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Creating a Resilient BusinessIntroduction & DiscussionTony Albertson
What does a resilient dealership look like? Are you thinking transitionally or transactionally?
Pillar 1: Balance Sheet
Pillar 2: Future-Proofing
Pillar 3: Organizational Effectiveness
Creating a Resilient BusinessPillar 1: Balance SheetJon Lancaster & David Spisak
Reversion to the MeanA theory suggesting that prices and returns eventually move back towards the mean or average. This mean or average can be the historical average of the price or return or another relevant average such as the growth in the economy or the average return of an industry.
Business is Cyclical: 2009
• “We paid for the excess returns of the ’90s”
• “Mean reversion is an odd concept because it’s clearly not causal.”
Carmax• Bond rating: BBB – NAIC-2 (no publicly held group in the US has this high of
rating)• $300 million of senior notes
7-yearInterest ONLY 10-
year12-year
7 yr T +22010 yr T +23012 yr T +240
3.86%4.17%4.27%
Is your banker your best friend?
ExampleConsider this: what are the results if the cap rate increases by 1.5%, or 150 basis points? In this instance, we’ll assume an annual triple net rent of $600,000 and apply the cap rate to determine building value.
As you can see, the 150-basis-point move from 7.5% to 9% effects loan-to-value substantially when value is reduced by $1,333,333. The impending environment will force dealers to 1) make critical adjustments to down payments (affecting operating capital) and 2) prioritize paying down debt.
7.5 Cap Rate600,000 ÷ 0.075 = $8,000,000
9.0 Cap Rate600,000 ÷ 0.09 = $6,666,666
US Economy is Slowing
66% 74%
76% 61%
86% 79% 78% 91%
60% 78%74% 69%
91% 82% 98% 100%
Threat
37%
13%
33%
17%
Student Loan Repayment Status (2014)
In repayment: Balance Not Delinquent
Current: Balance the same
Current: Balance Up
In repayment: Balance Delinquent
…or Opportunity?
Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax
What does this mean to you?
Three Things That Must Be Considered
• How have these factors started to already to impact your brand?
• Do you know exactly how much potential upside is in your store?
• What can you do right now to create a more resilient business that can still thrive?
KNOWYOURNUMBERS
Brand Specific Impact - Toyota
Brand Specific Impact - Honda
Brand Specific Impact - Nissan
Brand Specific Impact - Ford
Brand Specific Impact - Chevrolet
Brand Specific Impact - CJDR
Brand Specific Impact – Mercedes Benz
Brand Specific Impact - Audi
Brand Specific Impact - BMW
So, Exactly How Much Upside Do You Have?
More Importantly – How Do You Get It?5 Things Every Dealership Can Do Right Now To Create A Resilient Business
Disclaimer: If you aren’t leading this change nothing positive will happen to your net profit
• A simple pivot in your F&I Department will significantly increase your bottom line• Become a Master of the Big 3 – Cash, Asset & Expense Management• Address your compensation issues now to ensure a sound future• Pay much more attention to managing, leveraging, securing & controlling your data• Transition your approach from a KPI centric to transactional management
F&I CompensationMaking this change is long overdue
I said this is a simple change – it may not be easy. But it will yield huge results• F&I GP is the single largest contributor to net profit in your dealership• Have your F&I managers seen an increase in pay?• Was it due solely to their improved performance or because of an increase in sales volume?• What is the ideal target compensation % for a F&I Manager?• How many deals per month should each manager get per month?• What would happen if you made a real change by replacing highly over-compensated managers?• This is not new – it just is not wide spread yet. Neither was F&I back when it began
Become a Master Of The Big 3Sell like a privately owned dealership but operate like a publicly owned one
Your ability to effectively master cash, asset and expense management will dictate your future. For now - let’s focus on cash:• Do you have formal aging thresholds for every one of your receivables? • Are you including unbooked deals in your cash opportunity reports? Or only CIT?• Do you know how many days it takes your team, on average, to fund a deal?• Do you know if you have any cars that are currently not on your floor plan?• Are you currently measuring your cash flow cycle time?• What is your debt to asset (solvency) ratio? It should be no more than 2:1
Address Your Compensation Issues NowThe number one expense item in a dealership doesn’t always get the attention it deserves
• You must have total variability in your compensation plans• The number one indicator of whether your plans are working are associate ROI• This will change the way you hire – forever.• Associates quit their manager much more often than their compensation plan• If you’re a dealership group you must have common element pay plans• The key is to fully test your proposed new pay plan before it is implemented• The secret to avoiding backlash/brain damage is to include your top performers
Pay Much More Attention To Your DataIt could either be your dealerships biggest asset or biggest liability – it’s completely up to you• It will elevate transparency and accountability to unprecedented levels.• When accountability goes up – so does performance• Critical business insights not found in your financial statement• Low performers love inaccurate reports – your top performers hate them• It allows you to make everyone apples to apples – and eliminate the excuses• Fully protect your clients and your dealership from threats that can cost you
millions• Implement formalized processes to control, manage and secure your data
Make The Move To Transactional ManagementManaging by KPI’s has taken you where you are right now – this will take you far beyond KPI’s alone
• The average dealership is made up of an average of 12,000 – 14,000 transactions/mo• The vast majority of your transactions is likely being handled by your bottom
performers• Is your store a democracy or a meritocracy?• What would happen if just 10% more of your transactions were handled by your top
performers?• Making this change causes your dealerships GP and net profit to increase significantly• The better news is that it will contribute to a culture of performance and effective
employee turnover
How Do I Know This?
