Group 1 Automotive president and chief executive officer Earl Hesterberg described a predicament franchised dealerships might be facing as more new trucks and SUVs leave their showrooms.
Part of the fallout from those popular new models turning is what’s coming back as a trade — perhaps a sedan that’s not as popular as those trucks and SUVs that are back in vogue thanks to modest fuel prices, among other factors.
“It’s not a demand issue at all. It is an increased supply issue primarily,” Hesterberg said when Group 1 hosted its most recent quarterly conference call in part to discuss its used-vehicle performance.
“It’s an increased supply issue, and also I believe there is a mix issue of a greater supply of used cars over used trucks and SUVs,” he continued. “So the dynamic in the new-vehicle land of trucks and SUVs being in greater demand than cars is same in the used-vehicle market, and many new vehicle customers are trading in a car and moving to an SUV or a truck.
“Then those trade-ins get pushed into the used retail market,” Hesterberg went on to say.
And it’s likely those vehicles aren’t in high demand, especially if they’re compacts. Cox Automotive chief economist Tom Webb mentioned a wholesale price decline of nearly 10 percent yet again for that kind of vehicle when Manheim released its most recent Used Vehicle Value Index.
So to keep showroom activity buzzing, Hesterberg noted how Group 1 is active in dialogue with automakers on how to control the inventory at least on the new-vehicle side.
“All retailers such as ourselves have been communicating to the OEMs that we don’t have enough trucks and SUVs. I think that's been pretty clear,” Hesterberg said.
“And we're at the point now where we're in discussions with most of our OEM partners that we just can’t take any more inventory at the moment, at least in terms of a days’ supply,” he continued.
“We need to work it down a little bit. And actually our total inventory only went up two days year-over-year. But what's within that is skewed too heavily to cars, which are not moving as well,” Hesterberg went on to say.
Update on U.S. store count
During 2015, Group 1 acquired three dealerships, which executives expect to generate an estimated $340 million in annual revenues. The company also disposed of five dealerships that generated approximately $115 million in trailing 12-month revenues.
Within the first 45 days of this year, Group 1 noted, it disposed of two dealerships that generated approximately $75 million in trailing 12-month revenues.
As a result, investment observers wanted to know how Group 1 might modify its U.S. store footprint, which includes 114 dealerships mainly in Texas and along the Gulf Coast.
“I can’t really say I've seen the ask prices on dealerships for sale go down yet. My personal opinion is the pricing for acquisitions peaked in the U.S. over a year ago,” Hesterberg said.
“That’s one of the reasons we did not buy very much last year,” he continued. “I think we bought three different dealerships, and intentionally, all of them are outside of the oil patch and they were luxury brands. Pretty valuable assets we think.
“I think that will take some time for the pricing to get more realistic in the market,” Hesterberg went on to say. “I would think that with the margin pressure and a lot of the volatility in the stock market and such that all buyers would be a little more cautious this year, but I expect them to take a little more time for the pricing to adjust to a new psychology.”