Episode Transcript
Tariffs are here and they're shaking up the auto industry. Dealers are caught in the middle between rising costs, shrinking supply and nervous customers. What does it all mean for your dealership and how can you turn challenge into opportunity? Stay tuned as industry experts weigh in. How then what is your general impression of what President Trump is doing with carrots?
Generally, I think it depends on what seat you're sitting in. Right. The view from the manufacturers very different from the view from the retailers, different from the view from the consumers. But what I what it seems to me the intention here is to bring manufacturing into the U.S. And there's so much capacity and I mean automotive capacity specifically.
And then you have materials, labor, you have input cost inflation to the point where supply has just outrun demand in this country. So with that cost inflation, it invites the potential to seek low cost regions, produce in Mexico, produce in China, to be able, from the manufacturers perspective, to be profitable. But that means jobs leaving this country to go manufacture somewhere else.
So simply put, it seems to me that it's a decision between do you want affordable vehicles? In the case of the auto industry and obviously trade goes across many different industries, But do you want affordable vehicles or do you want manufacturing jobs in this country? And it seems like the administration is sort of leaning towards the side of let's bring jobs back in, manufacturing, automotive manufacturing jobs back into the United States?
I think to say that I would agree with Kevin, I think Trump is doing what he said he was going to do. And I'm really somewhat confused as to why everyone's so surprised. He has a history of doing what he says, and I think he's recognized that if tariffs were so bad, the rest of the world would not be using them to protect their markets and to build employment within their countries.
And but, you know, their unique things. Each country thinks it has a right like Canada, to protect milk producers that are along the border. And therefore they put a 200% tariff on Wisconsin milk. But it's it's something that has irritated Trump since his first opportunity to be president. And I think he is just doing what he said he was going to do.
And I think he uniquely has taken up the banner for the the middle class, which by and large has shrunk dramatically because the manufacturing segment has left the country for cheaper markets. As Kevin mentioned. Yeah. And I think also that we as consumers look at this from the consumer's perspective, which is this is inflationary, right? The price of everything goes up and and that's bad.
We can't afford. But again, I think really when you when you pare it back, the question is, do we want jobs? Do we want affordable things which become affordable? I guess if we increase the number of jobs and we think the economy grows in that way, but ultimately that that seems to me what what the administration is choosing and they're choosing, like Lloyd said, to bring jobs back to this country.
And it has been you know, the difficulty is that it's not simply I put a tariff on your vehicle. You put a tariff on my vehicle. To Lloyd's point. There's trade across different industries, different products, and it becomes all very uneven. And it seems frustrating, at least from the consumer's perspective, because everything is inflationary. And I think his goal is to create free trade.
I personally don't know if free trade is a reality because of some very micro industries in certain places that have extraordinary political influence, like farmers in Japan. I don't know if free. I think it's it's a utopian dream, but I think he is doing what he said he was going to do and he's trying to create a level playing field and that we are no longer going to be the one who is financing the economic success of countries who are really playing offense, a very strong offensive game with their tariffs.
Where we are playing, we're not even in the game.
Excellent. All right. Question to Lloyd, Do you think this is a good or do you think this is good or bad for the U.S. economy? That's yet to be determined. My knee jerk reaction is I think this is going to be good. Why? Because I think it's a disruption. I think disruptions those that are temporary in nature are ultimately good for the economy.
And I believe this is temporary. I do not believe that the rest of the world can just can win at a game that they currently lead, and that is they led with their tariffs. And if you're talking about reciprocal tariffs and you know, if we're taxing them at 3% and we're taxing them at 30 or they're taxing us at 30, we raise ours to 30 and they raise theirs to 40, that game will not win for them.
So I think this is a shorter term process. I think this is a negotiating tool for Trump. And I think on the other side of this time being the question on the other side of this, we're going to have a greater investment in the infrastructure and the industrial infrastructure of this country. And we are no longer going to be financing the working class of the rest of the world.
Yeah, and I would agree it's short term, obviously, economic pain, at least as it looks in terms of pricing and an inflationary impact, like almost immediately. But but I think the longer term view achieving what administration is setting out to do would have a net benefit to the economy, right. In creating jobs and you know and and that affordability would go along with having more manufacturing jobs in this country.
So you know, it's the it's sort of the tide lifting all the boats. And I think also, you know, like I said, every everybody wants everybody thinks they should make more money next year than they did this year. Right. And that that's perpetual. Right. And that's. Or chronic, you know, so. So the idea that we can cover that inflating cost structure with more and more product becomes difficult.
Right. Is just too much capacity for the demand level. And this to Lloyd's point, is a disruption. It's a reset of that supply demand balance, which is needed, especially in the auto industry. But in the economy overall, whether it's successful or not, remains to be seen. But I think there something had to be done and this is what Trump and the administration have decided, that that this is where it's going to start.
