FORT LAUDERDALE, Fla. -

As 2017 came to a close, auto dealership values fell a bit, and the number of dealerships sold in the U.S. for the year was down, but the tides could be turning in 2018.

According to the year-end 2017 edition of the Haig Report, a report released by Haig Partners that studies M&A activity among dealerships, buy-sell activity for 2018 is expected to remain strong, while tax reform is expected to support dealership values this year.

Starting by covering this past year’s numbers, the number of dealerships sold in the U.S. last year dropped by 7 percent from 2016 levels — 357 to 331.

That said, even though the industry saw a drop in rooftops purchased by public companies during this period, “they ended up spending significantly more money,” Haig Partners reported. Last year, publicly traded retailers spent $1,015 million on auto dealerships in the U.S., which was a whopping 53 percent increase from the $661 million spent in 2016.

Lithia is a name that stood out among the publicly traded dealership groups as the “most” active in the M&A market last year. According to Haig Partners, Lithia “continues to target underperforming large platforms in different parts of the U.S.”

And it doesn’t look like the dealer group plans on slowing down anytime soon. In fact, Auto Remarketing correspondent Arlena Sawyers reported earlier this month that it is poised for additional growth this year, according to Lithia president, Bryan DeBoer. 

Lithia opened one dealership and acquired 18 others in 2017, and dealership acquisition activity in 2018 is “off to a robust start,” DeBoer said during the company’s quarterly conference call in February.

Private or public, Haig Partners expects the new Tax Cut and Jobs Creation Act, which will reduce taxes for most dealerships, to add additional demand for dealerships in 2018. This is expected to in turn support values. While profits at privately owner dealerships were 4.9 percent lower last year than in 2016, values of these same dealerships fell by 2.6 percent during the same period.

Haig Partners painted a slightly rosier picture for franchise dealerships with increased valuations for Buick-GMC, Chevrolet, Honda and Toyota offsetting lower profits a bit. But either way, tax cuts are expected to help alleviate some of these challenges.

Alan Haig, president of Haig Partners, said, "The buy-sell market remains very active, although at a slightly lower level than in the past.  The new tax code could soon be having an impact on dealership values.  All dealers will be paying lower taxes, and we expect this to lift the demand for dealerships.  If so, we could see a continued decline in profits but an increase in blue sky values." 

Analysis on current dealer environment

Interestingly, while macroeconomic factors such as employment, number of miles driven and consumer sentiment remain “highly favorable” for dealers, according to the report, other trends in the industry are working against these headwinds. Think used-car pricing challenges, such as softening residuals; strong incentive spending by OEMs; rising interest rates and more.

While the report shows new and used gross profits per vehicle are dropping at dealerships — making what are razor-thin margins even smaller — analysts did find that some of these losses are being lessened by gains in the F&I office and fixed operations.

Interestingly, although the current environment might not be all rosy for dealers, potential challenges to the industry, such as ride sharing, autonomous cars and changes to franchise laws “are so far having no measurable impact on dealership values," according to the report.

Wes Lutz, 2018 NADA chairman and president of Extreme Chrysler/Dodge/Jeep, RAM in Jackson, Mich., recently touched on some of these challenges and opportunities in a recent Q&A with Auto Remarketing that focused on disruptive tech such as ride sharing and changes in the retail model.

“Ridesharing isn’t replacing my personal vehicle. It can’t! But it’s adding to my options. So I don’t look at it as an either-or proposition, and I don’t think my customers do either,” Lutz said in an emailed Q&A with Auto Remarketing.

“I think a variety of options are going to coexist. The future, in my opinion, is going to be a combination of vehicle ownership and ride sharing,” he said. “It’s not going to be one or the other.”