POSITIVE TRENDS IN THE automotive industry lately have been working in AutoNation’s favor. The average car on the road is a record 11.4 years old. Replacement demand and affordable credit drove U.S. car and light-truck sales to 16.5 million last year, a 14% increase from 2012, according to Manheim, a vehicle auctioneer. Jackson expects U.S. sales to top 17 million this year.
It’s an especially good time to be the biggest kid on the block. The number of independent new-car dealers has fallen 30% since 1987. New-car sales at the largest 125 dealer groups were up 13% in 2014, roughly double the gain of the overall industry, according to Automotive News and WardsAuto. Large dealerships accounted for 8% of the market a decade ago, but today claim 20%. AutoNation has a 3.5% share of the new-vehicle market.
The technological complexity of today’s cars also gives the big chains an edge over smaller repair shops that can’t afford equipment and training. Moreover, most auto makers want repairs under warranty done at the dealerships. The business is highly profitable; new-car sales contribute 57% of AutoNation’s annual revenue, but only 22% of gross profit. Parts, servicing, and financing, on the other hand, account for 19% of sales but 65% of gross profit.
Size also confers an advantage in allowing AutoNation to shift labor and cars from store to store, depending on demand. Small dealerships would be hard-pressed to match the company’s inventory and flexibility.