Evan, let me ask you, there has been some consolidation of global manufacturers and there's been some concern about other manufacturers currently stellantis and Nissan. Do you think this is going to promote or hasten any of that consolidation of global manufacturing companies? Well, I think I think you need to rationalize capacity globally in the auto industry, including in the U.S. So to give you an example, capacity utilization of automotive factories in the fourth quarter was 65%.
You look for 80% to be ideal. It gives you room to expand, but you're not paying overtime to everybody all the time. So. So there's too much capacity for the demand level here. What that results in is too much supply. You see an inventory build and then it becomes a race to the bottom in terms of pricing. So combining automakers to me doesn't do anything unless you take out some of that capacity.
Right. And if you think about it, it's what a trade war is. China builds out automotive capacity, doesn't have the demand to meet it. It looks to other countries to put those excess, that excess output, including the U.S., Europe, wherever it is at some point. And this is where we are now, those countries that are taking those exports as imports say we can't do it right.
This is taking from our manufacturing base. So I think globally, combining manufacturers isn't the issue can solid rating on the manufacturing, the actual production footprint has to happen? And I think to a degree, this tariff situation, when you look at it, if you're going to have and for the numbers which I looked at the other day, 16 million units of sales in 2024, 11 million were built in United States automotive factories.
So there's 5 million vehicles that I'd call in play. But then you consider. So then you say, okay, well, there goes pricing through the roof because the consumer choice is taking taken away supply and demand get much tighter imbalance like what we saw in the pandemic. The issue is, is that our automotive factories are only running at 65%.
So of that 5 million, you could add back a lot of that supply and a lot of that output. And you get to a total volume number that may not be 16 million anymore. It may be 13, 14 million. But if you think back to the pandemic, that was the most profitable time for manufacturers and dealers. So to me, that points directly to the rationalization of automotive capacity, certainly in the U.S. and absolutely globally.
And what do you think is going to be the turn time for, let's say, companies like GM, which I think currently has 20% of the parts are imported. Ford is, I think, a little better. I think they're at ten. What do you think should be the turn time if they're forced to to create those parts in the U.S. you that that creation of the supply chain.
You know it it probably couldn't happen in less than 3648 months. And and if you think about the way supply chains have built, it's over the course of decades. But as I said, you know, we're already under capacities in terms of usage with the factories that already exist. And perhaps that narrows vehicle architecture choice. Right. And that's happened organically.
You think about 2013 was the last time the U.S. was 50% truck, 50% car. Now we're 82% truck. And every manufacturer has truck capacity in the U.S. because of the the chicken tax, especially, you know, for European manufacturers. So the capacity is here. Right. Supply chains probably have to adjust a little bit. But I think with a lower break even by taking out capacity.
2022 was the most profitable year for dealerships and was near record for the manufacturers. And that was a 13.8 million unit market, nowhere near the 16 that we saw last year. So you had great profitability on lower volume and I think that's probably what you can expect going forward is that this is not going to be this perpetual growth market.
16,000,016 517 on its way to 18. I think we have to keep that that lower break even in mind and aim for that and keep supply and demand tight. Everybody's profitability, benefits, benefits from that. Consumer sees higher pricing. But again, that manufacturing base expands, right? Jobs expand. Yeah. And to point out a couple of contradictions that might be highlighted today, in 22, the I think the Dow was down something like 18% and the auto dealers had their best profit year that you can remember.
And the auto dealers at an extraordinarily good profit year as well. So the sky is not falling, that the stock market is down seven or 8% in the last few days. I know. And I think that's an interesting point, is that from the from Wall Street's perspective, everybody is focused on the manufacturers, the the Teslas. Right. And GM's, which are, you know, arguably become an investable.
But there is opportunity there. Right. And even even those companies, their profitability was very strong in those years. 24 was a little bit better because because that's a business that depends a little bit more on transactions. But when you think of the and the way I look at it this way is that when when you think about the auto industry in the U.S., a lot of people look at the volume number, the top line volume number.
So 16 million in 2024 looks like it's better than 13.8 million in 2022 or the record year of 17 and a half million in 2016. But the thing you have to layer on top of that is also transaction prices and the the front end gross per unit, which is way better when supply and demand are imbalance. Right? If you look at and I call it the revenue pull, if you look at 2016, 17 and a half million units averaged $35,000 when you look at 2024, 16 million units averaged $49,000.
So that revenue pool is about $140 billion larger by selling a million and a half fewer vehicles. Right. And I think people think the sky is falling because you're selling fewer units, but the pool is actually bigger. The revenue and profit contribution pools are bigger. So the industry actually is growing for working smarter, not harder. Right. You don't have to go find 17 and a half million buyers.
