Our analysis of yesterday’s stunning announcement from Warren Buffett that he is acquiring the Van Tuyl Group: Welcome to the Industry, Mr. Buffett.
I’ve had several conversations and have read numerous blogs that speculate Buffett will usher in a new world for automotive retail — improving the shopping and buying processes both online and offline. Some of what I’ve read borders on a breathless anticipation of an industry waiting for its Messiah.
I don’t think that is Buffett’s intention.
Buffett isn’t getting into automotive retail to change it. Instead, he’s buying in because he likes the fundamentals and the economics.
Historically, he invests in companies that have a stable and methodical business model – and that’s exactly what dealerships provide. He often keeps the executives in place – as he is doing with Van Tuyl keeping Jeff Rachor and Larry Van Tuyl as his CEO and Chairman. Buffett is not a transformational or revolutionary. His model is “Stick with what works.”
The change Buffett brings to the industry will not be on the operational showroom level. Rather, it will be at the investment level.
It’s been more than 20 years since the public groups created a new type of ownership in automotive retail. And that model has not changed, nor has it grown, since the early years. The groups have been artificially contained by market pressures and manufacturer efforts to keep them from becoming too powerful.
I’ve been covering automotive retail for a long time, and the industry has been waiting for a shakeup in ownership – or at least, new investors — for at least 10 years. Several have tried to enter the market and have failed.
There are certain dynamics inherent in automotive retail that make it hard for the typical investor. One, the manufacturers prefer to keep their base of dealer partners stable. Private equity or venture capitalists come in, strip a business of its costs and then look to flip it in three to five years. That’s not a healthy model for automotive retail.
Meanwhile, the private equity folks have trouble accepting the fact that automakers often act as an owner-partner in the deal and can have a lot of say in how a dealership is run. That’s not a model most investors have experience with.
We explore this in more detail in our analysis, but Buffett is unique and the type of investor automakers should want as part of the industry. He doesn’t make waves, but sticks to the gameplan.
Fifteen to 20 years ago it was folks like Wayne Huizenga and Mike Jackson, Roger Penske, O. Bruton Smith and Sid DeBoer who shook up the industry by taking dealer groups public. The industry will see another couple of investors similar to Buffett.
Buffett could lead a new charge today being the first of a new type of investor that we wrote about a couple of weeks – investors that are looking for stable slow growth businesses.
It would not surprise us to see Buffett surpass a Penske or AutoNation in the next couple of years in size. In fact, Buffett’s entrance could set the stage for consolidation among a couple of the public groups.
Nevertheless, Buffett’s entrance enhances the credibility of our industry – and certainly, is going to make it a lot more fun to watch over the next few years.
Meanwhile, check my friend Phil Villegas’ piece he wrote for Ward’s yesterday – it’s one of the more intelligent pieces I’ve read about Buffett and automotive retail – besides, Phil and I were the only two that I’ve seen to include Buffett’s investment in Chinese electric automaker BYD in our analysis.
Also, The Banks Report was quoted in a Wall Street Journal article yesterday about the announcement.