Buffett/Berkshire - general news

[Jurgis]

Interesting perspective oddball. +1 

[CorpRaider]

I like KMX but it never gets cheap enough for me.  Or it hasn't in a long while.

[longinvestor]

Van Tuyl's attractiveness to Berkshire

- their consistently high volume per dealership. Buffett's words when the deal was announced.

-  they are heavily in smaller towns, mostly Southern states. Kinda follows the recent newspaper purchases

-  own collision centers in most states where they have dealerships. Having been to collision centers thrice in 5 years, I know that is a nice business,  and btw, also have to work closely with auto insurance companies.

- VanTuyl has pioneered the owner-operator model for a long time already.

Berkshire can sell insurance along with cars. arrange financing with partners (perhaps soon start lending money to Van Tuyl a la Clayton Homes) and deal with wrecks and insurance claims at the other end.

Van Tuyl will continue to run the business while this can become a capital allocation pathway for the gusher of cash flow at Berkshire.

[Schwab711]

Buffett Says ‘Fun Has Just Started’ for Auto Sales at Berkshire


http://www.bloomberg.com/news/articles/2015-03-10/buffett-says-fun-has-just-started-for-auto-sales-at-berkshire

Is it going to be the same "screw the customer" experience as in other auto dealerships?

I guess I don't understand this purchase.  I have a friend who is in car dealerships and he's been saying valuations have been stretched for years.  When he and others are thinking of getting out you have Buffett climbing in.  The industry has completely changed in the last few years.

Previously there was a greater margin on new cars.  Now that margin has shrunk and dealers make their money on incentives from the manufacturers.  They also make money on service.

Used car sales offer some promise.  There is a LOT of margin in most sales especially in the $5-15k range.

Incentives have changed with online sales.  We recently purchased a car from a volume dealer near us.  The price changed on a fairly regular basis based on the surrounding market.  The dealer didn't actually set the price, they set parameters in the software and let the software set the price.  We paid what I'd consider a fair price.  The car is in great shape and is somewhat rare.  It was cheaper than other cars in the area by a few percentage points.  The dealer said the slight discount is how he moves volume.  They do 150-200 cars a month and have found for them that's the only way to make money.  It's an interesting business model.  I ran this by my friend who's in the dealer business, he knew the software immediately and said it's what everyone has moved to.  There isn't a guy out there guestimating a value anymore.

Part of me thinks Buffett is out of touch on this.  He's thinking dealerships are still full of guys in corduroy blazers with elbow patches working customers over for every last cent.  With the Internet and mobile I don't think too many customers have patience for that business model anymore.  Especially if you can go on TrueCar or a million other sites while at the dealer and see what others have paid.

What was the software?

[fareastwarriors]

Buffett Says ‘Fun Has Just Started’ for Auto Sales at Berkshire


http://www.bloomberg.com/news/articles/2015-03-10/buffett-says-fun-has-just-started-for-auto-sales-at-berkshire

Is it going to be the same "screw the customer" experience as in other auto dealerships?

I guess I don't understand this purchase.  I have a friend who is in car dealerships and he's been saying valuations have been stretched for years.  When he and others are thinking of getting out you have Buffett climbing in.  The industry has completely changed in the last few years.

Previously there was a greater margin on new cars.  Now that margin has shrunk and dealers make their money on incentives from the manufacturers.  They also make money on service.

Used car sales offer some promise.  There is a LOT of margin in most sales especially in the $5-15k range.

Incentives have changed with online sales.  We recently purchased a car from a volume dealer near us.  The price changed on a fairly regular basis based on the surrounding market.  The dealer didn't actually set the price, they set parameters in the software and let the software set the price.  We paid what I'd consider a fair price.  The car is in great shape and is somewhat rare.  It was cheaper than other cars in the area by a few percentage points.  The dealer said the slight discount is how he moves volume.  They do 150-200 cars a month and have found for them that's the only way to make money.  It's an interesting business model.  I ran this by my friend who's in the dealer business, he knew the software immediately and said it's what everyone has moved to.  There isn't a guy out there guestimating a value anymore.

Part of me thinks Buffett is out of touch on this.  He's thinking dealerships are still full of guys in corduroy blazers with elbow patches working customers over for every last cent.  With the Internet and mobile I don't think too many customers have patience for that business model anymore.  Especially if you can go on TrueCar or a million other sites while at the dealer and see what others have paid.

What was the software?

Excuse my ignorance, I thought dealers make money on the service side of the business. It seems like every time I go to a dealership their service bays are always full....

[longinvestor]

Buffett Says ‘Fun Has Just Started’ for Auto Sales at Berkshire


http://www.bloomberg.com/news/articles/2015-03-10/buffett-says-fun-has-just-started-for-auto-sales-at-berkshire

Is it going to be the same "screw the customer" experience as in other auto dealerships?

I guess I don't understand this purchase.  I have a friend who is in car dealerships and he's been saying valuations have been stretched for years.  When he and others are thinking of getting out you have Buffett climbing in.  The industry has completely changed in the last few years.

Previously there was a greater margin on new cars.  Now that margin has shrunk and dealers make their money on incentives from the manufacturers.  They also make money on service.