Maybe it's 15 and a half and it's a lot easier to do that. And do it profitably. Yes. And you can't have a beer in a banana with a car automobile dealer without him saying, Oh, it wasn't a good back in 22 when we had lower volume, higher grosses. Yeah. I mean, there's something to be said for foot traffic, right?
Because not everything is a new vehicle sale. Right? There's you know, there's fixed ups. You know, you think about selling a new or used vehicle to create a parts and service customer also, because that's really where the gross margin is. So. So from the dealer's perspective, you you understand where you want transaction and you want people in the door, you want finance and insurance, you want warranty contracts, things like that.
But ultimately, when you think about the new vehicle business, less is more in terms of profitability for the retailers.
Excellent. It's stuff. All right. Number four, Lloyd, with the recently announcement of tariffs, what immediate impact do you foresee for dealerships and how should dealers adjust their strategies to address these changes? Well, I think it depends on a few things. First of all, perspective, if you're willing to deal with change, I think there's going to be a good time.
We've been here before. 911 2009 2019. I think automobile dealers are some of the most versatile, dynamic businessmen on the planet. I mean, they are the canary in the coal mine with regard to the economy. And I think they have learned to be light on their feet and adaptable. So if you maintain that perspective, I think you're going to they'll do fine.
I also think that if you're Mercedes or Lexus, BMW and Kia, if the bulk of your product is being imported, I think you might feel more disruption than if you're a Ford or General Motors or Toyota. Honda. I think Ford, especially Ford and General Motors, I think they have the least content. And if you have one of those franchises that rely totally on imports, I think your your your approach to this is going to be different than than the other dealers.
And I don't think, frankly, you should panic. I think you should sit down with your manufacturer, listen to them. What are they thinking at their level? What are they believing they're going to be absorbing and what are they going to be passing on? What are they think the timeline is? How much inventory do we have? That is not tariffs, so to speak.
And you know, what's the run rate on that? And then I think you also need to talk to your customer, tell your customer that the sky is not falling. You're going to be there for them and you're going to provide them the best deal. You know, I think the Internet has really hit its peak as far as advertising with regard to automobile dealers, we're seeing a trend back to the more traditional media of TV and radio.
And I think this is where an automobile dealer can, you know, keep his cool and connect with his customer and say, you know, we're not panic. You shouldn't panic if you need if you if you're going to need a car in the future, we're going to be able to get it for you. And it might be a little expensive, more expensive.
But we're going to find a way for you to have the automobile you need, whether it's modified financing or, you know, just whatever it might be, we're going to be able to serve, engage. I think automobile dealers just need to start thinking ahead. Kevin mentioned earlier that, you know, they tend to the automobile dealers tend to think from year to year.
But most that I deal with think month to month. And I'd be delighted if they thought year to year. But I think now you do need to expand that thinking 90 days in the future. I think everybody's got 90 days of inventory. So I think the world only looks good for 90 days. Your inventory is going to be valuable and I think there's going to be some pent up demand and I think you're going to have a chance to get a little higher grosses if you're patient, if you don't think this goes well beyond 90 days.
I think you've got to be out there using your brain, start doing some collaborative thinking and just believe, hey, we've been here before. We got this and you know, the sky is not falling. Kevin, what do you think? And I would agree. I think for one, the franchise dealer base is great revenue diversity rate in times where new vehicle margin is is at its peak.
You can go focused more on that. Right. If the preowned market starts to compress a little bit. And I think it's it's going to stay undersupplied for a while. The used car market. Right. You can go to those other business units, whether it's the new vehicle segment, whether it's fixed ups, whether it's F9, and have the ability to diversify that revenue base and sort of follow the money, you know, in the segments that are hot.
I agree also that it's going to depend brand by brand. The impact of price increases due to two tariffs. But as I said, there's a lot of domestic capacity for the products that are popular, which obviously are trucks. And this is this is the direction of the industry and the market. The U.S. market has been moving since 2013.
Right. So I think that you're correct that there's a there's excess supply now probably for another two or three months, but vehicles will be built. Right. This is not April of 2020 where fourth thousand units were built in the entire North America, which would typically be 1.5 million. Right. And then and you think even in that instance, production basically completely shut down, except for a couple of hundred Kia vehicles built in Mexico in April of 2020.
It wasn't till 22 where that supply demand balance got so tight, it was actually the end of 21 to the end of 22, where that supply demand balance got so tight that the consumer was paying over MSRP for those 12 months. And that's every brand in the industry as a whole, which was obviously unprecedented. So I think there's some lead time before you start to see prices get super firm, but we will move in that direction.
