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How Much Dealers Make, Secret to Acquiring 15 Dealerships, Getting the Best Car Deal

Full transcript from Episode 8 of the CDG Podcast feat. Jake Lebowitz of Raceway Auto Group.
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Timestamps

(
01:08
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) Raceway Auto Group
(
02:40
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) M&A activity
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06:47
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) Sourcing strategies
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13:32
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) Jake's best deal
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17:13
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) Delegating operations
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21:45
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) Best and worst customers
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25:09
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) Jake's thoughts on used cars
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30:23
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) The uphill battle for small dealerships
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32:42
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) Which car brands are on the decline
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43:00
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) How consumers can find good deals
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46:17
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) Forecasting car prices
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52:42
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) Wrapping up
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Transcript

check-file
This transcript has been edited for brevity and clarity

Raceway Auto Group

CDG: Alright, Jake. lets dive right in. Give us some background on your dealer group. What brands do you represent? Would love to have some context there.
JL: So, our largest brand is Kia. We have five Kia dealerships in the metro Philadelphia, Jersey, Pennsylvania markets. We also have Hyundai, Chevy, Audi, Volkswagen, and we've recently acquired a Nissan store. We have Chrysler/Jeep/Dodge/Ram as well, and Isuzu truck, which is a medium-duty truck franchise.
CDG: And what are your revenues per year? Give us some context. How many cars do you sell a year?
JL: We sell anywhere from 1,500 to 2,200 vehicles per rooftop per year. If you extrapolate that to group-wide, I would say you're probably in the 3,000, 2,500 to 3,000 per year range. And revenue: Anywhere from 50 to 80 million, a rooftop, I would say.
CDG: So, 50 to 80 million. And you have roughly 15 rooftops?
JL: Yep, yep. So if you do the math, we're getting close to about a billion in revenue, I would say.
CDG: That's great.
JL: Some of the higher volume stores, you can get up there in the 80 million range, lower volume, maybe 50, 60 million.

M&A activity

CDG: You mentioned your dealer group. You guys have been very active with M&A, acquiring dealerships. How many dealerships have you acquired over the last two years?
JL: The last two years have been pretty active and we're big on not just buying any deal that comes across the desk. We're big on doing deals with a lot of efficiency across our platform. So, for instance, we might get called on a deal that we think is a good deal, but maybe it's two, three hundred miles outside of one of our markets. And there's not a lot of people, process, location efficiency with that deal. Doesn't mean we won't look at it, but we prefer deals where either we have brand efficiency, market efficiency, people efficiency. For instance, we did a deal last April, which was a Kia deal in Metro Philadelphia, and this was a deal that – we had interest on it for a long time. We liked the market. We identified the market based on the monthly annual registrations into the market. And we saw that Kia had a lot of upside in that market.
CDG: How did you see that Kia had upside?
JL: So basically what we'll do is we'll look at a shared sales report, for instance, and we'll look at how many competitive vehicles are being sold into that market. If Kia has, let's say, 8% share and the market's selling 12, 1500 cars a month. If you just do the math, you should be doing at least 100 new Kia's, and then if you outperform and you conquest and you take share from other brands and you sell out of your market, you could do 150, 200 cars. So, we're big on also looking at the market and looking at our closest competing dealers. And if we believe they're dealers that we can take share from – and I'll give you a good example. In 2016, we bought Allentown Kia, which is up in the Lehigh Valley of Pennsylvania. Amazing market, amazing people, blue collar. We were new to that market. And what we found is great, hardworking people. If you treat them right, they'll buy a car and they'll be happy forever. And when we did that deal, we recognized that there were two or three competitive Kia dealers that were not really that strong in our view. Meaning, we were more likely to sell cars into their market than them selling our cars, their own cars into our market.
CDG: Why do you think that is? Is it because of your platform, your scale?
JL: No, I think it's understanding the brand. I think it's understanding how each brand has its own... You have to find your edge with each brand.
CDG: So what's your edge?
JL: I would say our edge with Kia is we're the number one volume Kia dealer group in the region, by 70%, probably. That gives us massive economies of scale. For instance, if I can display 300, 400, 500 new Kias on my website, and the other dealer is displaying 30 new Kias on their website, A. Google now is solely ranking you on inventory. They used to rank you more on content and SEO. Now, if you have the most inventory, you are the most relevant key a dealer, no matter what.