Used car sales offer some promise.  There is a LOT of margin in most sales especially in the $5-15k range.

Incentives have changed with online sales.  We recently purchased a car from a volume dealer near us.  The price changed on a fairly regular basis based on the surrounding market.  The dealer didn't actually set the price, they set parameters in the software and let the software set the price.  We paid what I'd consider a fair price.  The car is in great shape and is somewhat rare.  It was cheaper than other cars in the area by a few percentage points.  The dealer said the slight discount is how he moves volume.  They do 150-200 cars a month and have found for them that's the only way to make money.  It's an interesting business model.  I ran this by my friend who's in the dealer business, he knew the software immediately and said it's what everyone has moved to.  There isn't a guy out there guestimating a value anymore.

Part of me thinks Buffett is out of touch on this.  He's thinking dealerships are still full of guys in corduroy blazers with elbow patches working customers over for every last cent.  With the Internet and mobile I don't think too many customers have patience for that business model anymore.  Especially if you can go on TrueCar or a million other sites while at the dealer and see what others have paid.

What was the software?

Excuse my ignorance, I thought dealers make money on the service side of the business. It seems like every time I go to a dealership their service bays are always full....

+1. Especially right after the warranty period is over. Best to promptly take it to the independent service shops.

A related juicy business is the same-hour-auto-repair-parts business that supports the service shops. I know a guy who is in this business, he rakes it in. The auto manufacturers try to protect this business very hard but are limited by the warranty period.

[benhacker]

I'm with FarEastWarriors on this.

The national dealership revenue breakdown is kind of the opposite of profit.  Revenue is like 55:35:10 for new:used:service sales.  But I would bet new car sales make the dealership $0 on average or close... used cars can be nice, agree there.  But I would bet service margins are astronomical... I'd guess blind that is 75% of dealership profits.  consequently, if you talk to someone who works at a dealer (assuming they aren't running it) they may not perceive how the money is made... or maybe I'm confused!

Some details here after some googling, basically says the service is most of the profits.  ROIC for dealerships is high.  New cars don't make a ton, used is more.  Service is the most.  (page 10) I guess makes sense re: new cars, they make money (haven't always in years past) but it's a loss-leader for service.

http://www.nada.org/NR/rdonlyres/DF6547D8-C037-4D2E-BD77-A730EBC830EB/0/NADA_Data_2014_05282014.pdf

This is a curious area, mostly because if electric cars really take off, they will turn the dealership model over and screw it... because the service aspect of an electric car should be fewer small ticket items, so I would imagine less need for a dealership.

I wonder if this isn't one of those businesses though that is perceived as dieing, but actually has a very long cash flow tail, with little competition and a strong competitive dynamic with car makers?  Leucadia and Berkshire both jumping in... it will be interesting to see it unfold.

[jay21]

LUK/MKL/BRK all have exposure to auto dealers. I think they are right. BRK and MKL are focused on scale in a fragmented industry, LUK is focused around distressed dealers.

[oddballstocks]

Here's another way to look at it.  This is how auto dealerships were viewed classically by founders.

You start a dealership in an area.  Usually you purchase land on the outskirts of town, you need land for a dealership.  The dealer takes a loan on the land.  The dealership pays the loan down over 10 years or so maybe longer.  The dealership makes fairly poor profits unlevered, nice money levered.  Eventually the land is paid off and the owner mortgages it to buy a new dealership.  The process starts over. 

At the end of 30-40 years in the business the owner has a nice stable of dealership properties in ideal locations.  The business on top brings in alright money and the land is extremely valuable.  The owner then sells the dealerships but retains ownership of the land and leases the land to the new buyer.  This lease is their retirement income.

Obviously with some extra capital this process could be sped up, and things compound.  Some dealers are content to own a location or two and get paid decently.  Look at small towns, the car dealer is often the one doing the best.  In larger cities dealers needed to scale quickly to stay in business.  This is why the survivors have a stable of brands.

My buddy in the business is very attuned to costs and where they make their money.  In his view if car dealerships weren't levered there would be almost no money to be made in the business.  Almost all of the return comes from the leverage.  Much like home ownership.

Ben,

In terms of new car sales I believe the dealer makes a few hundred dollars on the initial sale.  Then they get an incentive around $1-3k per car from the manufacturer based on volume.  This can't be negotiated at purchase time because it's technically not part of the car's price.  It's a separate payment from Honda/Toyota/GM based on the number and types of cars sold in aggregate each month.

I don't believe dealers make a lot on financing.  It depends on the dealer.  Some will add 25 or 50 bps to each loan and make a killing.  I talked to a wholesale dealer and they said they make a straight $100 per loan originated.

Warranties are a big seller.  The dealer tried to sell us on an extended warranty, I believe it was going to cost us $3500 for two years or something.  For a high end car with no problems this is a sucker bet.  Of course my wife wanted to buy it for the "piece of mind" but I just said no.  I'd love to know the commission or markup on the warranties.

[Rainforesthiker]

Of course my wife wanted to buy it for the "piece of mind" but I just said no. 

You said "No" to your wife?  How did that go?  Do you do that often?  Brave man.  (Or foolish one)