You look at March, crazy, right? Think about that. 16 million units in 2024, January, February were in that range, right? High 15 is low. 16 March. This pull forward was a 17.8 million units are right, completely not organic. That was panic and that was a rush to get vehicles before the tariffs hit. Now, the stuff that's on the ground is if it left the port in time is not tariffs in April and potentially even in May, depending on how long that inventory last.
But as we get beyond this initial shock, you're going to start to see discounting go away. Prices firm closer to MSP and you know, and maybe even then gets over again. But but the thing to consider is that even when that happened in 2021, through all of 2022, demand didn't really change. Discounting went away, incentives were gone. There was no leasing, there was no cash on the hood.
But the industry still average that same 1.3 million units per month. It was just a matter of how much inventory there was against it. So the demand will be there. Right. And and the consumer needs vehicles and the dealers are have the expertise and the experience to provide them for what they need. So I would I would expect more of the same super steady demand, maybe a a tick lower.
But really it's going to affect the inventory side, which will come in line with demand and that will drive prices a little bit higher. But the consumer's proven if your process as a dealer is good, the consumer will pay MRP, right? Just don't make them stay in the dealership for 7 hours to end up paying MSP anyway, right?
If that process is sound, the consumer's proven they'll be there. They'll pay to that level of demand that the dealerships are familiar with, which is that 1.3 million units on average. And it's an amazing chart. I have it in my presentation, whether whether it's supply, whether inventory is 4 million units or a million. Demand stays the same over the years.
It's right there in that range between one and 1.5 million units of sales. Whether you have 4 million in inventory or whether you have 1 million in inventory. And I think that's what we're about to see again, is that really, really firming up of the supply demand balance and enhancing factor to that also is that with this jabber about by bye by Wall Street about inflation, that the forecast for interest rate decline has accelerated.
And I heard as recently as this morning is they're projecting five rate cuts this year for a 125 basis points. I think that's going to be a positive supporting element of business at MSP and even slightly above. No, I don't. I mean, everything to me looks inflationary and in that environment, I'm not sure how you're cutting rates, but I'm no economist, that's for sure.
Nor I, I think it's a function of Wall Street trying to eat the elephant in one big gulp and they're choking on it and they're looking for it. Ramifications, talking heads on TV. And they are saying that they anticipate the Fed will become more aggressive when they see some increasing prices, a return of inflation and slow down the economy.
Yeah, one thing too, about inflation, though, is that, you know, inflation usually impacts everything, right, including wages right across the board. Your your returns in terms of of investment returns. Right. Inflation means things are going higher. Right. And that should mean everything, including your wages and your investments. So you know, an inflationary environment to me, you know, would would tend to show economic strength and would be when you are not cutting rates.
But again, it's you know, the logic escapes me. Likewise. So I mean Kevin fucking dealers effectively communicate with and reassure their teams about job security in the organizational organization, Stability in light of tariffs. What specific messages should leaders convey? Yeah, I think that again, we're talking about an environment potentially sustainable and structural change in which the U.S. auto industry is by volume smaller, right?
So fewer transactions, although those transactions may be more valuable, more profitable from a revenue and growth perspective. So I think you do have to be aware that there's that potential to right size your your enterprise to fit an industry that isn't doing as much total volume. That said, I feel like especially the franchised dealer base went through this recently during the pandemic.
Right. To Lloyd's point, we've we've seen these shocks before, whether it's 911, whether it's the global financial crisis of oh eight through 11, whether it's the pandemic. Right. So I feel like there was a lot of cost rationalization that happened early on in the pandemic that also helped drive 2022 as a peak earnings period. And so a lot of that works to me has been done right.
We can't we come out of the pandemic, arguably some time, 23, 24, and here we are right back into the same sort of supply demand dynamic, which means a smaller market. So I would I have been saying like I think the structural lift is much heavier for the manufacturers in terms of excess capacity, in terms of headcount and adjusting your manufacturing footprint to focus more on the U.S. and not, you know, globally or even Canada, Mexico, that's a way, way more financially burdensome task that they have relative to the franchised dealer base.
Again, I feel like they've been through this very recently. And if they're not completely right sized to a smaller market, they're pretty close already. I think dealers figured out back in oh nine, ten and 11 that they can no longer run their dealerships from their ranch or their sports fisherman. I think they're back engaged, if not granularly. They have supervisory management that is really communicating daily who's in touch daily with their management teams.
And I think this the results of of what we did in 18, how we recovered from that reflect that these dealerships now have been professionalized and they are communicating with management in this crisis. I believe they're going to do that right away. They'll be telling their management teams that, hey, I'm not panicking. You shouldn't panicking. Nobody's job is on the line.
