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Catherine Colbert

Buffett’s Latest Buy to Fuel Auto Dealership M&A

by Catherine Colbert | Dun & Bradstreet Editor

April 17, 2015 | No Comments »

Auto DealersWarren Buffett, the billionaire investor behind Berkshire Hathaway, has been making his own news in the auto-retailing world in recent weeks, long since thumbing through Automotive News as an inquisitive teen.

Bullish on the nation’s dealership sector amid its most profitable year yet, Berkshire Hathaway acquired family-owned Van Tuyl Group, America’s fifth-largest dealership chain. With more than 80 stores stretching across 10 states and $9 billion in revenue, the chain has been selling about 240,000 cars a year. Buffett’s investment vehicle renamed the business Berkshire Hathaway Automotive and moved its head office to Dallas. The auto retailer will serve as a platform for Berkshire Hathaway to purchase more dealerships in Van Tuyl’s established markets in the South and Midwest.

There are plenty more investment opportunities, as 45 percent of US dealers have fewer than four employees. Dealerships similar in size to Van Tuyl Group, such as Asbury Automotive Group, have been snapping up small independent dealerships that are looking to cash out.

The US automobile dealer industry includes more than 45,000 new- and used-vehicle dealers with combined annual revenue of about $805 billion, according to First Research.

Buffett believes that the nation’s firmly established distribution model — of consumers buying vehicles through dealerships — is here to stay. He practices what he preaches. Last year the Oracle of Omaha bought a Cadillac XTS from an area dealer.

Buffett asserted at the recently held NADA/J.D. Power Automotive Forum in New York that it’s unlikely the auto dealership sector would see wholesale changes. Some industry watchers are calling Buffett near-sighted, as it has been widely publicized that innovator Elon Musk is working to build his own direct-to-consumer model for Tesla. In March, New Jersey governor Chris Christie signed a bill into law that allows Musk to establish up to four dealerships in the Garden State to sell electric cars directly to consumers. Other states remain reluctant to join the bandwagon.

Fans of traditional dealerships are balking at the thought of a direct-to-consumer model gaining traction, perhaps because it’s a really good time to be peddling cars.

Auto dealers expect to sell 16.9 million vehicles in the US in 2015, according to data from Kelley Blue Book reported by The Wall Street Journal, representing the highest sales number in a decade. Solid growth in 2014, particularly in the key month of December, resulted in an estimated 16.7 million cars sold in the US. Incentives from auto manufacturers and dealers are improving foot traffic in showrooms. Other key factors, including an improved job market and low gasoline prices and interest rates, are enticing car shoppers to buy.

To the industry’s benefit, car prices are also inching upward each year. Currently, the average US retail price for a new car is nearly $33,000, while prices for used cars average about $19,000, according to the National Automobile Dealers Association (NADA). This continued sales traction is boosting dealerships’ bottom line. NADA reports that the average US new car dealership has annual sales of about $40 million.

Industry Impact — Automotive dealers should anticipate an increase in M&A activity industrywide as smaller dealerships cash out and midsized dealerships jockey for regional market share.

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