The Great Normalization is well underway and accelerating for certain brands in the automotive sector.
That is one of the main takeaways from the recently release of “Presidio Perspectives: A Quarterly Outlook on Auto Retail and M&A Trends” for the last quarter of 2023.
The financial performance of the average U.S. auto dealership is declining, and certain store values are under pressure as normalization from the industry’s pandemic-era highs continues, according to quarterly publication that is focused exclusively on automotive retail performance, technology and M&A trends.
Dealership Headwinds
The Presidio Group, an independent merchant banking firm focused on mergers and acquisitions, capital raising and investments in the automotive retail and consumer mobility sectors, reported the headwinds currently facing dealers include vehicle supplies continue to climb; more discounting; and high interest rates persisting, causing pain for both dealers and.
The report’s findings led Presidio CEO Brodie Cobb to note that “dealers will have to work a little harder to make less money.”
In the first full-year results for the Presidio-NCM Average Dealership Performance Benchmark, the average U.S. dealership saw additional profit declines as 2023 ended, with the average franchised store posting a 20.4 percent decline in net pretax profit for all of 2023, an acceleration from the 19.5 percent drop recorded through the first nine months of the year.
Choppy Seas Ahead
Survey results showed that dealers generally understand that profits aren’t staying at the peak levels of recent years. More than two-thirds of 285 survey takers representing about 3,100 franchised dealerships said they expect dealership profitability will decrease over the next 12 months.
The decline is impacting dealership valuations.
“This year will be choppier and will likely trend down overall,” said George Karolis, president of The Presidio Group, in a press statement. “But brands and geography matter much more than ever during this period of normalization.”
How to Stand Out
During this period, dealers can differentiate themselves through operational efficiencies and peer comparison. NCM Associates CEO Paul Faletti offered that dealers should examine their pre-pandemic operational baseline to best position themselves for the more traditional retail environment we’re seeing come back into play. That in part means going back to the basics.
“In a lot of areas, we took our eye off the ball during COVID,” Faletti said.
The public retail groups are exerting more discipline and taking a balanced approach to capital allocation—which means acquisition activity by the publics could slow as these consolidators may, for example, opt to buy back their stock vs. acquiring a dealership or group as they compare the deal multiple to their own public enterprise value multiple.
Toyota, Lexus Still Top Brands
But dealership profitability remains above pre-pandemic norms. Even with 2023’s earnings drop, the average dealership’s net pretax profit last year was still more than 2.5 times 2018’s level, according to a Presidio analysis. And more than half of Presidio survey respondents are still looking to grow and acquire dealerships.
Toyota and Lexus continue to lead the Presidio Brand Desirability Rankings. Both brands saw sales of new vehicles per dealership soar in 2023 as inventory levels continued to recover. Perhaps more notably, Honda and Subaru made significant gains near the top of the ranking with Honda at No. 3, up four spots, and Subaru at No. 4, up two spots.
The report is based on aggregated financial results of 4,000-plus U.S. franchised dealerships of all brands and sizes that work with NCM Associates, a provider of 20 groups, consulting and training to dealers across the country.