We got a challenge ahead of us. We've been here. We've done this before. We're going to do it again. We're going to have to stay in contact with our manufacturers. We're going to have to know what's coming before it gets here so we can be prepared. It's a function of a team acting like a team and practicing the Otis cycle, which I'm a big fan of, which is means observe what's going on in the economy, observe what's going on in the dealership with our mark, our local community, what's going on internationally, observe what's going on constantly and constantly orient ourselves to it.
So you observe the Orient, you're constantly deciding what you're going to do. The action we're going to take, Then you're going to act on it, and then you're going to observe the consequences of your action and start the cycle over again. Observe, orient, decide and act. That's the way management teams work and that's the way management teams affect effectively and deal with somebody moving their cheese, because the cheese is moving all the time and we've got to get ahead of it and we learned that we're going to do well.
Automobile dealers are going to do a heck of a lot better than washing, washing, machine washing machine salesman. I mean, I don't know if I'd want to be running a Best Buy dealer, Best Buy store right now. You got to believe that probably 90% of their merchandise is imported. The car dealers aren't that bad. We're going to do okay, great.
Okay. And that in response to potential price increases, what innovative strategies can dealers implement to maintain consumer interest in dealership traffic? I think the most important thing they can do is communicate with their customers, tell the customers they're not screaming. The sky is falling, world coming to an end, and the customer shouldn't think so easily. So either convey your confidence in your brand, convey your confidence in your service team, and invite people come in for service and tell them that they're going to be provided a value that we're going to squeeze value out of any kind of tariff impact that's out there.
I think communicating with customers is paramount and my dog agrees to. Yeah. And I think also you're going to there's going to be a message from the manufacturers through the retailer that will need to be communicated because as of now, essentially every brand, every manufacturer has a strategy on what they're going to do and what do you. And that goes from assuming all of the additional costs to none of it passing along.
There's there's the entire spectrum of what manufacturers are going to do. And I think dealers are already out there with those with those manufacturer meetings, finding out what the message is. And then I think, though, there's going to be this sort of frenzy right now. We've seen Ford employee pricing for all. I think Nissan has done some price actions on certain products.
And again, I think at the end of the day, that's all just inventory management, supply demand, balance. And as we get out past this 60, 90 day period, it's going to become even more important to be communicating with the customer, with, you know, with your with your team on on what the direction is, because that's when supply demand is going to get even tighter.
Prices are going to go a little bit higher or be a little bit more firm. Maybe they're not over MSRP by the end of the selling season or into the new model year in the fall, but it'll certainly be closer that way. But again, I think what what the consumer what markets fear in general is that uncertainty. So anywhere that a dealer can take away some of that uncertainty is beneficial not only for them or their manufacturing partner, but also for the consumer.
Right? Great. It was. Kevin, What are the most critical supply chain adjustments dealers should consider to mitigate the impacts of tariffs? And how should these adjustments be prioritized? Yeah, speaking to dealers already, you know, those high turn parts for your for your service bays and your parts counters. So there's probably a little bit of a pull forward in terms of those, you know, a big one is tires, right.
That you know, everybody needs nobody thinks about that are going to get more and more difficult to find and be more expensive. So I think you're going to see a lot of as buy in early or have already seen it to be prepared for those things that, you know, are high turn items. It's it's sort of like the big box store.
You don't need seven gallons of mayonnaise except, you know, you're eventually going to use it. So I think it's a little bit of that. The part, you know, you're going to turn, whether it's filters, whether it's brake pads, things like that, the things that you commonly are using. I think the dealer base has already been out there accumulating those products.
And I think a used car pre-owned strategy is going to be very important to some franchises. And this is a fickle market as we speak of dealer after dealer is trying to enhance their pre-owned and they're all encountering challenges because everyone's in the in the market to buy the wholesale units at the same time. But that is a business that you can depend on.
That is a service business that you can depend on. And it's not going to be tariff impacted other than, as you know, the parts that Kevin mentioned and the tires. But I would definitely be thinking about an aggressive pre-owned strategy that was going to keep my service department going and it was going to keep my F9 department going and that even without generating significant gross profit on the front end, that use car business will be critical if the cost of new cars creates serious sticker shock.
And that will happen, I think, the economy, I think our population will adjust. We've got to figure out just how much of this is permanent and how much of it is not. And that's probably going to take the rest of the year because everybody still says Trump is a dealmaker and we're all expecting him to to make deals that none of us are expecting that this is the the final edict on tariffs.
But when it when it does settle and we're going to have to make some adjustments and I think used car perspective commitment is going to have a significant impact on the winners and losers in this environment. Yeah, let me add a little color on on the pre-owned market as I see it. Undersupplied currently. And a lot of that has to do with the lower volume of the pandemic period.
