Inside Automotive with Jim Fitzpatrick, powered by CBT News

Tariffs, Valuations, And The Dealer Future

• Jim Fitzpatrick • Season 1 • Episode 24

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We unpack how tariffs and interest rates truly affect buy-sells, why consolidation is accelerating in key metros, and how OEM image programs are reshaping valuations and deal strategy. Erin Kerrigan shares data on cash-rich buyers, regional concentration, and the path to a 50% revenue tipping point.

• tariffs showing limited impact on buy-sells 
• domestics gaining demand and market share 
• valuations buffered by tight spreads and cash reserves 
• consolidation advancing faster in growth metros 
• bidder lists constrained by OEM approval thresholds 
• portfolio optimization and regional chessboard strategies 
• fewer IPOs offset by private capital and bonds 
• image programs inflating capex and pressuring returns 
• franchise laws and dealer advocacy as valuation backstop


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Announcer:

Welcome to Inside Automotive with Jim Fitzpatrick.

Jim Fitzpatrick:

Hey everyone, Jim Fitzpatrick. Thanks so much for tuning in to another edition of Inside Automotive right here at CBT Automotive Network. The buy-sell market is moving fast. Today we're talking with Erin Kerrigan, founder and managing director of Kerrigan Advisors. You've seen her here before on CBT News to break down what's happening, how valuations and transactions are changing, and what dealers can do to stay ahead of the curve. So welcome, Erin. Thank you so much for joining us on the show.

Erin Kerrigan:

Thank you for having me as always, Jim.

Jim Fitzpatrick:

Sure. So uh so let's let's jump right in here. How is uh you know the constantly changing tariff landscape impacting the buy-sell market? Which by the way, I might add, we haven't been talking a lot about tariffs lately on CBT, every now and then. But of course, I think we went through this huge storm of uh conversation about it, but how's it impacting things?

Erin Kerrigan:

Well, I think it's telling that you haven't been talking about it that much, uh, in that it it really hasn't impacted it that much at all. And uh, we actually did a survey. We have our dealer survey that we do every year. And I'll give you a sneak peek on one result. We did ask about tariffs, and the 600 dealers that responded to our survey, which is one of the largest in the it's I think it is the largest of its kind, yeah, uh of specifically dealers, the 41% said tariffs weren't impacting their business at all, which is somewhat surprising because it is certainly impacting inventories. I mean, I do speak to dealers all the time, and they do, they do have some impact. But nonetheless, uh at here today, it really is not impacting the buy-sell market. And even if you look at the financial markets, the the the six publicly traded new car retailers, their stocks are up about 5% year to date. Now, CarMax is down quite a bit because they missed earnings. So uh the Kerrigan index, which includes CarMax, is is not up year to date, mostly because of CarMax. The other companies are, if you take all those and remove CarMax, it's a the index is up 5%. So I think the financial markets, the dealers, everyone expects this is going to get resolved. Although I think most of us thought it'd get resolved this summer, and here we sit in the fall. So it's not having an impact.

Jim Fitzpatrick:

Exactly, exactly. And I will, you know, the question of did it impact your business? It could right away somebody thinks negatively, but it could also impact your business positively. So if you're a Chevy dealer, for instance, I've spoken to a lot of them, they're having a pretty decent year, and they uh a few of the dealers I've spoken to said, yeah, the the tariffs have impacted my business positively, just because of kind of the perception out there among consumers and car shoppers that oh, I should probably look at buying an American car and avoid any kind of tariff on there. Have you seen that at all?

