Welcome to this episode of The Friday 5 with Steve Greenfield, Founder and CEO of Automotive Ventures, an auto technology advisory firm that helps entrepreneurs raise money and maximize the value of their companies.
The news cycle continues at a torrid pace this year, and this last week was no exception. It’s incredible just how much change is coming to the industry. If you blink, you may miss big news that potentially impacts the franchise dealer model.
This week I want to recap three essential news items that came across the wire over the past week – news that dealers should mainly be focused on monitoring.
1. Buy/Sell activity
First up, there’s NO sign that physical dealership buy/sell activity will slow down anytime soon.
Lithia Motors has been the most ravenous of the public acquirers, intending to get to 500 rooftops and $50 billion in revenue before they’ve built out their planned footprint. Lithia’s aggressive pace of acquisitions has provided a floor for valuations in the market.
This week, Lithia announced the purchase of 10 dealerships across southern Florida and Nevada, which will add $950 million dollars in expected annualized revenue.
So far, the U.S. dealership buy-sell market is tracking at a similar pace to a record-breaking 2021; last year was widely considered the biggest year for store acquisitions in history.
The number of dealerships that changed hands in the 1st quarter of 2022 was similar to that of the 1st quarter of 2021.
In parallel, valuations continue to bounce along at an all-time high.
From my perspective, valuations will not likely get much higher than they are today. When natural acquirers like Lithia have satisfied their appetite and filled out their planned footprint, valuations will likely regress towards historical levels.
High inflation and fuel prices, low consumer sentiment, rising interest rates, and stock market declines may speed us back to more normalized valuations.
But for now, these record-high valuations are being applied to record-high profits, mainly attributable to a lack of new-vehicle supply. Many dealers are taking the opportunity to translate these excess profits into acquiring more physical stores.
While the dealer principals I speak with generally target only under-performing stores where they can justify paying sky-high valuations applied to these inflated profits. I imagine some buyers in this current environment will eventually feel “Buyers Remorse” when valuations inevitably fall back to earth.
2. Ford ends lease buyouts for EVs
Next up this week is interesting news from Ford Motor Company, which announced that they have stopped allowing customers in most states to purchase their electric vehicles at the end of a lease, a policy they say will help manage EV battery recycling.
For example, Ford Credit said customers who lease an F-150 Lightning, Mustang Mach-E, or E-Transit must return the vehicle when the contract is up and can then renew their lease with a new car if they choose.
While Ford is communicating that this initiative is to help reclaim the raw inputs into batteries, as prices have skyrocketed over the past year, I think there may be other dynamics at play.
We’re going to see a proliferation of new EV models over the next 18 months, and the OEMs will certainly not be able to predict residual values on all of these vehicles accurately. I believe this will allow Ford to control residual value risk for new EV models that might have volatile pricing at the end of the term. By controlling the used car supply, Ford can closely monitor and influence the price of used pricing.
Both GM (with CarBravo) and Ford (with Blue Advantage) now manage their own online used car websites. By controlling the off-lease volume, they can ensure that unique, attractive, used vehicles are only available on their proprietary sites.
The Automakers have been observing recent used car dynamics, including that most vehicles are coming back at the end of lease term with thousands of dollars of positive equity. Ford will essentially have a call option to participate economically in any vehicle coming back with positive equity instead of surrendering that profit to the consumer or the dealer.
It’s also likely that Ford realizes that battery and charging technology will advance so quickly that they may want the option of removing used EVs from the road, which may not perform competitively versus brand new models being sold in the future.
Preventing the consumer from being able to buy the unit at the end of their term does make a lease feel a lot more like a subscription product.
Let’s think about broader implications of this move, anticipating that other OEMs will elect to follow the same path. It will mean far fewer off-lease vehicles available to the automakers’ franchise dealer networks and independent dealerships.
We’ll be watching to see which other automakers announce similar plans over the coming months. I expect we will see many others follow Ford’s lead.