Sourcing strategies

CDG: So you mentioned three Kia stores in three different locations. I think lots of people are wondering, how do you source these stores? Is this from brokers? Is this from connections? Where do you find these stores?
JL: Good question. We've used brokers in the past. We haven't recently, and our most recent, we just acquired a Nissan dealership in Freehold. There was no broker involved on that.
CDG: How did you get connected to that store?
JL: That store was really just, getting connected to the seller, building a relationship with the seller, identifying where we may have had leverage, which could be a million things. You may have a piece of real estate in a market that the seller wants. You may have a dealership in another market that the seller wants. The other thing is, a lot of sellers have framework agreements. They can only have say, five of a brand in a market. So, they may want to buy another one of that brand in that market and this may be the store they need to sell. So we identified A. That that store gave us significant operational efficiency in the market, and when I say that, we outsell Honda, Toyota, and Hyundai in this market out of, maybe a 6,000 square foot building. These other dealers, Toyota, Honda, their facilities are 30, 40,000 feet. We have about 30, 40, 50 parking spaces, and they have 200, 300. In addition, this facility we're in wasn't built to be a car dealership. So we lack capacity in the shop. We have six bays. We probably need 26 bays. So we basically knew that in order for us to really grow in this market, which we've done. Like I said, we're top volume in the region out of this store, and we outsell Toyota and Honda in a big metro New Jersey market. So we identified that either we need to develop a piece of property, which we began doing, and we still are going in that direction, but once this potential deal came across our desk as being viable that we can maybe do the deal, we saw, okay, this store has 30 bays. They have 300 parking spots. They have 14 technicians. So, what does that give us? It gives us all the flexibility that we needed with Kia. It's right across the street. And now, you don't have to go and develop another piece of land if you don't want to, because you can service more cars, service more used cars. You can hold more used cars and you've got a lot of efficiency in a market like that. You can leverage your best people.
CDG: So it's very much a case by case basis. And it's interesting, you're saying pretty much, real estate's obviously a major aspect and we'll talk about that soon. I'm curious, what are you paying for a dealership like that? What are the margins? What are the revenues?
JL: So a deal like that, there's significant intangible value there that is hard for anybody except maybe me or our partners to understand. Basically, when I say that, I mean, if you just value Nissan, let's say, maybe Nissan in a good metro market is a three to four multiple, right?
CDG: So, just for the audience, three to four times on the net earnings from prior year.
JL: Correct, three to four times. You try to look at three to five year. It's hard to look at just COVID big banner years and put a multiple on it and say, hey, this is what it's worth. Every deal we do, we run a pro forma because the other thing is, your expense structure is gonna change. You're gonna have more debt if you're paying more for the store. If you're paying more for the real estate, your rent factor is going to be higher. So, we like to basically overlay our planned performance on a pro forma and project, hey, this is what we can do at our average new car use car gross profit. What we believe we could improve the service, labor margins by. For instance, maybe they're 66% labor margin. Maybe we're 74, 75%. So, we'll extrapolate that, and we'll project what that brings us to. And of course, volume. If they're selling 60 Nissans, and we think we could do 150 Nissans, of course, there's upside there.
CDG: And what are the returns you're projecting? What's the IRR payback period? What are you looking for?
JL: So if you just look at that deal, I would say we're looking for 40% IRR, give or take. But if you also add back the upside with giving Kia more capacity, with having the ability to sell more used cars and service more used cars, I would say then, your IRR can go up another 15, 20%. Because Kia is now, I don't know if you saw the latest Kerrigan report, but I believe Kia was in the, mostly in the 5X range.
CDG: Yeah, Kia is killing it right now.
JL: Yeah, and Hyundai as well. So if you think about, okay, 5X. If I can generate another million in net income with the added capacity, even if it's just on used car, even if it's just on servicing more used cars, then a million at a 5X adds, what? $25 million in added blue sky value. So this deal was very intriguing.
CDG: Yeah, and blue sky. Again, for the audience, by blue sky, you just mean multiples.
JL: Blue sky, I just mean what is the dealership worth beyond the fixed assets.
CDG: The intangible value?
JL: Yeah, exactly.

