We believe the auto retailing sector will remain a favorable
business. This is American Automotive’s rationale for
purchasing and owning dealership real estate for the long term.
Various industry attributes are discussed below.
Attractive Properties
Dealership and vehicle service properties can be attractive
real estate parcels as they are visible from, and have frontage
on, major roads. These properties typically have zoning which
allows alternative uses. If the properties can no longer be
leased to dealers or vehicle service operations, they may
represent attractive commercial or residential redevelopment
opportunities.
High Barriers to Entry
Auto retailing has high barriers to entry for reasons
including:
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1. |
Dealership locations
which are often difficult to replicate or relocate. Many
dealerships have been at their same locations for 25 years
or longer. Some franchise agreeements are location specific.
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2. |
Strong state by state franchise
laws which protect existing dealers.
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3. |
Automaker bailments (allocations
of vehicles) are sometimes limited, particularly for popular
vehicle models.
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4. |
Entry into auto retailing
requires substantial working capital. Financing requirements
include equity support for floor plan loans, increasingly
sophisticated computer and software systems, parts inventory,
improvement of facilities and real property, labor and
labor training, and government compliance.
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5. |
Continued pressure from automakers
to reduce or streamline their authorized franchised operations.
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6. |
Automaker discretion concerning
the sale and transfer of franchised dealers.
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Retailers Provide a Necessity Service
U.S. consumers will continue to purchase their vehicles in
the future similar to how they have in the past. U.S auto
dealers will not be easily disintermediated by the internet
and other technologies. Consumers want to touch, feel, and
test drive their vehicles before purchasing. General attributes
which reinforce automotive retailing include:
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1. |
Strong state
by state franchise laws.
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2. |
Dealers often are among the
largest sources of sales taxes for counties and municipalities.
Cities and counties seek to preserve the ability of dealers
to operate.
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3. |
Multiple lines of vehicles
carried by many U.S. retailers, which increase retailer
negotiating power with respect to individual automakers.
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4. |
The geographic expanse of
the U.S. and the need of both foreign and domestic automakers
to reach and service a diverse and widely dispersed population.
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Stable Franchise System
Dealerships generally operate under a written franchise agreement
with the automotive manufacturer(s). The franchise agreement
specifies the locations at which the dealer may sell and service
the manufacturer’s products. Franchise agreements include
stipulations on topics including the size and appearance of
the showroom, the facilities and service equipment, inventory
levels, minimum net working capital and personnel training.
Most franchise agreements expire after a specified period
of time and may be extended or renewed. In general, the agreements
assist automakers in ensuring that dealerships are profitable,
well-maintained and well-funded operations.
Improved Earnings Quality
A historic review of the dealership business indicates well-managed
dealerships have been profitable across a wide range of business
environments. Over the past thirty years, the average dealer's
sources of profitability were different than they are today.
During the past decade, only 20% of a dealer's profits were
generated from the sale of new vehicles and nearly 80% of
dealer profits derived from the parts and service department
and from the sale of used vehicles. During economically difficult
periods, consumers tend to keep their cars longer or consider
buying used vehicles. These choices require more frequent
service and increased purchases of replacement parts. Overall,
economically good periods favor sales of new vehicles and
accessories, and economically unfavorable periods will increase
revenues in the departments which are currently most profitable
for auto dealers.
Components of Dealership Profits
1970 - Present
Auto Dealer Consolidation
We expect auto dealership consolidation will continue. The National
Automotive Dealership Association indicates that from 1994 to
2004, the number of franchised automotive dealerships decreased
from 22,850 to 21,650. The majority of dealerships which sold
or closed were smaller and more rural locations. At the same
time, the number of dealerships which sell more than 400 units
per year has increased considerably. A portion of the industry
consolidation has been facilitated by the larger, well-capitalized
publicly-traded automotive retailers. American Automotive purchases
real estate from both public and private auto dealers. The following
chart summarizes auto dealer consolidation during the past 20
years.
Number of Dealerships, by Volume
of New-Unit Sales
Source: National Automotive Dealers Association
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