So when you think about that tight supply demand balance on the new vehicle side, there was no the incentives basically went away and leasing is a form of incentive, right? It creates affordability, it generates transactions. So you combine a lower total volume in the market through the pandemic period with low lease penetration. And that three year average lease term means that 36 months down the road, what comes back off of lease and again, that's that's a small part of the total 36 million use vehicle transactions per year.
But but they are the late model low mileage sort of best highest contented off lease, you know, used vehicles. So when you think about pre-pandemic, just to put round numbers on it, the industry average 17 million units up until 2019, going back, let's say five years before that lease penetration average, 30%. So 30% on 17 million units is roughly 5.1 million units coming back three years into the future.
Then you get to the pandemic where we get you know, 2022 is a perfect example, a 13.8 million unit market with transaction prices over MSRP indicating, the customer isn't getting any incentive at all, including a good lease deal. So leasing in 22 on 13 and a half, 13.8 million units was in the teens. So it goes from 30% to 17%.
So in 2025, which is three years later, we're talking about 2.4 million off leased vehicles to a market or a segment that is used to 5 million every year. So cut in half, it starts to rebound a little bit in 2026. But what we sell in 2025, if this is a supply constrained market and we go back to a 15 million or 15 and a half with tight pricing and no incentives by 2028, this use vehicle market is very tight again.
And now that you can't make money in a tight market, it just means that you may be paying a little bit more to acquire vehicles because in that space you're competing against not only the cabanas and car maxes of the world that are only used, vehicles that have to get inventory for themselves. But you're also dealing with the consumer who sees prices going higher and higher and higher and will just sell things themselves because it's easy to do so.
So there's opportunity in the pre-owned market, but it's going to be a very, very it's going to take great expertise to really navigate that and find the profit path within that really, really tight balance. I would say that in addition to expertise, it's going to take some where both Magnus, because in most cases you've got to step out and pay more for that used car.
And there's no assurance based on history that going to get a good return on it. You might actually lose money on these new used cars. It gives you a perspective. I think last year the average age of a used car was 11 and a half years. I mean, 11, 11, 12 years old, the average age of a used car this year, it has already gone up to 12 years.
It's gained people are holding on to these cars. It's hard to get a used car out of the out of the hands of somebody because they're thinking, heck, if I sell this car, I got to go buy something more expensive, just like houses. Right? And yep, but you got to not only you got to be smart, you're going to have to be brave.
You got to take some chances. And hey, talking about car dealers. Yeah. And I think and I think the what's an interesting angle there is, is you have franchised dealers who have obviously relationships with their captive finance company. And, you know, when you think about it, right, they know what leases are coming back. They know, you know, who's finance, how well the other the finance companies know a lot of things, at least the captives of the manufacturers, you know, So I would think that there would be a lot more or a tighter direct relationship between the dealer, the franchised dealer base and the finance the captive finance company as all manufacturers.
Well, we saw a lot during the pandemic, and that was a little bit different because people didn't drive as much. Right. Commuting, shopping. There was a lot more isolation during the pandemic period. But anything that was least, let's say in 2018 or 2019 that was coming off lease during the pandemic was way below its mileage. So the residual value relative to its street value was very low.
So you had a lot of people buying their their own off lease vehicle, which I don't think you'll get this time. So it may free up a little bit more of the market just because we are traveling. So mileage should be, which has already returned to normal. When you look at highway miles traveled in the U.S., it's already back above where it was pre-pandemic.
So so I think that'll loosen things up just a little bit. But I just don't think you're going to get those lease deals in the first place because automakers don't have to create affordability in this market of tight supply and demand. Yeah, a used pre-owned market is a great opportunity, but it's going to take thought and bravado. All right.
I, I don't know who I went to last, so I'll go with Lloyd. Considering the changing market conditions due to tariffs, executive orders, what advice you have for dealers who are thinking about buying or selling dealerships right now? How should they evaluate the risks and opportunities? I think from a simplistic perspective, it's a bad time to sell and is potentially a good time to buy.
I wouldn't be thinking of selling over the next six months unless I had an extraordinary franchise in an extraordinary location or I was on a cliff emotionally or financially. On the other hand, there are always going to be opportunities and I think those dealers who have dry powder are probably going to see some opportunities because every time we have one of these exciting times, like none on one of 2000, eight, nine and ten, 11, 2018, every time we one of these, a certain segment of our weary dealer body says, Oh, well, bring me a viable value.
Viable value, and I'm out. And those who are committed to their craft, committed to their profession, need to have their feelers out there and be alert because there will be some opportunities that come become available. Your thoughts? Kevin Yeah, and you know, I spent a lot of years basically looking at this from a Wall Street perspective, so I'm still learning about the deal market in terms of dealerships and, and the Presidio team has done a very I'm very grateful for the help that they give me in this.
