Local car dealerships will grow and disappear with the rise of giant car retailers

Derek Sylvester’s father built his family’s first Chevrolet dealership with his bare hands in 1972 on Main Street in rural Peckville, Pennsylvania.

Since then, the store and family have been a pillar of the village outside of Scranton. That was until late last month, when Sylvester and his family struck a deal to sell Sylvester Chevrolet to a New York-based dealer group.

“As a family, we decided now might be the time,” said Sylvester, 67. Sylvester is 67 years old and considering retirement. “Unless you’re a bigger store, a much larger store, it’s a little harder to make money. … It’s a matter of scale.”

Sylvester said many of his family members plan to continue working at the dealership, but they didn’t feel they were in a position to continue with the rapidly changing landscape of auto retailing in the United States. The industry faces disruption in the introduction of all-electric vehicles, technological innovations such as artificial intelligence, and increased demand from automakers.

Sales of dealerships such as Sylvester Chevrolet are proceeding rapidly across the United States, and the auto sales business, once considered the preserve of mom-and-pop shops, has evolved into a lucrative, multitrillion-dollar industry, riding a wave of consolidation that has captured the attention of Wall Street and investors in recent years.

Although the majority of franchised dealers in the U.S. are small business owners like Sylvester’s with fewer than six stores, the nation’s top retailers are experiencing significant growth, according to a report from the National Automobile Dealers Association (NADA).

The top 150 dealers will sell 27% of all retail and fleet new vehicles in 2025, up from 24.3% in 2021 and 21.2% in 2015, according to Automotive News’ annual Top Automotive Retailer rankings. The company owned about a quarter of its dealerships last year, up from less than 20% a decade ago, according to trade publications.

On the other hand, the top listed dealers are Risu Motors and autonation Their respective market capitalizations have ballooned to more than $6 billion. At online used car stores Carvana And although the company has a market capitalization of $74 billion, more than most car companies that sell vehicles, it has not disclosed its future plans and has quietly begun acquiring new car franchises.

“There’s a lot of money that wants to get into the industry,” Brian Gordon, president of dealer advisor and broker Dave Cantin Group, told CNBC. “And in general, the industry has kind of a consensus on how to value these things. That creates a good environment for (mergers and acquisitions).”

The multibillion-dollar dealerships are on the rise amid decades of consolidation that has led to a grow-or-die mentality for many U.S. auto retailers.

NADA, an industry group representing franchised dealers, reports that the average dealer owner owns two to three stores, but over the past decade, mid-sized dealers with six to 25 stores have seen the greatest growth.

According to the NADA report, 90.5% of the approximately 17,000 dealers own one to five stores, down from 94.4% in 2016. Meanwhile, 0.2% of dealers owned 50 or more stores, up from 0.1% in the same period.

“It’s clear that this industry is consolidating, and it’s an industry that will continue to consolidate,” Gordon said. But he added that it’s happening at all levels, especially with the expansion of mom-and-pop stores into major corporations.

Dave Cantin Group, an adviser to Matthews Auto Group, the dealership group that acquired Sylvester Chevrolet, said he does dozens of such deals a year and expects the pace of consolidation, mergers and acquisitions to continue to increase this year.

Matthews Auto Group is one of many regional dealership companies that have decided to expand. The family-owned company started in 1973 with a single Chrysler Plymouth store in Vestal, in central New York, south of Syracuse, and has grown to an approximately $800 million company with 18 locations and 800 employees.

Rob Matthews, second-generation owner and CEO of Matthews Auto Group, said the company’s determination to grow continues and aims to become more profitable and competitive in the current New York and Pennsylvania markets.

“I think it’s certainly a competitive advantage. I think sitting still probably isn’t the best play. We’re seeing continued scale,” Matthews said. “We will continue to see more consolidation in order to remain competitive.”

That’s why Sylvester said he wanted to sell the business on the condition that he retain the store’s dozens of employees. This was part of Matthews’ strategy when acquiring the store.

“There are a lot of things that a store like his can actually do because of our size,” Matthews said. “Honestly, I think this is exciting in the sense that we want to give them more tools and hopefully help everyone move forward.”

Wall Street is paying attention to how lucrative and protected franchise dealerships are in the U.S. The franchise dealership system is unique and highly regulated because it exists to allow automakers to sell new cars to consumers rather than sell them themselves.

“I think the upside is endless. The opportunities for growth for our company are endless.” sonic automotive President Jeff Dyke told CNBC in a recent interview. “I think having mom-and-pop dealers is very good for business. The problem is that mom-and-pop dealers need to evolve their mindset.”

Sonic Automotive, a publicly traded company with a market capitalization of more than $2 billion, has expanded from 96 franchised dealerships in 2015 to 134 by the end of last year. It also undertook major expansions of used car dealerships Echo Park and Sonic Powersports. During that time, the company’s revenue last year rose 58% to $15.2 billion.

Some companies, such as Lithia Motors, are experiencing more aggressive growth. The Medford, Ore.-based company overtook longtime dealer group AutoNation in 2022 to become the top new car franchise dealer in the United States.

Lithia, with a market capitalization of $6.3 billion, has executed a bold growth plan, going from sales of $8.7 billion in 2016 to $37.6 billion last year. The company nearly tripled its new and used stores during that period, from 154 to 455 stores.

John Murphy, a longtime auto analyst and managing director of strategic advisory at buy-sell advisory firm Haig Partners, said he believes dealerships remain an extremely lucrative market for investors, even though things have calmed down a bit as the coronavirus pandemic has boosted corporate profits.

“Structurally, there is real upside potential and increased attention from existing capital in the dealer community as it stands now from outside players, private equity family offices and other capital pools for this limited number of dealers and finite number of dealers,” he said. “Earnings upside is growing, and buy-side attention and demand is increasing.”

All of this combines to make many independent dealerships ripe for acquisition and expansion.

“There are so many factors that make it more difficult for small independent dealerships to compete,” said Taron Fee, managing director of the Dave Cantin Group, which led the sale of Sylvester Chevrolet to Matthews Auto Group. “I’m not saying small mom-and-pop dealerships can’t survive and thrive and survive, but you have to plan.”

Fee and colleagues said the top reasons owners sell are a lack of succession planning, an increasingly competitive and changing industry, and a lack of commitment to reinvesting in the business.

“Given the fact that you have to be an operator to get manufacturer approval, we’re figuring out how outside capital can come in,” said Dave Cantin Group’s Gordon.

But the industry is changing in other ways, with new automakers emerging, including: tesla, Rivian and clear Try to avoid the franchise dealer model and sell vehicles directly to consumers.

Those companies are continually battling state laws to allow such sales, and Rivian recently won a battle with car dealers in Washington state by threatening to take a ballot measure to voters to allow direct sales.

This adds to an evolving landscape in the U.S. auto retail industry that owners like Sylvester and his wife, who also worked at the dealership, have never had to deal with before. It also means that if Sylvester and many other small mom-and-pop shops sell their businesses, they won’t have to compete.

“I’ve had a great life, don’t get me wrong, but all good things must come to an end,” Sylvester said. He plans to spend his retirement tending to his 92-acre farm in Pennsylvania. “We lived a rich life. You know, we helped the community.”