Franchise laws will protect the dealership of 2030 but changes still needed.

By Alysha Webb, Editor and Publisher

The dealership business won’t have changed too much by the year 2030, concludes a report released earlier this year by Auto Team America. But the existence and profitability of the dealership business model will increasingly depend on the continued presence and strength of the state franchise laws, the report concludes.

“The big disruptors to retail automotive stores will not have occurred by 2030, but could be near the horizon. Dealerships continue to be independent franchised operations, but will have to diversify into the definition of providing transportation services to consumers,” says 2030 Dealership Vision: The Road Forward!

Scott Gordon, CliftonLarsonAllen

The disruption is driven by technology, including large technology firms looking to enter the sector and new technologies such as autonomous vehicles, Scott Gordon, managing principal for retail and dealerships at accounting firm Clifton Larson Allen LLP tells Automotive Buy Sell Report. He has faith in dealerships’ ability to survive.

“What will it do to the operators that have been here for 100 years?” he asks, then answers himself. “My sense is they will adapt.”

CLA’s dealership customers, which number around 700, are mindful of the need for evolution in the dealership business model, says Gordon.

“The big thing they are asking us is ‘what does [this change] mean? How does this all tie together and what should I be doing?” he says.

CLA is a member of Auto Team America, a group of CPA firms that work predominantly in the auto sector. Associate members include buy sell firms and law firms.

The 2030 Dealership Vision is one of the periodic looks at the industry Auto Team America undertakes. The last one was in 2011 when, as the report notes, Tesla had sold a few thousand cars, Uber had around 500 drivers, and autonomous vehicle technology was still more of a defense advanced research topic than a passenger car trend.

Dealers’ adaptation to the changing industry will be aided by the continued presence of the state franchise laws, which will play a key role in dealership’s continued existence, says Gordon.

“[The franchise laws] is one of the most important protections that dealers have as we move into the future,” he says.

Though Tesla’s push to open factory-owned stores has created waves in the franchise system, the report sees it remaining in place, and robustly, through 2030.

Despite the arguments against the franchise system, Auto Team America “fails to find an economic argument for ending the current distribution system,” says the report. “The demise of the franchise system would occur if there were a wide-ranging Federal Court action to strike down certain aspects of state franchise laws, but that seems unlikely.”

The franchise laws won’t shield dealerships from a changing industry, however. From hiring a different type of staff to keeping inventory offsite to allow for smaller dealership facility footprints, dealerships will need to evolve.

Commission-based plans won’t appeal to the dealership employee of the future, the report says. Instead, that employee will seek better benefits and a clear job path. Shorter working hours and more focused training will also be the called for.

Manufacturers will continue to push for larger facilities. Rising capital requirements will cause some dealers to exit the business. Remaining dealerships will often move to smaller footprints. That will in turn lead to the need for more efficient staffing and better inventory management, among other factors.

Auto Team America sees consolidation continuing through 2030, though the total number of dealerships will remain fairly static. Rather than a handful of mega-sized dealership groups emerging, however, the report figures that what will emerge is strong regional players of 20 to 30 franchises.

“Those are the dealer groups that have shown to be the most efficient in growth, management, and staffing,” says the report.

Dealership consolidation will help reduce operational costs such as vehicle preparation and conditioning, and centralized administrative functions, the report says.

There will still be single point stores, however. Single point metro stores that are “really efficient and really well run – a lot of them are family businesses that don’t really want to grow – we still see an opportunity” for them, says Gordon.

There won’t be as much consolidation in rural areas, says Gordon, giving single-point stores “plenty of runway.”

Well-run single point stores may be thinking, “I am a dealer, I have my area of responsibility, I have good CSI and good sales penetration, I am fine. I am protected by the franchise laws and the territories,” he says.

But that security rests on the continued strength of the franchise laws,” he says. So, dealers need to be thinking, “how do I strengthen them each year?”

New competitors

The cost to enter the dealership business will be higher in 2030 as multiples exceed those seen today.

“The injection of private equity against public companies, the ability of larger groups to have a lower cost of capital and the ability to leverage their presence in the market place will driver values higher for selective and desirable stores,” concludes the report.

A new class of competitor may also emerge. The desire to maintain ownership of all the data cars will generate may cause big technology firms to produce their own vehicles.

That will create uncertainty in the buy sell market.

“If I am a buyer, I really want to know what is coming from a technology standpoint,” says Gordon. “What does it mean for valuation? What if Tesla is selling five million cars? Do you bet against Elon Musk?”

Scott Gordon is managing principal for retail and dealerships at accounting firm Clifton Larson Allen LLP. He can be reached at Scott.gorden@CLAconnect.com or 612-376-4751.

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