Erin Kerrigan:

100%. The domestics are definitely benefiting also in terms of the buy-sell market. We have seen them take share in the buy-sell market. There is more demand for Ford, Chevrolet, even Stellantis is back on the shopping list. So which is a big deal and a big change. So I totally agree with your comment, Jim, and that the impact of tariffs, if anything, is actually causing a greater interest in domestic franchises. That being said, you know, we just we just sold uh um Porsche, JLR, Audi in Louisville, Kentucky, the Bluegrass Motor uh group. And you know, despite the fact that at different times, literally JLR was not selling sending cars, nor was Audi, there was tremendous demand for that franchise also. So I I do think that to your point, not everyone is is is having a negative implication of tariffs. Many are are seeing margins improve in some cases because the supply is down. And so it it is it is in a very interesting situation. I think if anyone had asked the implications before the tariffs were announced, we would have thought that it'd be pretty bad. But in fact, it's really had no effect on the buy-sell market, and really we're not really even seeing effects, if anything, only positive on valuation.

Jim Fitzpatrick:

That's great. Wow, that that's fantastic. All right, so our next topic here, have you seen a change in valuation with recent interest rate adjustment? I mean, that seemed to get some publicity out there. And then, of course, the fact that the Fed uh Powell said, hey, we we might be looking at another couple of reductions here by the end of the year. I would think that's big news.

Erin Kerrigan:

You know, you you really would think it. And of course, traditionally, as interest rates go down, valuations typically go up uh because your cost of capital goes down. And so you you you're in a position as a buyer to uh you can afford to borrow more, if you will, right? For an acquisition. However, this credit spreads have been very tight. They're actually historically as tight as they've ever been on a corporate level. So that is is certainly meaning that the implications of change in interest rates aren't quite as significant as they were. And I think most importantly, because our our transactions aren't that heavily levered, and the fact that dealers still have a tremendous amount of capital on their balance sheets. Just by way of example, the public continue to reach record levels of cash on their balance sheets. And since 24, and just in the first half, they increased that capital by half a billion dollars. So that's a lot of capital. And and and while certainly individual dealers are seeing their balance sheets maybe shrink if they have franchises that are more challenged. The largest diversified groups continue to be frankly flush with cash. And they certainly haven't spent it uh all of it on acquisitions or on other things that they might enjoy. They they just have so much cash they probably couldn't even do that. So there is just a lot of capital out there for acquisitions, and I think that's why a reduction in interest rates hasn't hasn't had as big of an impact on our industry as it might in other industries, uh because the the market still is just very well funded.

Jim Fitzpatrick:

All of that said, what inning do you think that we're in as it relates to industry consolidation?

Erin Kerrigan:

It's such a good question. It's when we we often talk about at Kerrigan Advisors, you know, where are we if you lift up and look at consolidation? I mean, we see the industry has been shrinking by about 50% every 30 years in terms of the number of dealers. That's just if you look back historically at the auto retail industry. Uh and so we're probably tracking to eventually be go from 10,000 dealers in in 20 in 2000 to about by 2030, maybe 5,000. So we're tracking downward for sure. Yeah. That being said, the top 150 only represent 27% of dealership rooftops. Now they represent 33% of revenue. So they have the higher volume of stores. Uh and so that's interesting. And that has grown quite considerably in the last decade. In fact, they're tracking to to be uh in 15 years, the top 150 are tracking to be to represent 50% of the industry's revenue. Okay. Which we do think could be an interesting tipping point. And and so that's something that we look at. The other thing that we look at is okay, well, maybe broadly we're not that consolidated. However, what about the top growth metros, major metros in the US? Now, when you look at that from that lens, what you see is that actually we're very consolidated. Uh, for instance, the the top 10 metros, uh fastest growing metros in the country, you think Orlando, Tampa, these kind of cities, Dallas, they the the top 150 groups own 72% of the top luxury franchises in those markets on average. Wow. So it's there's hardly any left to buy for non-top 50s. Yeah. Uh top 150s. And then uh when we looked at just Toyota, which is the highest demand franchise, so what how consolidated is that franchise? Well, in two of the 10 markets, it's 100% consolidated. All of the Toyota stores are owned by top 150 dealership groups. That's in Raleigh and Tampa.

Jim Fitzpatrick:

Wow, that's interesting.

