Friday, April 13, 2018

Scaling up Auto Dealership Size

The WSJ reports that the efficient size of an auto dealership in the US is getting larger. They have become 20% larger over the past four years:
The top 50 dealer groups are poised to book more than $175 billion in revenue this year, compared to $144 billion 

There is an consolidation wave going on:
Erin Kerrigan, founder of the Kerrigan advisory, said about 200 dealerships changed hands in 2017, near an all-time high with a similar level of transactions to take place this year.

An economist observer naturally asks why?

1. One explanation suggests that inefficient small firms had been able to survive only because of weak competition. They cannot stay afloat on the smaller margins:
... dealer margins are shrinking amid tough competition and the increased pricing transparency enabled by the Internet. Dealers took home about 2.5% of the selling price of the average new car in 2017, down from about 4.7% in 2009, according to data from the National Automobile Dealers Association; used-car margins slipped to 6.9% from 10.7% in 2009 during that period.

and
 Dealers say they need to as much as triple revenue in the next half-decade to offset shrinking margins and increasing competition from companies that didn't exist a decade ago.

2. Another explanation is that the cost conditions changed so that unit costs are lowest at a larger scale.
"In order to survive and thrive you need scale and scope and access to capital," he [Mr. Rosenberg, chief executive of GPB Capital] said.

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