But one thing we talk about all the time is that you know, that valuation is really tied to the earnings side of the equation, right. So you think about any deal. Earnings times are multiple and it's not really the multiple that changes. It's the earnings dynamic that changes. And I think to me, this looks a lot like. Right.
So when you think about the deal market through the pandemic period, earnings through the roof. Right. So valuations go up not because of the multiple, but because of those really strong earnings. And again, as we get into this tight supply demand driving revenue and profitability, I feel like we're heading back in that direction, which is, you know, if you own a deal or thinking of selling, you're going to be able to to command valuation just because the earnings side of your equation is strong.
And we've we've that start to come down. Right. The earnings have come down over supply back to 3 million units of inventory. Right. So gross on the front end is compressed a little bit still better than it was before the pandemic, but certainly not what it was at the peak. So so now we take a turn back in the other direction.
And I think that's where you know that to your point, Lloyd, it's a personal there's a personal situation there that will make you either want to sell or buy, and that's going to vary from person to person. But I think ultimately what dealers can expect is if you want in sooner rather than later, because I think the turn in valuation or values is going to go higher due to that earnings side of the equation being stronger.
And that being said, I think based on our experience as succession planners, we found that the the market reps of Presidio really have the experience having gone back through these market cycles in the past. And depending on whether they're dealing with a buyer or a seller, they really have an awful lot to offer. And I would have to suggest that any dealers who are thinking on the buy side or the sell side, that they talk to the people who went through this before and get some is some validation on their thinking and or new thoughts because this is really not new ground.
We've been here before and people who have been dealing in this market as long as Presidio can really offer some some very solid background to thinking and very solid information on which you can make good decisions. Yeah, thank you for doing that commercial. So I didn't have to do it. Yeah, I'll send you a little bill. All right, two more questions, Kevin.
But dealers planning the future of their family of businesses, how should they approach that? By question as well as long term growth and succession planning in this new economic landscape? Yeah, that's for again, that's really personal question. Depending on location, size of the dealership are the brands that you're representing. You know, so there's a there's a lot there.
The one thing that I would say again is that expect that this is a smaller market. Right. And understand your and your brand's place in that market probably stronger or more solid price and margin environment in that lower volume. But but really, it just depends. I mean, there's probably a million reasons why you want in or you want out.
I would think that in a lot of cases the trend you know like Lloyd referenced best by earlier right that that there was this move towards consolidation where you have big players getting bigger and you have sort of mom and pop just getting out because it's difficult to compete with scale in many different industries. So again, and really sort of personal choice, I think, you know, it just really depends on the family dynamic.
Who who's next in line, who you know, what what your what your consideration for the brands you hold are this. But like I said, I think that the thing is to expect that this is not a market that is going to be perpetually expanding its unit volume. I think as a mature U.S. market, we can expect that organically and healthy volume for us is in that 15 to 16 million unit range.
And the expectation that it goes much higher than that is probably not only not realistic, it's probably not healthy. There is not really good sales and good profitability if the market were to turn to that. So things to consider, but I really have no I mean, that's that's going to be that's going to be a very personal choice.
We work on the personal level with the families and they have since 2000, eight, nine, ten, 11, they have come to the table. And those that are committed to the craft, committed to their business, are alert. They're aware of what's going on, their in touch with their industry. They're in touch with the community, in touch with their manufacturers and those that are not have been weeded out or they're going to go during this cycle.
And I think these family owned businesses need to just continue to focus on they are professionals, they're prepared for this, and they do have questions how they're going to react and they can find adequate answers and they need to work with their environment, just make sure that they're in touch with every dimension of their business, from manufacturing to distribution and sales and employees.
And if you're planning on selling on, talk to people who've been down this road who who I would say get a feel for what's happening, we're going to know pretty quickly, is this going to be a positive or negative to the net value of the dealership? And I personally cannot see how it's going to hurt it. There may be some man specific manufacturers that are hurt, but the market's going to adjust.
I think it's going to be additive. That's my feeling long term for our automobile dealerships, and I'm not sure I would change my plans dramatically. I just wouldn't be making any impulsive decisions. There are a few more factors you need to take in regarding whether your what franchises you want to buy and what locations you want to buy them.
And the next few months are going to give us insight into that. I personally think that these manufacturers, like Toyota, Honda, GM, Ford, General Motors, they're going to adapt. They've been through these cycles, too. They're going to do that. This guy is not falling. They're going to be okay. And if you're planning on growing and expanding, continue to plan on growing and expanding.
If you plan on selling, then take a deep breath. Talk to people in the know like Presidio and develop some extended plans. Might take you a little longer because there are going to be a few more questions by buyers. I have no doubt you'll get your value. No other thing I would say too, is that I. I am not considering that.