Erin Kerrigan:

So that's pretty so so again, I think what this tells us is on a regional level, we're starting to get we're we're further in on our innings. On a national level, we're we're not quite there, but on a regional level, you're starting to see pretty significant consolidation. And um another data point to that is that in the last year or so, the majority of transactions occurred in market the buyer was already in the market. In other words, the buyer owned three stores and they went and bought three more. So they weren't buyers are really focusing on growing their regional footprint. And and and so that's that's the stage of consolidation we we see as we see our industry in.

Jim Fitzpatrick:

Okay. Now on for for the uh on the on the OEM side, um, with that with with 100% of those uh Toyota stores being owned by the the big big big boys out there, is there a saturation point? Because I know that in many cases OEMs are like, hey, hey, you got you have too many Toyota stores, you've got too many X, Y, Z stores in one particular area. When does that start to really create a problem where a seller of a store says, I've got a buyer, and they go, Yeah, but we're not going to approve that buyer because of all of the stores they currently have in that market.

Erin Kerrigan:

Well, it's not a problem, yeah, because remember, there's 150. So the top 150 dealership groups. I mean, many industries.

Jim Fitzpatrick:

Yeah.

Erin Kerrigan:

It's not necessarily the many industries, but it is, it is, it can be a problem. For instance, when we represented the sale of the Toyota um store in Tampa, which was the last remaining dealers, Tampa Toyota store in that market that was not owned by a major consolidator.

Jim Fitzpatrick:

Right.

Erin Kerrigan:

Some of the consolidators already owned too many stores in that market, so they could not buy that store. Right. So um, you know, the the list was smaller because because I think the public, this is from memory, but I think the each of the publics owned, you know, several. And so you you really didn't have many players yet, but of course, a lot of people want to buy a Toyota store in Tampa, so it wasn't it it there was still tremendous demand. And um the Gettel Organization, which is a top 150 dealership, private dealership group, was the ultimate um buyer of that store.

Jim Fitzpatrick:

And then we also know that that OEMs will say, All right, we'll let you buy that that store so long as you give up one of your other Toyota stores. So I'm sure those those, you know, those those managers of uh those uh consolidators go, okay, where's the weakest link? And we'll pick up that Tampa store and we'll drop off this low producing Toyota store. So there's right.

Erin Kerrigan:

Yeah, I'd like to, I like we talk a lot at Kerrigan Advisors about we're kind of transitioning from a game of chess, uh, pardon me, from a game of of checkers to chess, right? So there's a lot more strategy that goes into this because it's not simply moving the checkerboard. It's now you gotta sort of think very strategically on how on how you grow your business and and you know, ultimately, why do people grow by more dealerships? Usually they're looking to enhance the value of their group.

Jim Fitzpatrick:

So that's right.

Erin Kerrigan:

Um, yeah.

Jim Fitzpatrick:

Yeah. I would imagine too, we're gonna we're gonna at some point in time see one publicly traded company try to acquire another publicly traded company as a merger, and that's gonna be problematic in terms of the OEMs and getting approval on, you know, one's one's got 300 stores and another one's got 150 stores, and right? Because that's just gonna-

Erin Kerrigan:

I don't I that I I don't have any strong opinion about. Um yeah, I think I think that quite honestly, what you're gonna see is I think those that aren't in the top 150 are gonna be working very hard, again, playing chess to figure out how to how to be in the top 150, because I believe that once we get to the 50% of the revenue being represented by that that cohort, you're gonna start seeing some real changes in the industry where it's gonna be harder for a smaller dealer to compete when when there's that much consolidation. So I think everyone's gonna be focused on getting there. And I think that some of the folks in the top 150 will sell also, like the Coons transaction. I mean, they and the Keys, you know, the Howard Keys is still in the business, but they did sell their mothership business. Right. Um, and and so I I do think you're also gonna see transactions in that top 150 group. So there's gonna be shuffling of that list, but ultimately, uh ultimately we will hit a tipping point um where they're gonna represent 50% plus of the revenue of the industry. And that that's I my estimation is that that's a a significant moment.