Jake's best deal

CDG: Tell us about your best deal. I think everyone here wants to know. You guys have done some great deals. What has been your your sweetest deal that you've done?
JL: I believe each deal you have to do at the right time. I believe there's almost a cadence to the way you want to execute deals. And I've missed deals where I look back and I'm like, how did I miss that deal? How did I not execute on that?
CDG: That feels the worst. Missing a deal is so much worse than making a mistake sometimes.
JL: Yeah. It happens to the best of us. You can't do every deal. You can't buy all the real estate. I think what's important is doing the right deals at the right time. And a lot of dealers, what I've noticed is, they want to just buy every dealership they can buy. They end up spreading themselves thin. They actually go backwards. They're less efficient because they don't have the capacity to take on the deals they're doing. Whereas, we very much look for efficiency. We look for markets with a lot of upside. If we're paying, say, 10 million blue sky, goodwill - we need to see that we can take that store to being worth 20 million or 25 million blue sky. Ultimately, we're not really sellers. We more so want to identify good deals, generate efficiencies in markets, generate cashflow for a long time. So, I would say our best deal, raw numbers, is Kia in Freehold. At the time when we bought this store, 2017, they were losing money. The reputation was completely battered. I renamed the store from Kia of Freehold to Raceway Kia, because there's a local racetrack and people are familiar with Raceway. So I went in, I rebranded, built the team, took care of the community, which I'm a big believer in, is give back to your local community, sponsor Little League, give back to your local police directly, give back to your local charities, anything you can do in the community. During COVID, giving masks, donating medical supplies, all of that stuff. That goes a long way. So freehold has been a massive deal for us. We bought the store for south of 2 million, let's just say. And I would say we returned that the first year in what was a very challenging year growing the business. And now, I would say this is one of our best stores, platform-wide. And like I said, there's so much upside here.
CDG: What's that store worth today, do you think?
JL: I don't really want to speak in real numbers terms. I'll leave it up to you, Kerrigan and Hague and a lot of these places or Publix, you can see what their top Kia Hyundai stores are making. So just assume that if we're in the top 20 or 25%, which we are, extrapolate that, multiply it by five, and you have an idea of what this store is maybe worth.

Delegating operations

CDG: One thing I'm interested in is how do you structure your partnerships? Because you're obviously not at every single store every single day managing the business. So I'm really curious how you align incentives. Do you bring operating partners into every store? Tell us about that world.
JL: Good question. We like to give our operating partners a lot of incentive. That doesn't necessarily mean we give them equity, but it does mean that if they achieve certain growth rates or certain income thresholds within a certain period of time, that they can earn a bigger piece of whatever maybe the net income is. Or, if it's a sales manager, as they sell more cars, they earn a bigger piece of the gross profit. It depends on the market. If I have a great general manager in one market, that I believe can operate more than one store, then we'll let that specific operator get involved in two, three, four stores and earn out of all those stores. Now, you can't pay everybody on everything. So, you have to kind of pick your spots of, hey, this is a great operator in this market. And if he does a great job in this store, let's pay him on it. It all has to work. So, we generally will, you know, we'll run a pro forma on compensation and we'll see if this store goes from making a million a year to making three, four million a year – What does this gentleman deserve based on or woman deserve based on the work? And now we're more and more looking into letting those operators buy real equity down the line. So, if you really help us take off in this store, in two, three, four years, we're going to let you buy 5, 10, 15% equity at a discount to whatever the store is actually worth. Then it gives them a real incentive to take care of the business like it's their own, to grow the culture, to build the culture, and to do business the right way. I think a lot of old school dealers weren't properly incentivizing, you know, general managers for the long term. And I think a lot of dealers found out the hard way. So, we're big on long-term incentivization and giving somebody real career growth over time.
CDG: When you say operating partner, I'm assuming you don't necessarily mean a general manager. Is that right?
JL: The operating partner may be the general manager. Many of my stores, I structure them as: I personally will take equity in the deal, 25, 33%, however much. Then, I have a couple partners that have equity in the deal. And then on top of that, I may identify a general manager that may get paid on the net profit every month and get a piece at the end of the year. It depends on the market. Every store may not need that general manager in it. If you have efficiencies in a market, you may not need as much personnel at that level. But, I would say a general manager is not always an operating partner, first of all. But, a general manager generally can turn into an operating partner if they execute over time. Say, somebody is every year, they're growing new cars. We got Kia President's Club in Freehold and Conshohocken in Kia. If you're getting accolades like that, and you're achieving great results, over time, we're going to give you an opportunity to buy equity, which is going to help them earn over time.

