Auto Dealers Decide Cars Are Taking Up Too Much Prime Space
Adrenne Roberts, Wall Street Journal
Apr 29, 2017
Large chains opt to move merchandise to less-valuable real estate
AutoNation Inc., AN -3.78% the largest seller of new vehicles in the U.S., is making a $500 million bet on the used-car business. To pay for it, the dealer chain is selling what has long been the industry’s most precious asset outside of the cars: property.
The Fort Lauderdale, Fla.-based company’s move follows a broader trend in the business. As car buyers increasingly use smartphones and internet tools to shape shopping decisions, several large chains are paring property holdings as they shrink the amount of inventory they keep in eyeshot of the showroom.
Auto dealers own or lease about $130 billion of real estate in the U.S., according to Kerrigan Advisors, an advisory firm that helps dealers sell their businesses. Dealers traditionally have sought land on high-traffic roads with enough space to store gobs of inventory, requirements that led to significant real-estate investments.
AutoNation, for instance, owns $3 billion of real-estate assets. It will sell some of it to help raise as much as $500 million to create a line of stand-alone used-car stores called “AutoNation USA,” which the company says could deliver higher margins than the new-car business.
“It’s a very prudent approach to brand extension,” AutoNation Chief Executive Mike Jackson said in an interview.
Car sellers are seeing buying behavior rapidly change, with shoppers sometimes spending more time searching for better deals while in the showroom instead of looking at a dealer’s inventory. Aware of this trend, inventory is being stored off-site on cheaper land.
Nearly 90% of car shoppers use the internet to shop for a vehicle, according to a 2016 study by the third-party shopping site Autotrader.com conducted by the research firm IHS Automotive. Of the customers who use their smartphones at a dealership, the study found 59% are comparing prices for vehicles at other dealerships while 38% are comparing inventory at other dealerships.
At the same time, commercial real-estate values have increased for the past eight years, amplifying the underlying property’s role in the overall value of a dealership.
For those dealers who own the land in a prime location and whose business is thriving, the real estate is an asset, said Jamie Albertine, an analyst at Consumer Edge Research LLC. “But our sense is the retail strategy is poised to shift considerably in the next 15-20 years such that land ownership could potentially be a burden,” he said.
Brad Carter, principal of Greystone Valuation Services that specializes in auto dealerships, said it doesn’t make sense anymore for dealers to invest in a big piece of land on auto row. He said the auto dealership model now resembles the trajectory of bookstores, which started as mostly mom-and-pop stores and were overtaken by big-box retailers like Barnes & Noble Inc. and Borders Group Inc., which went out of business in 2011.
“The big-box retailers came in and overnight the mom-and-pop stores were gone,” he said. “The big-box retailers had big and expensive stores. But then people realized they could buy these books on the internet. Why walk into a $3 million Barnes & Noble?”
Dealer groups at the forefront of this change are responding in different ways: Some are choosing to sell underperforming dealerships on expensive land, while others are finding ways to save money by storing cars on less-expensive real estate.
Erin Kerrigan, founder of Kerrigan Advisors, said for those dealers that own the land, it is a good time to sell.
“It would not be a bad idea to sell valuable land and then deploy the money to buy more dealerships,” Ms. Kerrigan said.
Dealerships looking to expand, meanwhile, are confronting record-high prices for land, leading players like Sonic Automotive Inc. to buy smaller plots. Jeff Dyke, executive vice president of Sonic, said many of the stores operated by Sonic’s used-car chain, EchoPark, are located closer to neighborhoods, atypical areas for car dealerships, and carry very small amounts of inventory.
“What we did is develop a hub and spoke model,” Mr. Dyke said. “For example, we have a large store in Thornton, Colo. with smaller stores surrounding it. We are going through a massive transition in our industry…we know that down the road, we’ll need less and less real estate.”
Mr. Dyke said EchoPark uses technology to determine what vehicles sell best at each dealership location. If a vehicle a customer is interested in isn’t on the lot, EchoPark will ship the vehicle to that location.
Holman Automotive, a dealership group with 33 locations across the U.S., has adopted a localized strategy, leasing land in more expensive cities like Palo Alto, or buying smaller plots of land and building up.
“The big thing we’re able to do is lease or purchase space off site,” said Brian Bates, president and CEO of Holman Consumer Services. “We can store cars in old warehouses about two to 5 miles away. It’s much more cost effective.”