An overview of the auto retail industry

Recent years have seen a number of changes in the automobile retailing industry. The mid-1990's introduced large corporate industry consolidators, creating publicly traded mega-dealers. The overall number of dealerships has declined, but sales have increased and branched into related services such

On January 1, 2002 there were 21,800 new-car dealerships in the U.S., some 350 fewer than on the same date a year earlier and 450 fewer than two years earlier. The decline in the number of dealerships is nothing new and represented the 15th consecutive annual decline in the number of new-car dealerships since 1987. Today there are about 4,000 fewer new-car dealerships in the U.S. than there were 20 years ago.

While the number of dealerships has fallen by 4,000 in the last 20 years, the number of new cars sold annually has grown substantially from 10.9 million units in 1980 to 17.1 million units in 2001. What has changed markedly has been the number of cars sold per dealership as more cars are being sold by fewer dealers. Today almost 60 percent of all dealerships sell more than 400 cars annually while 20 years ago more than 70 percent of all dealerships sold less than 400 cars annually.

Large dealerships have replaced small dealerships as the primary outlets for new cars. Small dealerships that have not been able to grow have dropped out of the industry and represent the bulk of the 4,000 dealerships that have left the industry over the last two decades. Other small dealerships have grown into large dealerships, particularly those that were fortunate to be engulfed by expanding high growth population centers in suburban areas of U.S. cities.

The number of new vehicle sales in 2001 was just marginally below the record year achieved in 2000, and most significantly, achieved despite the first recession year for the U.S. economy in a decade. The American consumer (aided in part by a Federal Reserve policy that kept interest rates low,) and innovative marketing by retail automobile dealers helped the automobile retail industry outperform the economy as a whole.

The automobile dealership industry is a mature industry. There are over 128 million passenger cars and over 216 million total vehicles in operation in the U.S. The average household already has more than two cars and there are few eligible drivers who do not already own or have access to a vehicle. The quality of vehicles is much higher than a decade ago which means that consumers are able to delay replacing their automobile longer than in years past. Thus, automobile retailing is not a high growth industry, but rather an industry that would grow at no more than the growth in the economy and be most influenced by the growth in population.

On the other hand, there are several reasons for auto dealers and new investors to feel optimistic about the industry. The automotive retail industry with approximately $1 trillion in sales, accounts for close to one-third of the total $3.3 trillion in retail sales. Furthermore, with over 60 percent of the cars on the road today seven years and older and over 38 percent ten years or older, a sizeable portion of the existing stock of vehicles on the road will have to be replaced in the near term future.

Historically, new car sales have been cyclical, falling and rising with the economy. But since the last recession in the early 1990s progressive automobile dealerships have broadened their product mix in two significant ways. Now, the more successful dealers are representing multiple franchises and offering more brands. Additionally, dealers have continued to emphasize sales of products and services with higher profit margins than the margins possible on sales of new cars. This changing product mix, both additional brands and additional services and products, have served to cushion the industry during economic downturns.

Automobile dealers have long sought to represent more than one franchise, first at different locations, then at the same location. By offering consumers a wider choice, dealers are more likely to make a sale. The major automobile manufacturers, for the most part unsuccessfully, have resisted the dealers' efforts to offer multiple brands, either from multiple locations or from the same location. The automobile producers feared loss of brand loyalty. But brand loyalty no longer was an arguing point after the consolidated automobile manufacturing industry itself became more concentrated when the world's largest vehicle manufacturers began merging and buying up the second tier automobile manufacturers.

As a percentage of total dealership revenue, new car sales have continued to slip from a high of almost 63 percent in 1988 to 61 percent in 1991 to 59 percent in 2001. At the same time revenues generated from the sales of used cars, service and parts, and providing financing and insurance have become increasing shares of the auto dealer's total business. For new car retail dealers, revenue from the sale of used cars has risen from 23 percent in 1988 to 25 percent in 1991 to 29 percent in 2001. While unit sales of new and used cars were about equal in the 1960s, now used cars outsell new cars 3 to 1.

Dealership sales of service and parts rose 9.1 percent in 2000 and 8.5 percent in 2001, remarkable achievements given the struggling national economy. New car dealers have more control over labor and other costs, mark-ups and margins for providing services and selling rebuilt and replacement parts than they do on the sale of new cars. Dealers have become more aggressive in their marketing and customer service in order to sell products and services with higher margins than new cars.

Despite the declining number of dealerships, the auto retail industry is consistently profitable, showing positive earnings for-the more than 20 years that NADA has been tabulating its average dealership net profit results. Compared with high risk and volatile scientific and technology industries, the automobile retailing industry is currently an attractive investment alternative for many investors.