Change is good.
Dealerships need it.
Our customers are demanding it.
David SpisakPresident & CEO
ReverseRisk
P. 510-604-0308
Creating a Resilient BusinessPillar 2: Future-ProofingThomas Gage
The Winds of Change• The Changing Consumer• Four Drivers of Change• Four Sales Models that are resilient to change
Urbanization
Ride Hailing
Connected Car
Autonomous Car
No license !
Apple Experience
42
Longer loans with
Lower downs to
Lower FICOS
Record Lease Penetration
67 Months
3.9M
At 31.4%, the negative equity rate means that nearly one-third of car owners are underwater on their purchase
The Changing ConsumerTransportation Modes
Consumers rethinking cost of personal vehicle ownership: Transportation as commodity, not “you are what you drive”Solutions emerging through:• Car hailing – Uber, Lyft• Ride sharing – Zipcar, Car2Go, Hertz 24/7• OEM investments
• Audi Access• GM – Maven• GM - Lyft • Hyundai / Uber• Ford – GoDrive, Smart Mobility
Do you treat Uber buyers like a fleet buyer?
Bad News / Good News
Cox Automotive, 2015 study on Future of car buying
How do you transact with out of state buyers?
Consumer ExpectationsPeople used to value the product and the best price, but now consumers value the best experience before, during, and after the sale.
They expect an Apple experience.Do you offer a different experience for a friend then a customer?
Use of multiple devicesConsumers are shopping you and your competitor while on the lot.
What do your sales people do when they see someone with a phone in their hand?
* 2015 Cox Automotive: By 2020, 80% of consumers will be using multiple devices to shop for a car%
HypothesisControlling the negotiation is the main source of tension between consumers and dealers.
FindingConsumers need information to proceed from Shopping to Buying. Dealers confuse asking for prices as Buying.
Consumers transition to buying mindset when they put the item in the cart.
Trade-In AppraisalLaura hands over her keys
I’ll need your keys.What are they going to do with my car?Will they match my KBB estimate?Guess I’m stuck here.
Idle time = DissatisfactionThis is taking soooo long...
Let’s submit this credit app and find some rates.
Do you have key runners? Do you let consumers explore Menu before F&I?
If consumers want a better process, why has the experience not changed?
4 Drivers of ChangeConsumers & OEM's
Transparency
Speed
Convenience
Margin compressi
onNo front end profit
Fewer trades
Marketplace transparency
Cost to sell
2.5 sales consultants/manag
er
7 employees per sale
9-10 sales / sales person /month
Emerging Business
Online only
Car Sharing
OEM experiments
[1] Two forces against one• Consumer data overwhelmingly highlights they want more
transparency; less wasted time in the sales process; etc.)
• OEM`s are Embolden to make more demands on how dealerships sell cars
OEM Actions: • Market Price• Exploring paying “flat fees”• Reselling off lease cars• Ride Hailing
• Incentivizing based on adherence• Market area approaches• “Intercepting” consumer leads• Advertising covenants• Review sites replace CSI
What actions do you believe OEM’s will impose on you to “force” a better experience?
