The noteworthy takeaways from July’s Automotive Ventures Intel Report

Welcome to this episode of The Friday 5 with Steve Greenfield, Founder and CEO of Automotive Ventures, an auto technology advisory firm that helps entrepreneurs raise money and maximize the value of their companies.

July Automotive Ventures Intel Report

The July Automotive Ventures Intel Report is out, and I wanted to recap two thematic areas that appear to be top of mind for dealerships, and are areas that dealers should particularly be focused on monitoring. 

First up, it’s worth reflecting on the size of the franchise dealership footprint. NADA reports that there are 16,658 franchise dealer locations in the U.S., while Urban Science reports 18,230 physical “rooftops”.

As direct selling and more of an Agency Model are being discussed with more regularity in the news, a key question is if and how automakers will attempt to reduce the number of physical dealership locations in the U.S.

Certain brands have overbuilt the number of dealerships required, especially as a greater percentage of consumers inevitably become comfortable with purchasing their vehicle sight unseen.

We can put this into stark contrast by comparing the domestic and import OEMs, in terms of new vehicles sold per physical location. For example, last year GM dealers sold an average of 290 new vehicles per location, and Ford dealers sold on average 493 new vehicles per rooftop. 

This contrasts with the average Honda store selling 1,401 new units per store, and Toyota dealerships selling on average 1,884 units per location. Efficiencies aside, it’s no wonder that the average Honda and Toyota store transacts at a higher valuation than their domestic counterparts.

In terms of how a deliberate orchestration of shrinking the dealership footprint might play out, we need not look any further than how things have played out across the Cadillac brand.

The number of Cadillac dealers in the U.S. has shrunk to 564, as compared to 921 dealer locations just four years ago.

You may recall that Cadillac required that dealers invest $200,000 towards electrification improvements: things like on-site vehicle charging stations, new tooling, service upgrades, cosmetic enhancements, and training for sales and service staff.

Dealers who opted not to upgrade for the EV transition were offered a buyout package said to have been an amount between $300,000 to nearly $1 million. Some dealers reported low customer interest in EV products, including some dealers located in more rural areas.

With the evolution toward EVs and direct selling, it’s very likely that other automakers may follow suit to deliberately shrink their dealership footprint.

It’s also very likely that OEMs will encourage larger, stronger dealers to acquire weaker and more remote stores and operate them as satellite locations.

We will be keeping an eye on total dealership count, specifically across the legacy domestic brands, that have built out a physical dealership footprint that is currently too large to ensure strong dealership profits into the future. 

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Next up, but related to this previous topic, I wanted to provide a perspective on the benefits of size and scale for dealerships. 

A question that I’m getting more and more often from small dealer groups is “How big do I need to be to weather all of the dynamics in the market?” This question is coming up more frequently as the news cycle introduces more uncertainty about the future. 

I’ve thought a lot about how best to address this question, and the answer isn’t necessarily straightforward. Having said that, I think dealers should look at this from three different perspectives: Cost Structure, Diversification, and OEM Influence.

In terms of cost structure, the scale and size of the public groups do put them at an advantage vs. the average dealership. 10-15% of efficiency in selling, general and administrative costs (usually referred to as SG&A) flow directly through to the bottom line, and this efficiency provides the public groups with more “dry powder” to acquire stores (or buy back shares). 

Another way to look at cost efficiencies is through advertising expenses. In 2021, Carvana spent $479 million on advertising, which is 3-times more than CarGurus. CarMax spent $218 million, while Lithia spent $162 million. 

It’s not unreasonable to project that within a few years some of the large dealer groups will spend more than $1 billion per year on advertising, which is kind of astonishing when you think about it. This will make it much harder for smaller dealerships to compete for consumer eyeballs. 

In parallel to keeping a watchful eye on their cost structures and using size and scale to centralize and remove costs, dealers might look to diversify across multiple OEM brands. Some of the automakers are moving towards elements of an “Agency Model” at a faster pace than others, and owning a diverse portfolio of OEM brands will allow dealers to naturally hedge against any one OEM becoming more aggressive with direct sales, centralizing inventory, and reducing margin per unit sold. 

Last, but not least, the more locations you own, and more units sold for any given OEM, the more influence and voice you will have when it comes to the evolving retail model and being prioritized for new car allocations. 

The average dealership location doesn’t have much leverage when compared to the size of the average automaker. But by growing through acquisition, small dealer groups can become mid-sized dealer groups, which gain more control and potentially a “seat at the table” in discussions with OEMs about how to shape OEM/dealer strategies and influence the future. 

I’ll continue to think about how best to answer this question on “How big is big enough?”, given all of the dynamics evolving in the market. If you have specific thoughts on this question, please shoot me a note at steve@automotiveventures.com. I’d love to discuss it with you.

Companies To Watch

Every week we highlight interesting companies in the automotive technology space to keep an eye on. If you read my monthly industry Intel Report, I showcase a few companies each month, and we take the opportunity here on the Friday Five to share some of those companies each week with you.

Today, we have two companies to watch: Armatus by DealerUplift and Rolling Energy Resources.

Armatus by DealerUplift

DealerUplift and its Armatus product help Dealers Increase Their Annual Warranty Parts Gross Profits by $80,000 – $100,000. 

Complex state statutes, manufacturer protocols and pressures, gatekeepers, and limited internal resources are just a few of the challenges that make receiving full retail warranty reimbursement difficult for automotive dealerships.

Auto dealers across the country have been forced to “discount” their warranty parts. When they are reimbursed, they typically only receive a 40% markup or MSRP. Neither reflects true retail reimbursement rates.

Further, legislation in 49 states entitles automotive dealers to be reimbursed by manufacturers for warranty work at retail, which is actually the dealer’s customer “repair” rate.

The reason I love this company is that the value prop is kind of like picking up dollar bills that are just laying on the floor in a dealer’s service bays. For almost no incremental work from the dealership, the company guarantees results and doesn’t charge the dealer until you see an ROI.

You can check out Armatus/DealerUplift at www.DealerUplift.com.

Rolling Energy Resources

Rolling Energy Resources takes a new approach to managing electric demand from vehicle charging. 

They connect directly to EVs through the vehicle’s native APIs, utilizing systems that are already in place. 

Rolling Energy Resources can then control charging and monitor battery state-of-charge, regardless of where the customer plugs in.

The reason that I love this company is that they provide electric utilities with smart charging, demand response, and electric vehicle research solutions for all automotive brands, without having to install new hardware. They provide persistent battery status monitoring, and their MyCharge reports inform customers of their charging costs and drive satisfaction.

You can check out Rolling Energy Resources at www.RollingEnergyResources.com.

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So that’s your weekly Friday 5, a quick wrap-up of the big deals in the automotive technology space over the past week.

If you’re an early-stage automotive technology entrepreneur looking to raise money, or an entrepreneur who is trying to decide whether and when they should raise money or sell their business, I’d love to speak with you.

Thank you for tuning into CBT News for this week’s Friday Five, and we’ll see you next week!

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