The big tick for the dealership business model: Why major investors have auto dealerships in their crosshairs.
When the most successful investor of the 20th century starts investing in car dealerships, it’s worth taking note.
Earlier this year, Warren Buffett completed his acquisition of the largest privately held dealership group in the United States, the Van Tuyl Group.
Buffett’s larger-than-life character and extraordinary investing track-record only increase the interest in his latest investment choices. With nicknames like the ‘Oracle of Omaha’, you can begin to understand the almost mystical aura behind the 84-year-old’s otherwise jolly persona.
However, Buffett is no fortune teller. Chairman, CEO and largest stakeholder of Berkshire Hathaway, and consistently ranked amongst the world’s wealthiest people, Buffett is only interested in trends that work and models that succeed.
Despite his enormous wealth, he is also well-known for his personal frugality. No cent is gambled in rash and most key choices are made in adherence with the philosophy of value investing – an approach that places greater emphasis on buying stocks at a discount to their intrinsic value rather than their market value.
Buffett is also a notable philanthropist. Having pledged to give away 99 per cent of his fortune to philanthropic causes; he was named in Time’s 100 Most Influential People in 2007; President Obama awarded him the Presidential Medal of Freedom in 2011; and he, along with Bill Gates, was named the most influential global thinker in Foreign Policy’s 2010 report.
Buffett’s moves are always closely followed and there is a sense of surety in his choices.
So, by purchasing the Van Tuyl Group (with an aim to buy more dealerships in the future), is Buffett giving the automotive industry – and the dealership model, in particular – his ultimate stamp of approval?
The Van Tuyl family founded the group six decades ago. It’s now ranked amongst the highest US dealerships for revenue (almost $8 billion in 2013) and has 78 independently operated dealerships in its stable. As a result, Buffett will acquire the plethora of dealerships across all 10 states, in one swoop.
Therein lies one of the most attractive prospects of this type of ‘bundled’ purchase.
In Buffett’s eyes, the dealership business model is a winning one. And it turns out he’s not the only one looking to jump on the bandwagon.
American business magnate, George Soros, too sees the cash-flow capabilities of car dealerships. He recently sent his most trusted assistants down to the NADA convention in San Francisco to scout for possible dealership investment opportunities.
In a clear nod to the ‘ripple effect’ caused by successful investors, shares of the major publicly owned retail chains, including Penske Automotive, rose remarkably from 2 to 7 per cent with word of Soros’ intentions quickly spreading.
Then there’s the world’s richest man, Bill Gates, who owns 15% of AutoNation, itself a rollup of individual dealerships created by fellow billionaire, Wayne Huizenga.
For dealership owners in the US and in countries like Australia, the keen interest shown in the dealership model by the likes of Buffett and Gates should be viewed as positive.
‘This is the beginning of a journey that will have no end,’ says Buffett on his recent acquisition.
‘(Van Tuyl family members) Cecil and Larry have given us the ideal platform with which to build an auto dealership business that will be thriving and growing 50 and 100 years from now. The fun has just started.’
Buffett hopes to use this agreement as a means to buy other dealerships and predicts that he will hear from hundreds of dealership owners looking to sell their businesses in the near future.
Whilst speaking about his new purchase, Buffett also dismissed the direct-to-consumer model championed by Tesla’s Elon Musk.
‘I would doubt if it picks up much steam,’ he said of the company’s sales model. ‘What Tesla does with it, we’ll find out. But I do not see the distribution system changing in any major way.’
Some analysts believe that online vehicle buying will eventually replace all or part of buying at your local car dealership, making cars much cheaper than they are right now.
Coincidentally, now-Berkshire Hathaway Automotive Chairman Larry Van Tuyl, agreed with his boss, saying that he did not see the Tesla model as much of a threat.
‘I don’t see any serious volume potential there, and their pricing for what they build will be fine, but it’s certainly at the upper end, so I just don’t see it as a volume product,’ he said.
Dealerships aren’t too difficult to buy. But they are complicated businesses to run successfully and require significant investments in showroom and workshop facilities. In an age where the information deficit between salesperson and customer is shrinking, and consumers are more astute – purchasing directly from the manufacturer is an issue that deserves consideration.
Whether the predictions of investing giants like Buffett and Gates are correct, or if the dealership model is set for a shake-up, still remains an unknown – only time will tell.
In the meantime though, the retail automotive industry can march on with an added level of confidence, knowing that some of the world’s biggest backers are behind it.