[2] Front-end Margin Compression• The consumer is setting the margins and will
further with online tools
• The vast majority of dealers lose money in their new car departments
• Taking in fewer trades – numerous ways consumers can sell their own vehicle
• Raise margins through customer experience
• Optimize F/I, accessory sales and lower costs
• NOTE: revenue compression is taking place in fixed ops – less repairs; longer service intervals; electric cars; connected car
2007
2Q 2007
3Q 2007
4Q 2007
2008
2Q2008
3Q2008
4Q2008
2009
2Q2009
3Q2009
4Q2009
2010
2Q2010
3q2010
4Q2010
2011
2Q2011
3Q2011
4Q2011
2012
2Q2012
3Q2012
4Q2012
2013
2Q2013
3Q2013
4Q2013
2014
2Q2014
3Q2014
4Q2014
2015
2Q2015
3Q2015
4Q2015
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
How can you improve experience to increase PVR?
Used Vehicle Retail Gross Margin (Publicly-traded Dealership Groups)
[3] Cost to Sell a New Car• One manager for 2.5 sales consultants!
• Managers are very expensive compared to other retail industries
• DP/GM/GSM/SM/SC/BDC/Support/ all get paid for selling a new car!
• Low sales consultant productivity (9-10 sales)
18How can you improve productivity with less managers who add more value for everyone?
Research
Test Driv
e
Negotiation
Desking F&
I0
50
100
Future State
Participation in the process increases satisfaction
Researc
h
Test D
rive
Negoti
ation
Desking F&
I0
50
100Current State
EFFICIENCY
Consumereffort
Dealer effort
Consumereffort
Dealer effort
Conduct focus groups once a month with recent customers:Ask: How can we make your experience better?
What are you doing to drive down labor cost?
$450-550advertising
$750labor
$150labor
Research and Shop Structure Transact Deliver
Single point of contact more efficient? Consolidating roles increases throughput and reduces overall costs
How can you lower labor costs by combing roles? Improve CSI?
[4] Emerging Business Models
What features of vRoom/Carvana could you adopt?
Managers are Biggest Opportunity & Impediment
• GM’s are not “change agents” but great “Operators”
• Sales managers are “deal managers” who are “change resistant” and lack the skill sets to develop a sales staff
• Dealers must quickly find/develop new managers who will attract a younger sales force
• Must have modern day skill sets (coaching; recognition; training; etc.)
• Millennial work force not in sync with Old School
How would you attract a Millennial workforce?
Four Sales Models
1. Online Sales2. Self Service3. Every day low
prices4. Experience
How does the talent, compensation, training, showroom look different between these models?
[1] Online Sales
In-Store Self Service
Costco / Zappos approach to prices, volume, labor
Every day low prices
High Touch
Dealers we interviewed agreed the traditional model would end at some point in the near future
The Mushy Middle
Many dealers are in the “mushy middle” providing consumers very little differentiation in the sales process or experience and limits
the ability for the dealership to “Optimize” its operations
• A great consumer experience results in greater profit
• Change is going to be forced upon you
• Align marketing, hiring, compensation around a clear sense of identity
Streamline – Do more with less
Thomas GageCox Automotive
P. 404 568 8976
L. https://www.linkedin.com/in/thomas.gage
Creating a Resilient BusinessPillar 3: Organizational EffectivenessRyan Kerrigan
Overview of Session
• Buy/Sell Activity • Market Drivers • Impact of Real Estate Prices • Update on ROFR • Valuation• Building a Resilient Business
Lots of Activity in the Buy/Sell Market
Source: The Banks Report
Acquisition Activity Grew 111% since 2013
Number of Transactions2013 to 2015
2013 2014 2015
114 Transac-tions
206 Transac-tions
241 Transac-tions
81%
Increas
e
17%
Increase
Franchises Acquired
Source: The Banks Report
Acquisition Activity Grew 52% since 2014
52%
In
crea
se
2014 2015
368
558
Acquisition Activity Grew 52% since 2014
Number of Franchises Transacted
2014 and 2015
2014 2015
3.2
6.3
Sold Dealership Groups Double in Size in 2015
97%
In
crea
se
Average Franchises per
Multi-Dealership Transaction
Sold Dealership Groups Double in Size in 2015
Big Players Find Big Exits
81 Stores
13 Stores
11 Stores
8 Stores
11 Stores
McLarty Auto
The Largest Transactions Announced or Closed in 2015
Public 7%
New29%
Private64%
2015
Public22%
Private78%
2014
Source: The Banks Report
New Entrants Dominate Platform Acquisitions
Buyer Market Share
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
$767$570
$1,046
$392$803 $654
$283 $14 $211$504 $502 $659
$1,449
$832
Source: SEC Filings
- 43%
The Publics Acquisition Spending Declines in 2015The Publics Acquisition Spending Declines in 2015
Public Dealership Group Acquisition Spending in US Since 2002
Source: Automotive News
14,930 dealerships are owned by individuals,
families, and small groups
Top 125 Dealership Groups
Small Dealership Groups and Individual
Dealers
5.2%
82.9%
0.118166666666667
Non-Public Dealerships
Public Dealership Groups
The Publics Own Just 5.2% of US Dealerships – Auto Retail Remains FragmentedThe Publics Own Just 5.2% of US Dealerships –
Auto Retail Remains Fragmented
US Dealership Market Share
“We look at every buy-sell as a chance to put in someone that we want.”