Jim Fitzpatrick:

Sure. I am surprised, Erin, that we haven't seen more uh publicly traded or or more car groups, auto groups going public. I mean, there just seems to be still this six, seven number. And it would seem to me with the money that's out there and the private equity players and the and the market, and ever since Berkshire Hathaway jumped in, and it there's been so many positive things about the auto industry that it seems to me that there would be more publicly traded auto groups out there, and there just there just hasn't been. There hasn't been that many that have right? When was the last time we saw?

Erin Kerrigan:

The IPO market has not been very strong in the last year. That being said, I would say that in general, that there's if you think of the capital markets, the private side of the capital markets have become so robust that what you are seeing is is is dealers tapping into that, tapping into the private private capital investors, uh private equity, uh, family offices. So I think that that is where we're at in terms of the industry tapping into uh professionally managed capital. It's just not there's a lot of headache that goes with being a public company. And you know, you can ask any of the CEOs of the current uh six public companies and they will tell you that, right? It's it's it's it's a lot of work. And and I think that the private turning to private equity, and that's a broader term, it includes family office, is a much more attractive way. Now you are also seeing though, um you have seen private dealers tap into the bond market. That is happening. And uh the Morgan group uh tapped into the bond market, um, Garf has tapped into the bond market. I think you're gonna see more folks do that, especially going back to your earlier question, especially with interest rates going down and be more even more attractive. Again, remember I mentioned the credit spreads were so thin. That's why it's been attractive, even with higher interest rates, for those companies to tap into the bond market.

Jim Fitzpatrick:

Gotcha, gotcha. Makes sense, makes sense, makes sense. Um, what are your thoughts on on all the new image programs being rolled out by the OEMs?

Erin Kerrigan:

Well, I think that that is that is definitely not going to be great for the buy-sell process and not for valuation. I mean, the the challenge that we always have is that when there is an image requirement, a new image program, you know, concocted in a boardroom of an OEM, the the they always are very nice to their existing dealers about oh no, no, not necessary to do this. And then the buy-sell comes. And it's like this is a chance to, you know, take a pound of flesh. And so so it's it is negative for valuation because the buyer usually has to do the image program. And these image programs um have become much more expensive just by virtue of the inflation we've seen in the market.

Jim Fitzpatrick:

Oh, no question. You just mentioned you just mentioned the the sale of Porsche store in Kentucky, and man, those new Porsche stores, those destination points are unbelievable.

Erin Kerrigan:

Yeah, and and and that's impacting Porsche's valuation. I mean, the reality is it might work in some markets, but when land is so expensive and the facilities are expense so expensive and supply and allocation is so limited, okay, you know, sure you're gonna give me 20% more cars. It's still not enough cars to make up for the cost of this building. So so there is there is a challenge there, no doubt. And I I I think at this point I can't even count the dizzying number of of OEMs that are announcing one new program after another. I don't know what was in the water in 25, but we've got I think six or seven new beautiful buildings that are gonna not sell more cars that dealers are being asked to build. And so um this is, you know, one of the reasons that the franchise laws are so important. And I always encourage dealers to really lean into their their associations. I do think I agree with Don Hall that the the uh that the letter that the the OEM sent to to the Department of Justice claiming that that franchise laws were not legal. It was an aggressive, aggressive move and a shot across the bow. And we all that care a lot about the value of these businesses and and what dealers have invested personally in generations in these businesses uh need to continue to be very vigilant in supporting all the associations that make sure that that that that that dealers get a fair shake. I mean, dealers are have mortgages and have all sorts of things that that there are reasons behind all these franchise laws. And um, and so I guess we'll maybe we'll we'll wrap up with that. That is so important. So I I I really do credit all of the associations for the hard work that they do and and believe it's a very important thing to support your society.

Jim Fitzpatrick:

Totally agree, totally agree. Erin Kerrigan, founding and managing director of Kerrigan Advisors. Thank you so much for joining me on the show once again. I know that our dealer viewers get a lot out of your visit with us. So thanks so much.

Erin Kerrigan:

Thank you so much, Jim. It's great to be on.

Announcer:

Thanks for watching Inside Automotive with Jim Fitzpatrick.