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Car dealership

Sector Spotlight: Car Dealership

We’re giving you a complete look at the car dealership market from 2017 through 2022, including key considerations to ensure successful selling.

Before you get into the car dealership industry, it’s important to understand where the market has been, where it’s at, and where it’s going - and to do your due diligence on the key factors to your dealership’s success.

For the last century, the automotive market has shaped more than the global economy. Vehicle production and sales shape billions of people’s daily lives, create millions of jobs, and continuously prove to be an industry with staying power.

But with an industry rooted in technology, and market variables that are subject to constant change, it’s important to understand where the automotive sales industry is at today, and where it’s heading through 2022 to determine if owning a car dealership is the right move for your entrepreneurial career.

Automotive Market Outlook

It’s important to know where the market’s been to understand where it’s going. We’re breaking down the automotive sales markets from 2017, through projections into 2022, so you can understand the variables that influence dealership sales.

2017 - 2018

Despite the drop from 17.46 million unit sales in 2016, 2017 recorded the fourth highest year in unit sales. It’s important to keep in mind that any US automotive sales above 16 million units annually is considered a strong market. New light-vehicle sales through the first half of 2017 increased 1.9% to more than 8.6 million, with a total of 17.2 million unit sales in 2017.

According to the National Auto Dealers Association (NADA) 2018 U.S. sales forecast, new car and truck sales were projected to decline from 2017’s total of 17.2 million to about 16.7 million in 2018.

Despite early projections, rising interest rates, higher gasoline prices and the threat of a tariff-fueled trade war, U.S. auto sales didn’t slow as much as expected in 2018 - and the 16.7 million unit count still indicates strong market demand. With a modest decline, projections are in the mid-high of 16 million units by 2020.

2018 - 2020

While sales rates and projections show decline by 2020, this is still considered healthy market demand. As a potential automotive dealer that’s considering your inventory, it’s important to note that the highest demand in the U.S. market is for light trucks, SUVs and crossovers, and automakers are investing heavily in autonomous and electric vehicles to meet increasing customer demand.

The projections in the 16 million unit range are in part due to the Federal Reserve raising interest rates, which will increase loan terms and raise transaction prices.  

And, with more cars projected to be turned in for new leases on used cars, new vehicle sales will show numeric decreases - but, working with trade-ins is still substantial transaction volume and revenue for most dealerships.

Through 2022

According to a McKinsey report, the U.S. auto dealership market is forecasted to grow at a healthy rate through 2022. The market is supported by a range of growth variables, including a greater influx of off-lease or previously leased vehicles in the U.S. in coming years, incentives to purchase new cars, rising interest rates, standalone automotive stores (like Tesla), and gradually rising share of Certified Pre-Owned (CPO) sales from franchised dealers.

However, the industry will inevitably face some challenges. These challenges include a limited number of auto dealerships that offer a hassle-free customer experience, customer satisfaction issues with traditional used car purchases, and the auto dealer industry’s ever-present vulnerability to economic depressions.

Regulatory and Compliance Trends

On the regulatory end, dealers will need to pay attention to the actions of the Consumer Financial Protection Bureau (CFPB) as well as the Federal Trade Commission (FTC) through the coming years as they enforce stricter oversight.  

According to Dealertrack’s 2018 Compliance Guide, the CFPB is expected to amp up examination of auto-dealer transactions under the Larger Participant Rule, which it adopted in 2015.

Major tax reform was approved by Congress in the Tax Cuts and Jobs Act, passed on December 22, 2017, which will increase margins for car dealerships with less taxes owed annually.

Additionally, the average American will get a tax cut of $1,600 in 2018, with the biggest benefit going to households making between $308,000 and $733,000, which could increase consumer buying power and demand for new vehicles.

Assessing Your Local Market

Beyond looking at the national market trend, consider your local market before investing in a private or franchise car dealership. Research the number of vehicles sold in your area, which categories have the highest demand (trucks, sedans, electric cars, etc.), and how many dealers exist in your area.

For example, if you’re looking into buying a Honda dealership, assess how many Honda dealerships

already exist within a 10 mile radius.

Research your customer. Automotive manufacturers release data on their customers. To continue the Honda example, Honda’s target customer is between the ages of 27 and 50, with a slightly above-average household income.

Make sure your local demographics align with the target market and demand for your dealership brand or certain models.  

Valuation

When it comes to determining a fair price, make sure you’re educated on how to valuate a car dealership. Consider inventory, revenue streams, real estate, and other factors that influence profitability. Crunch the numbers yourself, and consider the local market demand, to ensure you’re paying an adequate price for potential earnings.

Of course, it never hurts to rely on a local professional — either a business broker or attorney with experience buying and selling car dealerships — to make sure you’re covering all your bases.  

Whether you’re looking to sell used cars or buy a new car franchise, becoming familiar with the industry and market trends is essential to your profitability and long-term success. Buying and running a dealership can be a complicated but rewarding experience, so be sure to do your due diligence before you get to selling.



Bruce Hakutizwi

About the author

USA and International BusinessesForSale.com Manager for BusinessesForSale.com, a global online marketplace for buying and selling small medium size businesses. The website has over 60,000 business listings and attracts over 1.5 million buyers to the site every month.

@BizForSaleUS

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