Has Warren Buffett Gone Car Crazy?

The other day, Warren Buffett made a big announcement – he’s engaging in the automobile dealership business.

Buffett’s investment company Berkshire Hathaway said it could acquire Van Tuyl Group, which is headquartered in Phoenix, Ariz., and may be the fifth-largest owner of dealerships in the united states.

Therefore the car industry now includes a titan in its midst. Another question is obvious – why?

How come Buffett engaging in a business where sales are reaching their peak, where margin is steady, but small, and in which a nascent technological disruption could be on the verge of upsetting the sales model which has ruled because the 1950s?

And could it be an excellent idea?

“I don’t think it seems sensible, in all honesty,” said Sarwant Singh, a senior partner and automotive industry analyst at Frost and Sullivan. “The dealership stricture, especially in america, can be an age-old model that’s going extinct.”

Singh is discussing the franchised-dealer car sales model: car manufacturers such as for example Ford and General Motors have regional franchise dealers, which are owned either locally or by a chain, which has been upset by online shopping and mobile apps.

Singh expects the quantity of U.S. dealerships to shrink by as much as 30% in the coming years.

Within an interview at Fortune’s MOST EFFECTIVE Women Summit earlier this week, Buffett said he experienced the business since it has high volume and low capital investment needed, and therefore despite having relatively low margins, profits could be substantial. Plus, he can sell insurance and financing products. The question, though, isn’t whether car dealerships have already been good businesses, it’s if they will maintain 10, 15 or twenty years, considering that the industry is seeing the same technological disruption so a great many other post-World War II industries have.

Car-buying later on could follow a model more similar to Tesla’s, where there is absolutely no lot, only a small showroom, and where in fact the office is more regularly in a city center than in the suburbs.

Singh notes that millenials don’t like salespeople, they prefer “product champions,” just like the folks working at the Apple’s AAPL 0.54% Genius Bar – employees who are engaged but cool, who at least seem to be trying to obtain the merchandise you want as. They would like to feel just like they’re getting coffee, not engaged in negotiatory combat with a slick-haired huckster in a bad suit. That’s hard in the concrete purgatory of an automobile lot.

For example, Singh points to an automotive dealership in London where 60% of the cars are ordered without a try. If that model grows and finally crosses the Atlantic, that might be a bad sign for Buffett.

Analyst Greggory Warren of Morningstar, though, thinks it’s hard to visit a majority of the marketplace likely to stores that are Tesla-clones, leaving a lot of space for the original dealership.

“If 25 % of that business goes away completely to another model, that still leaves 65% of the marketplace,” he said.

And that remaining market is widely open. AutoNation, the biggest dealership chain in the united states, owns 266 dealerships, a minuscule percentage of the approximately 17,000 in the U.S.

Which means that Buffett can continue steadily to gobble up dealerships and build Van Tuyl to become a bigger player.

Imagine the family-owned dealership in your house town. If the grandchildren of the founders decide they would like to do something apart from sell cars, they’ve surely got to sell it – enter Buffett and Van Tuyl, who makes it part of their chain.

The other big plus Warren sees in the dealership business for Buffett may be the service component, that is a big part of business for dealerships.

Steve Anenen, CEO of dealer services company CDK Global – which recently completed a spinoff from payments company ADP – thinks that if Buffett is prosperous in his quest for acquisition, he’ll be very successful available.

Anenen also remarked that he wouldn’t be shocked if Buffett got Van Tuyl in to the used car business, that is a much bigger business with regards to volume in the usa.

Still, there are other reasons this purchase is a head scratcher. Auto sales are moving towards the finish of a cycle. It’s expected that year between 16.2 million and 16.4 million cars will be sold. Expectations for 2015 are hovering around 16.7 million. From then on, growth will likely plateau or simply begin shrinking again. If Buffett were likely to get into the automobile business, it could likely have made more sense to watch out for a chance in 2011 or 2012, when the business enterprise was building to its current peak carrying out a bigger-than-usual valley through the depths of the credit crisis. That is a short-term concern, as barring another major crisis the cycle will eventually keep coming back around, but it’s still strange to find yourself in a business by the end of a boom.

Warren, though, doesn’t think that’s ultimately a big deal. He said that Buffett and the Berkshire people understand that this is a cyclical business, and that with the marketplace heading down, it might make the expansion area of the plan cheaper, perhaps evening out the price in the long-run.

It’s hard for anybody to question an financial commitment created by the Oracle of Omaha. But much like when Buffett began his foray in to the world of newspapers – a business that, unlike car dealerships, no-one doubts is circling the drain – you can’t help but wonder what it really is that he sees that others are missing.

The question of if this investment works may depend using one thing: the power and desire from Buffett and the largely intact management of Van Tuyl to fundamentally change.

If, twenty years from now, car dealerships have taken care of immediately technological disruption with aplomb, fundamentally shifting just how they conduct business, and if Van Tuyl reaches the forefront of this revolution, Buffett’s bid could decrease as genius.

If, though, the auto industry reacts with the overall aversion to changing mores that it has during the past, and the franchised auto dealership becomes a relic to go with video rental stores and travel compani

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