Omaha's Village Pointe Toyota is just one of about 80 new-car dealers now owned by Berkshire Hathaway. Source: Berkshire Hathaway Automotive. http://www.berkshirehathawayautomotive.com/dealership/village-pointe-toyota.htm
Legendary investor Warren Buffett raised a few eyebrows when Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) announced that it was acquiring the Van Tuyl Group, the country's largest privately held group of automotive dealerships.
It's no secret that Buffett likes basic businesses. And while this was its first move to acquire auto dealerships, it won't be Berkshire's last: The Van Tuyl Group is forming the basis for the new Berkshire Hathaway Automotive, a company that will be actively looking for more dealers to acquire and run.
Has Buffett found yet another opportunity to add to Berkshire's profit stream?
It's a very Berkshire kind of move, but there are big questions
Owning a slew of auto dealers isn't exactly a huge reach for Berkshire Hathaway. Berkshire (mostly) doesn't invest in high-tech wonders. Instead, the company has built an enviable portfolio of companies like Geico (insurance), Burlington Northern Santa Fe (railroads), and Heinz (ketchup), among many others -- companies that are well-run and engaged in stable businesses that aren't hard to understand.
Geico, BNSF, and Heinz (and most of Berkshire's other holdings) have something in common besides being well-run and relatively easy to understand: They're all businesses that -- at least, in Buffett's view -- are serving markets that will still exist many years from now.
As he put it in the company's most recent letter to shareholders:
A century hence, BNSF and Berkshire Hathaway Energy will still be playing vital roles in our economy. Homes and autos will remain central to the lives of most families. Insurance will continue to be essential for both businesses and individuals. Looking ahead, [Berkshire vice chairman Charlie Munger] and I see a world made to order for Berkshire. We feel fortunate to be entrusted with its management.
And it's clear that Van Tuyl itself is a very Berkshire kind of business. Again, to quote from Buffett's shareholder letter:
In October, we contracted to buy Van Tuyl Automotive, a group of 78 automobile dealerships that is exceptionally well-run. Larry Van Tuyl, the company's owner, and I met some years ago. He then decided that if he were ever to sell his company, its home should be Berkshire. Our purchase was recently completed, and we are now "car guys."
Larry and his dad, Cecil, spent 62 years building the group, following a strategy that made owner-partners of all local managers. Creating this mutuality of interests proved over and over to be a winner. Van Tuyl is now the fifth-largest automotive group in the country, with per-dealership sales figures that are outstanding.
Buffett also made it very clear that this is just the beginning of Berkshire's venture into the car-selling business:
There are about 17,000 dealerships in the country, and ownership transfers always require approval by the relevant auto manufacturer. Berkshire's job is to perform in a manner that will cause manufacturers to welcome further purchases by us. If we do this -- and if we can buy dealerships at sensible prices -- we will build a business that before long will be multiples the size of Van Tuyl's $9 billion of sales.
So, this is a significant move for Berkshire Hathaway. But how well will it pan out? Buffett's investing savvy is legendary, of course, but even the master readily admits to making some big mistakes from time to time.
It's possible this will work out very well. But I see two things to worry about.
Selling cars isn't a very profitable business
Most auto dealers are privately held and don't disclose their finances. But it's an open secret that competition -- and services like TrueCar that arm consumers with more information than ever -- have squeezed many dealers' profit margins to the bone.
That's true even for very big dealer groups. The biggest of them all, AutoNation (AN +1.23%), owns over 270 dealerships in 15 states. In 2014, it generated $820.8 million in operating income on $19.1 billion in revenue, for an operating margin of about 4.3%.
That's pretty slim, especially when you consider that AutoNation's size and scale should be giving it substantial advantages over your local mom-and-pop dealership. And it's a long way from Berkshire's operating margin of more than 14% in 2014.
Do Buffett and the former Van Tuyl team think they have a way to unlock more profit here?
Will auto dealers really be around in 100 years -- or 20?
Talk to investors with a Silicon Valley focus, and they'll tell you franchised new-car dealers are a business ripe for disruption. At least one big name is already working on that: Tesla Motors has already pushed several states to change or modify their laws to allow Tesla to sell directly to customers, and it's pushing for more.
So far, the big automakers have been very leery of joining Tesla's quest, so as not to alienate their dealers. But it's no secret many consumers would love a way to buy a car that doesn't involve dealer shenanigans -- and secretly, many automakers would probably prefer to sell directly.
In some cases, Tesla is simply getting a special exemption from state laws designed to protect the franchised-dealer system. But even so, those are cracks in the legal armor that dealers -- many of whom contribute generously to the campaigns of their state legislators -- have spent decades putting together. More cracks may well follow.
And of course, this all assumes individuals will be buying cars at all in the years to come. Some high-profile analysts see a large-scale move to crowd-sourced autonomous cars happening by about 2030 -- after which private ownership of cars will be a quaint relic, the thinking goes. And some think such a move is exactly what Apple's rumored car project is really about: a premium automated-car service.
The upshot: An intriguing move into a tough business
It's hard to be a new-car dealer nowadays. Consumers are armed with more information than ever, which squeezes a dealer's pricing power -- and that power is squeezed further by the sheer number of dealers, which makes it essential to compete hard for every sale.
Operating dealers at scale -- in big groups -- has long been a way for local entrepreneurs to turn modest income streams into fortunes. Bigger dealer groups can get more operating efficiencies around everything from financing to employee benefits, lowering costs and helping to boost those thin margins.
Buffett clearly sees this business as one where Berkshire's scale and entrepreneurial values can bring more of those kinds of efficiencies. He also sees it as a business likely to endure for many decades.
I'm willing to believe the first, but I'm skeptical of the second -- the prospect of disruption is real, if only because too many people hate buying cars through franchised dealers. If Berkshire's new auto team can change that, then Buffett and company may have yet another winning line of business on their hands.
