The Business Of
Cars | AutoNation | How Do They Make Money?
Morning All!
So yesterday, we started our new series on The Business Of Cars and we kept things fairly high-level, looking at what car dealerships do and how they work with car manufacturers. Today, we’re going deeper and asking the question - how does AutoNation actually make money from their car dealership operations?
And to help us answer that question, let’s first take a look at where AutoNation’s revenue comes from…
As we can see, revenue really is dominated by 2 main areas; (i) selling new vehicles, and (ii) selling used vehicles! So today, we’re going to focus on these 2 segments. And then tomorrow, when we look at margins - we’ll actually shift focus and look at ‘repairs and maintenance’ and ‘finance’…
… because whilst the selling of cars makes up most of AutoNation’s revenues - the margin picture is going to surprise you! Alrighty, let’s crack on!
The Global Financial Crisis Was In 2007/08. AutoNation Are Still Recovering!
Okay so, new vehicles. We saw yesterday that when a car manufacturer like Ford develops a new car and wants to sell it, they don’t sell it directly to customers like me and you. They sell their new cars to independent car dealerships. And these dealerships then sell the cars onto customers like me and you!
Now, tomorrow we’ll look at how much it costs AutoNation to buy these cars from Ford. But today, let’s first look at how much revenue AutoNation makes from selling new vehicles from their 247 car dealerships!
And to kick us off, let’s ask the most obvious question - how many new cars did AutoNation sell from their dealerships last year? Well, in 2022, the group sold ~230k new vehicles. Yesterday we saw that ~13.6 million new vehicles were sold in the US in 2022. Which means that AutoNation’s dealerships were responsible for ~2% of the total new vehicles sold in America (230k/13.6 million).
But here’s another question. We’ve talked a lot about Ford - do AutoNation only sell new vehicles from Ford? Well the answer is a huge no! In fact, Ford isn’t even the most popular car that AutoNation sells! As the chart below shows us, 21% (~47k) of AutoNation’s new vehicle sales were actually Toyota vehicles!
Okay, so we know the most popular brand (Toyota). And we know how many new vehicles they sold in 2022 (~230k). But is that ~230k figure good? Bad? Average? Well, in order to answer that, we need to look at how many new vehicles AutoNation have sold in the past!
And as we can see from the chart below - the ~230k new vehicles that AutoNation sold in 2022 is actually less than half the number of new vehicles they sold back in the year 2000! So what’s going on here? Why are AutoNation selling so many fewer new cars now than they did 20 years ago?!
Well, a big part of where they are today is because of what happened in the period between 2000-2009. So, let’s focus on that time - why were AutoNation selling less and less cars each year from 2000-2009? Well, the answer is actually pretty simple. They were closing more and more dealerships every year!
In 2000, AutoNation had 287 dealerships. By 2009, this had fallen to just 203! They closed nearly a third of their dealerships! But why is that? Why were AutoNation closing dealerships? Surely, they’d want to increase their number of stores right?
Well, at the start of the 2000s, the US economy - and hence the US car industry - was facing a huge slowdown. During the 1990s, new car sales had boomed. US households were buying more cars than ever. But then the early 2000s saw (i) a stock market crash, and (ii) rising fuel prices, which led to a decline in consumer confidence. Which resulted in a fall of new vehicles sold!
Car manufacturers like Ford, and General Motors reduced their production of new vehicles. And as a result, started selling less cars to AutoNation. And what did that mean? Well, it meant AutoNation had less cars to sell themselves! But then… things got even worse! The 2007/08 financial crisis saw US new vehicle sales plummet. As the chart below shows, only 10.4 million new vehicles were sold by US dealerships in 2009, the lowest amount since 1982! And AutoNation closed a whopping 29 dealerships in 2009. Mainly because 2 of their key suppliers - General Motors and Chrysler - filed for bankruptcy - and were forced to close >25% of their dealerships!
Okay, so we know why AutoNation’s revenues struggled from 2000-2009. But I have a question - the chart above shows that by 2014, the US new car market had recovered back to what it was in 2000. So why hasn’t AutoNation’s new car sales recovered to 2000 levels? Well, remember - AutoNation owned 287 dealerships back in 2000. How many do they own now? 247, so still ~15% less. So, even if each of AutoNation’s dealerships were selling the same number of new cars in 2022 as they were back in 2000, the company as a whole would still be selling less new cars because they have ~15% less dealerships!
Alrighty, let’s move on now! Because volume is only half the revenue equation. What about pricing? Has pricing also been poor? Or will pricing come to AutoNation’s rescue? Well, as we can see from the chart below… pricing has really helped AutoNation! The average new vehicle AutoNation sold in 2000 brought in ~$26k of revenue for the company. But this figure has risen at ~3% per year over the last 22 years to reach ~$51k in 2022. Nearly double the 2000 figure!
So, we’ve seen that AutoNation sold ~230k new vehicles in 2022. We saw that the average vehicle sold for ~$51k. What does that mean AutoNation’s 2022 revenues were from selling new vehicles? Yup, using the classic ‘volume x price’ equation - it was a whopping $11.8 billion (230k x 51k)! The chart below shows us how this $11.8bn compares vs history.
And as we can see - despite new car prices going up over the last 2 decades. The fact that AutoNation has ~15% fewer dealerships now vs 2000, means that new vehicle revenues haven’t quite returned to their peak.
