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Kevin and Darlene Bathgate stand in front of the Volkswagen dealership sold to AutoCanada. (Chris Beauchamp for The Globe and Mail)
Kevin and Darlene Bathgate stand in front of the Volkswagen dealership sold to AutoCanada. (Chris Beauchamp for The Globe and Mail)

AUTO industry

Big dealers remodel Canadian car lots Add to ...

From his first job as a mechanic at People’s Automotive Ltd. to the moment he sold the car dealership as its owner, Kevin Bathgate saw his share of the ups and downs that define the auto industry.

The up cycle peaked at the Grande Prairie, Alta., Volkswagen outlet in 2005 and 2006, when Mr. Bathgate’s dealership sold 225 new cars, a more than tenfold increase from the 18 that rolled off the lot when he and a partner bought the store in the mid-1990s.

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Last year, as new vehicle sales dwindled to 100, he sold the business to AutoCanada Inc., one of the largest dealership groups in the country.

“I built the company up once; I didn’t want to build it up again,” Mr. Bathgate says.

The 50-year-old has been swept up in a trend that is reshaping the structure of the auto dealership business that has existed for decades in Canada.

A growing number of dealers with just one store are selling to big dealer groups, which are expanding in size and clout as demands by auto makers for multimillion-dollar capital investments in the stores intensify and the requirements for sophisticated management increase.

The shift in power to big groups will likely lead to more modern facilities and better-trained sales and service personnel at dealerships, but a decline in opportunities for individual dealers who want to expand or hand the business down to family members.

In 2008, single-store dealers delivered 43 per cent of the new vehicles sold in Canada. That fell to 36 per cent in 2012 as the ranks of single dealers dropped to 1,876 from 2,109.

The number of groups with four or more stores rose to 1,058 last year from 982 in 2008.

“They’re all buying,” says independent consultant Chuck Seguin, who advises dealers on mergers and acquisitions and succession. “There’s nobody who is sitting on the sidelines.”

The trend is accelerating. This month alone, the Dilawri Group of Cos., which owns the largest number of dealerships in the country, bulked up to 46 outlets with the purchase of two stores in the suburban belt around Toronto.

“We look at each opportunity as an individual one; making sure it’s the right fit and what its additional value is,” Kap Dilawri, co-founder of the Thornhill, Ont.-based Dilawri Group, said in a response to e-mailed questions. His group now covers some 29 automotive brands.

With the purchase of Mr. Bathgate’s store, Edmonton-based AutoCanada, the largest publicly traded group in Canada, boosted its total to 27, mainly in Western Canada.

Jared Priestner, president of Go Auto, another expanding consolidator whose most recent purchase was a Nissan store in Edmonton last November, says he gets two or three inquiries a month from dealerships looking to exit the business. The Edmonton-based group has grown to more than 20 stores in Alberta, British Columbia and Yellowknife, NWT.

So-called imaging programs – requirements by auto makers that dealers upgrade their stores to a certain image and standards all must meet – are a key trend working in favour of large groups and against single-point dealers. The costs per dealer for image programs vary, but run easily into the millions of dollars and auto makers are now requiring such updates every five to seven years.

That can be prohibitive for an individual dealer, Mr. Seguin says. Dealers facing that scenario who are close to retirement and who don’t have family members to inherit the business will sell instead.

“When you take a single point like myself and you have to look at going out and making what in a metro location is the better part of a $20-million investment – and that’s conservative – that’s nuts,” says one dealer who recently sold one franchise to pay for an upgrade at the other dealership he owns.

That kind of financing is much easier for a Dilawri Group, AutoCanada or Open Road Auto Group, all of which have better access to capital.

“The groups have the ability to do the imaging without too much of a hassle, and they have the ability to spend dollars on customer satisfaction … which keeps the factories’ customers happy,” adds Mike Lewicki, an Ernst & Young LLP partner who specializes in auto dealerships.

The groups’ ability to raise money also makes them the choice when auto makers decide to open new outlets.

Vancouver-based Open Road has won the nod from Volkswagen Canada Inc. to build a new dealership in Burnaby, B.C., which will give it 13 stores.

“The biggest issue right now to owning a store – especially in a metropolitan or major market – is the cost of real estate and the cost of construction,” Volkswagen president John White said in an interview.

When a brand is hot, as Volkswagen is now, Mr. White added, goodwill will raise the price tag, “therefore you need buyers with deep pockets.”

Follow on Twitter: @gregkeenanglobe

 
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