- Un-Named Manufacturer Rep at NADA Cocktail
“Some of these big deals come in as package deals. When it is one store and they are selling them as a bundle, it is hard to exercise our right of refusal.”
Steve Cannon, Prior CEO of Mercedes-Benz USA, July 2015 Automotive News
Right of first refusal (ROFR or RFR) is a contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a third party. In brief, the right of first refusal is similar in concept to a call option.
ROFR
All in?
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,166,675
$279,685
Source: NADA and Kerrigan Advisors Analysis
Average Dealership Earnings at Peak Levels?
2000-2007Average Earnings $542,881
2008-2015
23% Compound Annual Growth
New Normal or
Peak?
Average Dealership Earnings at Peak Levels?
Average Dealership Earnings
Source: SEC Filings
THE KAR INDEX ™
Ticker CompanyClose
4/12/16Market
Cap
KMX CarMax 51.59 10.10B
AN AutoNation 44.83 4.81B
PAG Penske Automotive Group 34.86 3.12B
LAD Lithia Motors 84.18 2.23B
ABG Asbury Automotive Group 55.93 1.38B
GPI Group 1 Automotive 55.66 1.32B
SAH Sonic Automotive 16.41 817.38M
MethodologyThe Kerrigan Auto Retail Index (The KAR Index™) is composed of the seven publicly traded auto retail companies with operations focused on the US market. The purpose is to track this group of companies to identify and assess the drivers impacting changes in their valuations, with implications for both public and private auto retailers. The KAR Index™ is weighted by the market capitalization of each company and benchmarked at 100 on 1/3/2000.
The Kerrigan Auto Retail Index – The KAR Index™
0100200300400500600700800
Source: SEC Filings
THE KAR INDEX
Introducing The Kerrigan Auto Retail Index – THE KAR INDEX™
563.02
Publics - Net SellersSome Buy/Sells
Distress
Market Takes O
ff
968% Rise (N
ov. 2008-Ju
ne 2015)
™ Year End 12/31/2015
The Kerrigan Auto Retail Index – The KAR Index™
Source: Green Street Advisors & Wall Street Journal
Real Estate Values Increasingly Drive Up Transaction Pricing
“For the right store and the right location, we're probably paying 20% to 25% more money than we did two or three years ago.”
Roger Penske, CEOPenske Automotive Group 3rd Quarter Earnings Call 20152007 2008 2009 2010 2011 2012 2013 2014 2015 2016
$60
$70
$80
$90
$100
$110
$120
$130$121
Real Estate Values Increasingly Drive Up Transaction PricingGreen Street Commercial Property Price Index
Higher Real Estate Values Result in Higher Transaction Values
Annual Rent: $500,000
Earnings Before Taxes: $1,000,000
Total Blue Sky and Real Estate:
$11,100,000
Annual Rent @ 7%: $700,000
Earnings Before Taxes: $800,000
Total Blue Sky and Real Estate:
$13,200,000
Real Estate at7% Cap
Rate:$7,100,000
Blue Sky @ 4x:
$4,000,000
Appraisal: $10,000,000
Blue Sky @ 4x:
$3,200,000
Higher Real Estate Values Result in Higher Transaction Values
Blue Sky Multiple
Real Estate Multiple
Multiples Cap Rates
3 33%4 25%5 20%6 17%7 14%8 13%9 11%
10 10%11 9%12 8%13 8%14 7%
Real Estate Values and Transaction Values
Luck Running Out?
