5 factors shaping auto retail M&A in 2024 and beyond

The “golden age” of auto retailing can’t last forever, and 2024 is the year we’ll likely see the industry start to revert to more standard conditions. We shouldn’t be surprised to find a combination of pressure from inflation, volatility in the economy, vehicle affordability, and elevated interest rates moving auto retail margins toward historic norms but probably above what the industry was experiencing in 2019.

When it comes to M&A, buyers—growth-minded private dealers, public auto retailers, and private equity investors—will be gauging the impact of economic factors, technological advancements, and consumer behavior shifts, along with how quickly they’re happening as they set their acquisition strategies.

Sellers should take stock of the M&A market as well, with “season of life” driving decisions for baby boomer owners. The assumptive, "I'm going to pass this on to my kids," position that patriarchs and matriarchs have had in auto retail for years is waning as succeeding generations opt for their own business interests or passions outside of auto retailing. That leaves owners more closely analyzing the industry’s trajectory and considering the demands of operating the business in the coming years as they make their plans and find the best way to monetize the business for themselves and their families.

Projecting M&A in 2024

As buyers and sellers look for answers about business valuations and M&A activity levels and consider the issues that will shape the business over the coming years, five factors come to mind:

1.      Strong financial headwinds may keep the auto industry flat in 2024.

Understanding M&A over the coming years starts with the fundamentals today. The average price of a new car—$47,401 as of January 2024—is starting to keep would-be buyers out of the market.^{Disclosure 1} Further, the affordability problem is compounded by the OEM’s labor deal with auto workers which is estimated to add an additional $900 to the base manufacturing cost.  That means an average price increase of $3,600 for the consumer, bumping the total retail sticker price of a new vehicle to roughly $51,000.

The persistently low supply of used cars in the marketplace has elevated used car prices, with average prices rising from $19,826 pre-COVID^{Disclosure 2} to $26,446 at the start of 2024.^{Disclosure 3} Manufacturers are finally reaching new car production levels that will allow fleet buyers to restock, which means another three to five years before those vehicles make their way to the used car market, normalizing supply and lowering prices.

Meanwhile, high interest rates continue to constrain sales across new and used auto markets alike. The Federal Reserve is expected to cut interest rates at some point in 2024, but auto loan rates may not move significantly until the end of 2024 or beyond. It could be the first quarter of 2025 before measurable reductions appear across the industry. Until then, higher interest rates will continue to dampen auto sales.

2.      EVs continue to be a conundrum for auto retailers.

Auto retailers have been bracing for the impact of electric vehicles (EVs), from costs required for additional EV charging infrastructure to the anticipated reduction in service department revenue. As it turns out, the EV transition may be more gradual than predicted.

While there are plenty of reasons for consumers to acquire an EV, including the environmental benefits, federal and state tax credits, and the allure of driving the latest thing, customers aren’t buying them at the forecasted pace. Demand for EVs is falling below expectations.

Owning an EV comes at a high cost, both in upfront cost and in charging access and range management. Average retail prices for EV still exceed internal combustion engine (ICE) vehicles by thousands of dollars, creating a significant drag on EV vehicle demand. It’s hard to see EV demand taking off until purchase prices start to equalize between electric and gas vehicles, or consumers begin valuing lower maintenance and “fuel” costs for EVs.

The insufficiently robust charging infrastructure creates headaches for EV consumers. Until charging facilities are ubiquitous, routine travel will continue to be an exercise in research and planning as drivers try to figure out where—besides their homes—they’ll be able to charge an EV.

EVs have yet to be winners for most auto retailers. Consumers can buy EVs at or below invoice cost, and dealers are forced to discount EV vehicles to complete a sale. For those auto retailers with significant EV inventories, that can often mean suppressed acquirer appetite and lenders equally cautious about investing in EV inventories.

3.      Advanced data management and the digital buying journey

The car business has become a data business, with your ability to deploy and benefit from technology. Today’s auto dealers collect copious amounts of data—in every aspect of the business—as part of their routine operations. The best dealers use that data to plan, manage, and operate their businesses at a granular level, especially in looking for ways to enhance the consumer’s digital buying journey.

Customer expectations for the auto shopping experience are informed by their day-to-day interactions with other online retailers. Consumers begin shopping online for vehicles using a website, mobile device, or a car-buying aggregator. Best-in-class systems can seamlessly transition a prospect from the digital platform to the physical dealership. Salespeople at the dealership can use customers’ online shopping data to move the purchase forward from the moment the customer steps into the showroom, rather than having to start from scratch.

Sophisticated data management and technology deployment demands investment. It’s natural to balk at the steep up-front costs and increased technology staffing required, but these initiatives demonstrate solid results—even when implementation is still a work in progress. They can help take your business to the next level and keep you competitive with the larger dealership groups that can afford to invest in digital platforms.

4.      Increased regulatory burden weighs on many dealers.

This summer, the Federal Trade Commission will roll out the “CARS Rule”, regulating dealership advertising and sales practices and protecting consumers from vehicle-shopping scams. It comes at a cost to dealers by adding considerable time and money to the tracking, documenting, and reporting on every aspect of the sales process.

Many dealers, particularly those who have logged many miles in the industry, have little appetite for dealing with the burdens of increased oversight and regulatory compliance. Yet the ramp-up in regulatory pressures is unavoidable, and leaders trying to decide whether to stick with the business or transition need to factor this ever-increasing burden into their decisions. Larger buyers may be able to more easily find the management resources and scale to build systems that address the latest rules.

5.      Evaluating the costs of growth

“Grow or go” continues as the dominant rationale behind auto retail M&A. Owners are deciding whether they’re the right person to lead through the challenges ahead and grow the business or if it’s time to pass it on to a successor or buyer.

Buyers in today’s market view potential acquisitions with a close eye on capital expenditure needs, looking to adjust their acquisition offer to account for investment needed to:

• Build or renovate showrooms, service facilities, and other dealership real estate that aren’t up to manufacturer standards.
• Add technology that supports operational workflow, data storage and analysis, and the digital buying journey that’s increasingly required.
• Meet electrification requirements mandated by OEMs.

The same scrutiny extends to the strength of the management team and the ability to retain leaders and key personnel—from service technicians to salespeople.

Modernizing a dealership to today’s standards can add substantial expense to an acquisition, and buyers will factor this into the acquisition price. Sellers should have a clear-eyed view of these costs and prepare accordingly.