The recent purchase by Warren Buffet of the fifth largest auto dealer network, the Van Tuyl Group, has sparked investor interest in consolidating the extremely fragmented market of US auto dealers.
Historically run by individual families with one or two dealerships each, AutoNation and other big dealer networks are beginning to buy up these small dealers to increase efficiencies and available car options for customers. Dealers also maintain other lucrative lines of business like servicing and aftermarket products that can be better exploited through greater economies of scale.
As dealers turn into “super dealers” with more significant share of the market, they may eventually be able to gain substantial bargaining power as a much more powerful buyer. While relations between dealers and OEMs have on average been good, the OEMs have always had the upper hand as the sole (or one of a few) suppliers to individual dealers. However, as dealer networks expand to the hundreds of lots, the OEMs have much less power over dealer operations, and the networks may be able to start bargaining for prices or leniency in other areas of their business that OEMs have largely dictated in the past.
Whether or not this becomes a viable challenge for OEMs won’t probably be known for a while, but clearly OEMs need to consider the fact that they may not have as much power over the sale of their products as they have in the past. Somewhat sarcastically in regard to dealer rules, Mike Jackson, president of AutoNation, stated at a recent JD Power Event, “Now when it gets down to the color of toilet paper, you’re getting on my nerves.”
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