New Used
52 Months
37 Months
78 Months
63 Months
2005 2015
50%
70%
Source: HIS Automotive, George Petras, USA Today
50% Increase in Length of New Car Ownership Since 200550% Increase in Length of New Car Ownership Since 2005
Average Length of Car Ownership
29.5%
39.7%
21.3%
9.5%73-84 Months61-72 Months49-60 MonthsOther
70% of New Car Loans Longer Than 5 Years70% of New Car Loans Longer Than 5 Years
New Car Loans by Term In Q1 2015
2010 2011 2012 2013 2014 2015 2016E 2017E0.0 2.0 4.0 6.0 8.0
10.0 12.0 14.0 16.0 18.0 20.0
11.6 12.8
14.5 15.6 16.5
17.5 17.8 17.8
Total U.S. Light Vehicle YoY Growth
6% 6%
2%0%
8%
17+ Million Sales Means Slower Future GrowthAnnual Auto Sales and % Growth
11% 10%
13%
Plateau?
6/5/
156/
16/1
56/
27/1
57/
8/15
7/19
/15
7/30
/15
8/10
/15
8/21
/15
9/1/
159/
12/1
59/
23/1
510
/4/1
510
/15/
1510
/26/
1511
/6/1
511
/17/
1511
/28/
1512
/9/1
512
/20/
1512
/31/
151/
11/1
61/
22/1
62/
2/16
2/13
/16
2/24
/16
3/6/
163/
17/1
63/
28/1
64/
8/16
400.0000
450.0000
500.0000
550.0000
600.0000
650.0000
700.0000
Source: SEC Filings
THE KAR INDEX
The Kerrigan Auto Retail Index – The KAR Index™
463.584/12/2016
709.276/5/2015
Down 34.6%
™ The Kerrigan Auto Retail Index – The KAR Index™
2013 2014 2015 Q1 2016
9.2x 9.1x
7.6x
6.3x
Blue Sky Multiples
Source: Kerrigan Advisors Analysis
Publics Estimated Blue Sky Multiples 2016 AUTOMOTIVE Q3:2015 MULTIPLES
($ in millions) AutoNation Penske Group 1 Asbury Sonic Lithia Total
Market Cap (as of 03/18/16) $5,385 $3,522 $1,370 $1,480 $875 $2,348 $14,980
Net Assets (515) (104) - (136) (177) (457) (1,389)
Estimated Blue Sky 4,870 3,418 1,370 1,345 698 1,891 13,591
Adjusted EBIT $715 $498 $221 $255 $194 $264 $2,147Blue Sky Multiple 6.8x 6.9x 6.2x 5.3x 3.6x 7.2x 6.3xSource: Kerrigan Advisors and SEC Public Filings
Public Estimated Blue Sky Multiples Down Since 2014
Let’s Do The Numbers
Luxury Franchise Blue Sky Multiple
Source: Kerrigan Advisors Analysis and Automotive News
Lexus BMW Mercedes Audi Porsche Land Rover - Jaguar*
Acura Infiniti Cadillac Volvo1 2 3 4 5 6 7 8 9
10
Kerr
igan
Adv
isor
s Bl
ue S
ky M
ultip
les
Kerrigan Advisors Luxury Blue Sky Multiples – March 2016
Non-Luxury Franchise Blue Sky Multiple
Source: Kerrigan Advisors Analysis and Automotive News
Toyota
Honda
Subaru
Chevy
FordCJDR
Buick/GMC
Nissan
Hyundai
Kia VWMazd
a1
2
3
4
5
6
7
Kerr
igan
Adv
isor
s Bl
ue S
ky M
ultip
les
Kerrigan Advisors Non-Luxury Blue Sky Multiples – March 2016Kerrigan Advisors Non-Luxury Blue Sky Multiples – March 2016
Domestic53 Franchises
32%
Import Luxury
29 Franchises18%
Import Non-Luxury
83 Franchises50%
Source: The Banks Report
Franchises Acquired by New Entrants
Over 80% of Franchises Acquired by New Entrants are Non-Luxury
Building a great business
• Deep systems and organizational knowledge
• Site control• Sound business plan
• Fixed operations• Pay plans • Balance sheet strength
• Scenario analysis: Rising interest rates
“Are car dealers really $1mm smarter today? Or, are
interest rates at about zero?”- Industry curmudgeon
(with about 40 years of retail experience)
Building a Great Business for Good Times and Bad
Ryan KerriganManaging Director
P. (949) 728-8849E. [email protected]://www.kerriganadvisors.com/the-blue-sky-report/
Questions & Answers
Tony Albertsontalbertson@
ncmassociates.com
Thomas Gage
Thomas.Gage@
CoxAutoInc.com
RyanKerrigan
David SpisakDavids@
reverserisk.com
JonLancaster
Thank You!
