LOS ANGELES -- Which stores are most vulnerable in the next wave of dealership consolidation?
Those in the suburbs.
So said National Automobile Dealers Association consultant Glenn Mercer. He predicted that the number of U.S. dealerships will shrink to around 16,500 stores in 2025, from NADA's count of around 18,000 today.
Mercer made that forecast as part of an NADA-commissioned study evaluating the prospective state of dealerships in 2025. He presented the results of that study during the Los Angeles Auto Show.
While all small dealership groups -- those with just one or two stores especially -- are at an elevated risk, those with suburban locations are more likely to shut down than those with rural locations, said Mercer, a former McKinsey & Co. partner who previously studied automaker facility programs for NADA.
Mercer reasoned that rural stores were thinned by the last recession. Those that remain, while surviving on low volume, are less subject to price competition when they're the only dealership selling a brand -- or possibly any brand -- within 50 miles or more.
"We lost a lot of small rural dealers last time around," he said. "But the ones that remain -- while they might be feeling burdened by regulation, burdened by capital requirements -- they're not being competed out of existence."
But a single-point store in a large metro area with 12 more dealerships representing the same brand within 50 miles is "walking a very narrow tightrope," Mercer said. "It cannot make any mistakes at all."
A suburban dealer also has more options when it comes to an exit.
Property in suburban areas is more valuable. Owners of such stores are much more likely to have buyers for their real estate whether the bid is coming from a larger dealership group or someone looking to buy the property for another kind of development, he said.
Consolidation of rural stores is harder because there aren't really consolidators who specialize in truly rural stores. And today's rural owners are more likely to have had their real estate paid off generations ago, reducing the overhead pressure they face compared with that of a suburban store with a hefty mortgage.
"If we're going to lose owners, [the suburbs is] where they might throw in the towel more," Mercer said. "The suburban guy might say, "This is hard. I'm surrounded by tough competitors. And if I could convert -- to use a ridiculous example -- my Palo Alto real estate, I would liquidate in a heartbeat.'"