OEMs are exploiting a move to an agency model to push their Dealers to utilize particular suppliers. It is challenging to chew that the cost of supplies is approximately 50 per cent greater than what dealers are already paying. This is detrimental to Dealer profitability and consumer welfare.
We can endlessly discuss the many components of an agency model. However, the fact is that these Dealers who are being asked to transfer to an agency have, more often than not, represented a brand for years. They have frequently invested enormous sums of money. They can no longer capitalize on the goodwill they have spent time, money, and effort cultivating, thereby diminishing the value of their firm. These Dealers are entitled to compensation, primarily when the OEM seeks access to the client database. Under an agency model, it is not reasonable for the OEM to expect the Dealer to send up this customer information.
Dealers respect the ability of original equipment manufacturers to develop alternative distribution schemes. They have done so in the past. They will do so once more. It is their privilege. However, when such modifications are done, they are responsible to their Dealers. They should communicate such changes in advance. They should collaborate with their Dealers to address all controversial issues and permit Dealer input on the final model. Importantly, they must comprehend these changes’ substantial effects on their Dealers. The value of enterprises will undoubtedly be impacted, and Dealers should be compensated fairly and adequately for these changes.
This is not the time to be a passive spectator. As a dealer, this is a time to pay attention, lean in, listen, and connect with whoever your advocates are. Stay in the know, and make sure you have the most significant communication relationship with your OEM.
The pandemic, in a way, didn’t change many things, but it accelerated many things. And one of them is people’s comfort level. It’s the very reason why, you know, we have so many of these brick-and-mortar retail places for lease now because we just found a better way and all of a sudden, that old way is not that appealing anymore.
Overall, the conversation offers valuable insights into the current state of the dealership buy and sell market and the challenges and opportunities facing the industry.
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