Or if dealers or franchises are considering the threat of direct sales, whether from the factory or from a big marketplace like Amazon. I just don't see that as being realistic or feasible. I think the franchise base is experience and established, and I think even if a manufacturer were to try and recreate or go direct to the consumer, they would wind up recreate the franchise base that already exists.
Right. And then you have not only that new vehicle distribution expertise, but you also have aftersales expertise, whether it's in F, in AI or whether it's in fixed ups parts and service all the or used cars. Right. So so I wouldn't you know, obviously, I would never tell anybody what they should be doing. But I but if if your concern is the agency or the direct sales model, I don't think it works.
And I don't think it certainly doesn't work at scale. And I think that while people will point to a model like Tesla and say, well, they do it, they do it very poorly, right. And they do it very unprofitable way, you know, so you hear from one side and I really don't think I think any of the direct sales or agency sales talk you heard during the pandemic was a function of that very tight supply and demand balance, where inventory came in today and was gone late today.
And then you had manufacturers look over and go, well, boy, you know, we could do that, right? Anybody can do that and they can't. And especially in times like these where the consumer needs guidance, they need input, they need experience and expertise, the manufacturers can't do it. And even from a consumer's perspective, where I hear all the time like, oh, just cut out the middleman and it would be easier.
And I always have the same answer, which is if you think it's difficult to to interact with a dealership about your new vehicle or service or whatever, wait till you try and go directly to the manufacturer with those same issues. You think it's bad now? It would be 100 times worse because they're manufacturers, they're not retailers. They have no experience in doing it.
They have no network or scale to do it. So if you think you can, just because you're a manufacturer, you can magically become a retailer, it's it just doesn't work that way. So yeah, that would be the only advice I would give is to say if that's your if that's your fear, I wouldn't be making decisions based on that potential reality in the future.
At any at any point. I think quite the opposite is true, that manufacturers need to lean even harder on their franchise base to just attribute more expensive vehicles. Right. To help understand what this means in terms of tariffs for them. So I think I think the manufacturers need dealers now more than ever. I agree. I believe that the United States automobile dealer is a unique entrepreneur who has done so much for so long with so little.
He can do the impossible with nothing. And he reinvents himself every day. And that's something manufacturers do not do. Well. They are process oriented. They do not change on a dime. And the retail marketplace, you got to be dynamic, you got to be brave. And I think the automobile dealer is in a very secure position. All right. Last question.
Well, and that's this new set of challenges. What opportunities might tariffs present for car dealers innovate or expand their business models to stay competitive in success? Well, I think the most important thing they can do is connect with their customers. Just tell them that they're not planning to galgorm. They're planning to be there as their partner in their endeavor to secure quality transportation.
And that keep your wits about you. This is not a time to be taking impulsive action, being afraid that that you're not going to be able to get an automobile or the price is going to go up 25%. Americans in general just really do well at this. And Donald Trump is a disruptor. He knows what happens and disruption opportunities are created.
And I think the dealer has an opportunity here to connect with his customer base. I think he also has an opportunity to start drinking some Kool-Aid of his manufacturers because he to be on the inside of the information, the real information of what is his supplier is providing him. And if you've been the class, you think the manufacturers are idiots, I think you need to basically pack that opinion away, join the team and try to give them good information and endeavor to solicit good information from them that can help you refine your business plan.
And it's going to work out. It's going to work out. And I think the challenge for and I don't think they have to sort of reinvent. I agree. I agree with that. And especially if the dynamic of supply demand balance is very similar to what we just saw through the pandemic period. I mean, that that that story was written and now it's it's sort of coming back around.
What I will say would probably will be one of the bigger challenges and this was the challenge during the pandemic, is that it is the dealer that sits between the manufacturer and the consumer. So whether it's pricing and that may mean higher MSR fees or additional fees, whatever it winds up being, it is the dealer that sits across the desk from the consumer and in many cases feels the wrath of the consumer for those things.
But ultimately, as a translator between the two, the opportunity is is obviously great, right? So I think that that's coming back around as well where, you know, you why don't you have these vehicles? Why is supply so tight? It's not the dealers fault. You know, they're trying to they'll they'll sell anything a bag of sand if they can make money on it.
Right. It's just a matter of this is what we have from the factory. These are the products they're producing. This is what they're sending us. This is what the pricing dynamics look like. And and, you know, we're we're on your side, but we're in between both the manufacturer and the consumer. And that can get a little bit sticky.
As you know, there isn't there is an inventory as far as the eye can see anymore or there isn't this sort of haggle ability where you can get 2500 off MSRP just by walking in the door anymore or there's no lease deals. And again, this is a lot coming from the manufacturer or the macro dynamics, but it's the dealer that is sitting across from the consumer.
So so that's probably something to be prepared for and, and to collaborate and think on for when you do have to have those conversations with the consumer and.