But, here’s a question - what role do acquisitions play for AutoNation? Yesterday we saw that the US car dealership industry is incredibly fragmented. The largest players - Lithia Motors and AutoNation - have market shares of only ~2%. So, what’s stopping AutoNation just buying lots of dealerships every year? More dealerships = more cars to sell = more revenues… right? Well, yes and no! And on Thursday, we’ll be diving into this acquisition question in some detail!
Old Is Gold… And More Affordable!
Okay, so that’s new cars. But as we said yesterday, new car sales is only one half of the story. Because whilst 13.6 million NEW vehicles were sold in the US in 2022, a whopping 38.6 million USED vehicles were sold! Purchasing used vehicles is ~3x more popular for people than purchasing new cars! So, do AutoNation sell 3x as many used cars as new cars? Well, let’s find out!
But first, here’s a question - where do these used cars actually come from? Well, there are 3 main ways AutoNation get their used cars - (i) trade-ins, (ii) auctions, and (iii) lease returns.
Let’s quickly go through 2 of these methods. So, a trade-in happens when a person goes to an AutoNation dealership to buy a new vehicle. And they decide to trade-in their old vehicle. The dealership can buy this old vehicle and then sell it later! Simple!
Car auctions (online and in-person) are another super popular way dealerships build up their used car inventory. The company, Manheim, is one of the largest in-person car auction companies in the US. Dealerships, like those owned by AutoNation, will go to these auctions, inspect the cars and place bids on the used cars they want. Then, these cars will be taken to AutoNation’s 247 dealerships and sold there!
Now, here’s the main question - how many used vehicles did AutoNation sell from all of their dealerships? Well, get ready for this - the company sold ~300k used cars in 2022! That’s ~70k more than the new vehicles they sold!
The chart below shows us how this ~300k used vehicle figure compares to the past. And we see something really interesting. Whilst the number of used cars sold fell in a similar pattern during 2000-2009 as what we saw earlier for new cars. The recovery since 2009 has been much stronger for used cars! So what’s going on here?
Well, what’s going on is that the demand for used cars is on the rise! And there’s a couple of reasons for this. One, new vehicles are becoming unaffordable for a lot of people. We saw earlier that the average new car will set a person back over $50k now!
And the second reason is that the difference between a new and a used car has reduced. New cars aren’t THAT much ‘better’ than their previous models. So, why get the brand new Ford, when you can just get the older version from 2 years ago with pretty much all the same technology features… at a fraction of the cost!
Okay, so ~300k used cars sold in 2022. Now, let’s move onto pricing - how much were AutoNation getting for each of these used vehicles? Well, unsurprisingly, these used vehicles are sold for quite a bit less than new cars. As a rough rule, cars lose ~15% of their value every year after purchase. And the chart below shows us that the average used vehicle was sold for ~$32k in 2022. Which was still more than double the ~$15k they sold for on average in 2000!
And I just want to draw our attention to the spike in prices in 2021. AutoNation’s revenue per used vehicle sold rose by 39% from $23k in 2020 to $32k in 2022! And the reason for this spike is down to semiconductor chips. To be more specific - a shortage of semiconductor chips! I’d love to go into the whole story now but this newsletter’s getting on the long side so I’ll leave this cracking article here for anyone who’s keen to learn more about this!
Alrighty so, let’s put this used vehicle segment together. We’ve seen that AutoNation sold ~300k used vehicles in 2022. The average vehicle sold for ~$32k. And what’s 300k x 32k? ~$9.7 billion! And as we can see from the chart below, AutoNation’s revenue from used cars has nearly caught up with their revenue from new cars!
Bigger Than Airbnb And Spotify Combined?!
Alrighty, let’s wrap up! We’ve gone through a fair amount today. AutoNation make a whopping ~$22bn revenue from selling new and used cars. Which in itself is extraordinary. Some huge companies made a lot less revenue than that in 2022. In fact, Airbnb ($8bn) and Spotify ($12bn) combined made less revenue in 2022 than AutoNation did from selling cars!
But hold up - because selling cars isn’t the only way AutoNation makes money! As we mentioned yesterday, the company also helps people finance their vehicle purchases - AutoNation will make revenue by charging interest on these loans. And then there’s also repairs and maintenance - where AutoNation makes money by fixing people’s cars for a fee. These two additional segments add a further ~$5 billion in revenues to AutoNation! So AutoNation actually made a total of $27bn revenue in 2022, not the $22bn we see in the chart above!
Now, we’re not going to go into more detail than that today because we’ll be diving into the ‘finance’ and ‘repairs’ segments tomorrow when we look at margins! So, to close for today, let’s look at the chart below of how AutoNation’s total revenue has trended over the last 2 decades.
And there’s not a huge amount to add to what we’ve already said today. AutoNation makes a load of money. But because buying a car is one of the most expensive purchases an individual will have in their lifetime (probably only 2nd to buying a house) - AutoNation’s revenues will fluctuate based on the state of the economy. You’re probably not going to buy a new or used car if you’ve just lost your job!
As opposed to say McDonald’s - for whom it doesn’t really matter if the economy is doing good or bad. People will still eat their Big Macs!
16th Jan 2024
And that’s a wrap! I hope you enjoyed breaking down how AutoNation makes its money. Tomorrow, we’ll crack on with looking at the company’s margins. And we are in for a shock!
Have a fabulous day!
The Business Of Team