3. FTC cracks down on F&I departments
Last but not least this week, The Federal Trade Commission has signaled that increased regulation may be coming to dealer F&I profits.
This week, the FTC proposed banning finance, insurance coverage, and physical vehicle add-ons that quote-unquote “provide no benefit” and require expanded disclosure and consent on such optional products — including a list of prices online.
The agency is also considering cracking down on dealerships’ advertising related to the cost of the vehicle itself.
An accompanying news release repeatedly depicted physical additions and F&I products as “junk fees.” However, the four commissioners supporting regulations acknowledged in a separate statement that “Not all add-ons provide no value.”
The FTC’s proposed regulations include:
- Bans on all products without benefit.
- Posting a list of all optional add-ons and their prices online.
- Bans on misleading pricing advertising.
- Disclosure and declining in writing of the “Cash Price without Optional Add-ons.”
- “Express, Informed Consent” on F&I products and other add-ons.
Since the CFPB was largely “de-fanged” during the Trump administration, there hasn’t been much threat of regulators squeezing dealer finance and insurance profits.
We will be keeping a close eye on this latest development and if the FTC, or any other government entity, starts encroaching on and threatening dealership profit centers.
I told you the news cycle was busy this week.
These issues should be monitored closely by dealerships and have broad implications for the franchise dealership model and ongoing profitability into the future.
Companies To Watch
Every week we highlight interesting companies in the automotive technology space to keep an eye on. If you read my monthly industry Intel Report, I showcase a few companies each month, and we take the opportunity here on the Friday Five to share some of those companies each week with you.
Today, we have two companies to watch: WrenchWay and Axion.
For as long as I remember, I have heard from dealerships that they’ve had difficulty recruiting and retaining technicians.
WrenchWay is a job-recruitment platform for both technicians and service departments. It is changing that dynamic by giving techs an insider’s view of dealerships’ operations, equipment, pay levels, company culture and other pertinent information.
WrenchWay accomplishes this with its Top Shop program. Dealerships pay a $150 monthly fee to be listed as a Top Shop, but the listing is much more in-depth than a typical job-board post. Dealers must include specific information before posts are accepted, including pay levels for technicians, workplace amenities offered (things like air conditioning and heating), and available equipment.
In addition, the posting must include videos showing what the shop looks like and interviews with technicians and fixed ops management who talk about what it’s like to work in their shops. This unique approach markets the dealership and the opportunity to more than just the job-seeker.
I love this company because they are attempting to solve one of the most significant pain points for dealers’ FixedOps departments – recruiting and retaining technicians. The company was started because a dealership needed help recruiting, and they wanted to bring technology and process to make their efforts repeatable and scalable.
You can check out WrenchWay at www.WrenchWay.com.
Axion is an AI platform & predictive digital offering for engineers and QA management that allows users to efficiently mine through tons of unstructured data to derive insights to accelerate vehicle development efficiently.
Axion’s mission is to empower engineering leaders with the best decision intelligence platform, to strengthen decisions to deliver the best results.
Forward-thinking engineering leaders across automotive, aerospace, and defense leverage Axion to accelerate product development, enhance program planning & collaboration with suppliers, and improve quality using Axion’s predictive AI-based digital platform. Customers include Boeing and the U.S. Air Force.
I love this company because they can augment a user’s current process to very quickly and efficiently mine through tons of unstructured data to derive insights. Axion provides clear visibility into the future results of today’s decisions and actions.
Check out Axion at www.AxionRay.com.
So that’s your weekly Friday 5, a quick wrap-up of the big deals in the automotive technology space over the past week.
If you’re an early-stage automotive technology entrepreneur looking to raise money, or an entrepreneur who is trying to decide whether and when they should raise money or sell their business, I’d love to speak with you.
Thank you for tuning into CBT News for this week’s Friday Five, and we’ll see you next week!
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