A New Deal

Last week, Automotive Stock Analysts down-graded the outlook for Publicly Traded Dealer Stocks (i.e., Auto Nation, Asbury, Group 1) explaining that both the economy and auto sales were going to decline in 2008.

Wall Street analysts were indeed right about short siding Publicly Traded Dealer Stocks (“Publics”), however for the wrong reasons. Sure it’s the economy that fuels the appetite for car sales, but for Publics, sheer sales increases can’t save an overall defunct business model.

If you view Publics in similar way you view (and invest in) large “box” retailers you will find three key differences:

1. Publics can't receive discounts for large stock orders.
2. Publics are restricted to sell only one brand per facility.
3. Publics can't profit from the sale of their new products.

Think about it, Wal Mart can buy 50,000 tubes of tooth paste for one quarter of the cost to your local drug store and then profit off any brand a consumer chooses, all displayed on the same shelf.

In automotive retailing, a dealer who sells five cars a month buys products for the same price as a dealer who sells 100 cars per month. Publics become large by committing to exclusive brand offerings (especially in expensive major markets) and then report significant losses in their new car departments. Sure there are exceptions, but unless everyone drives Toyota, Honda, BMW and Lexus brands the retailing business model will remain seriously flawed.

The only "real" value Publics have is real estate. Steer clear of Publics who pay more rent than mortgage (thus funneling rents to separate LLC’s - more of this at a later time).

The future of automotive retailing does indeed belong to big investors and CEO’s with vision and leadership (common traits of most Publics today). However only those Publics strong enough to lobby changes in franchise laws and distribution policies will prevail. Imagine IKIA sized retail facilities where customers can view products and services in the same way one clicks onto the Internet.

If you must sell Publics, sell because the business model is as out of date as the leaf springs I saw today on the new Hummer H3.