Best and worst customers

CDG: Fascinating details. Let's shift gears a bit. I want to go into the operations, because I think a lot of people are very curious about the nitty gritty of running the business. Specifically, what are the most and least profitable customers that you service?
JL: So I believe in serving all customers the same, but when you ask that question, I immediately think of wholesale parts. Those customers, they could be aftermarket parts warehouses. They could be body shops. Those customers are largely running on credit, and the margins are extremely thin. I actually really try to avoid that business. Your margins might be 10%, 12%, if that. So, you're putting a lot of time, a lot of resources, and if one of those customers goes belly up, it could cost you a lot of money. For me, the parts manager's job is to keep the parts department clean. If all day they're focused on this low margin business, where is there opportunity for them to take advantage of the higher margin business,
CDG: Which is what?
JL: Which is counter retail, selling a roof rack to a customer, or just helping the used car department source parts. That's hugely important, as you know, as a used car dealer. In addition, your service department is hugely profitable. So, your customers that are coming in for their 15, 30, 45, 60K services, they're hugely valuable.
CDG: What are the margins there?
JL: Labor, anywhere from 65, 75% gross margin. Parts, you're anywhere from 40 to 45%. And that's also where your OEM warranty comes into play. which as you know is hugely profitable and the OEMs will are paying the dealer to fix the cars.
CDG: And what's the margin on that OEM warranty? How does that get priced?
JL: So the OEMs basically look at your warranty-like customer pay, they call it. If you're selling a customer an engine job. They'll look at, hey, the dealer is selling a customer this engine job for X, and they'll look at maybe 100 or 200 or 300 consecutive repair orders, and they'll identify your warranty rates off of that. They don't just say, hey, we're paying you X. Basically, a lot of the states legislated that, as a dealer, you have the right to ask the factory for a certain amount of warranty dollars. The strong dealers, I believe, ask for what they are entitled to. So, that's kind of how it works. It's a moving target every year. Every couple of years you need to reassess and align.

Jake's thoughts on used cars

CDG: How do you feel about the used car space right now? We haven't touched on this just yet but, thinking through margins and opportunities in a dealership, you're all franchise, every single store. What's your general take on used cars and what are you doing in-store right now? How are you directing your teams in terms of inventory management?
JL: So another huge advantage of having scale and having many dealerships is data. If I have, let's say, 15 or 20 rooftops, and I can see more data points, kind of like why did Google outperform Ask Jeeves or Yahoo. They had more data and they had more efficiencies across their platform. What I mean by that is: Every month, every week, even every day, I look at the car business as, you need day-trading attention.
CDG: Yeah, we're like a stock market. I was just having this conversation with another CEO, you likely know him. But yeah, we're just saying, this is like tracking a stock market.
JL: Yeah, so I'll send out quarterly used car summaries, some of which you've seen, to my teams, which include general managers, general sales managers, used car managers, even the BDC. And what I noticed that was interesting, I believe in November, December of '22 was that, at a time where you would expect seasonal weakness, we saw a used car day supply go from 53/54 to 43/44. So, day supply went down.
CDG: Which means that there's less inventory available.
JL: Which means there's less inventory available in a seasonally softer time. I noticed that across all of my rooftops, used car "water" was going like this [down], which is your profit or your loss in your used car inventory.
CDG: Pretty much the difference from what it's worth to the lenders on book vs. what you actually own it for.
JL: Correct. So, what I was able to identify at that time was that, hey, day supply is trending lower, water is trending lower. Even though the macro was bleak and a little scary, I understood that structurally, the used car market had changed. There's less lease returns coming back. There's very little fleet lease business. So you're not seeing those volume cars that you used to see, and what else? You used to be able to buy a Kia Forte for $18,000 new and the same Kia Forte is $25,000 new. So, the 2019 or 2020 Kia Forte or Honda Civic or Hyundai Elantra is going to be worth structurally more than what it was worth pre-supply issue where you're leasing cars and they're coming back off and you have rental companies selling cars into the market. What we try to do is take advantage. When I noticed that, my email went out and it said, Hey, step up, trade every car you can. Don't not trade a car if you're 2000 away, if it's a good car, meaning it's a car that's going to sell in less than 60 days, let's say. Because in two, three months, you've got February, March, you've got tax time coming, you've got the strong season coming. And I was able to forecast that it was likely that the market would go higher, and it has. Those quarterly stats that I look at generally have been hugely valuable as a group. It's enabled us to have similar strategy. The other thing that I'm big on is retail arbitrage. To give you an example, the Metro New Jersey markets, pickup trucks might not move quickly. Lehigh Valley, they move like that [snaps]. So if I'm able to trade a pickup truck in Metro New Jersey and ship it to rural Pennsylvania, where you used to send that truck to the sale to make the money, now you're able to make the money wholesale through the dealer who traded it. Then, you're able to retail it and make the right amount of money on the retail end. You're able to make the warranty, reinsurance, and service it. So that's why you're seeing so many less cars at the auction is because you've got a lot of dealer groups that are understanding that different cars work better in different markets and they're shifting vehicles to different metros.

The uphill battle for small dealerships

CDG: Yeah, hearing everything you're saying it's pretty fascinating how much the business has changed and how you're treating it almost like a stock market when it comes to inventory management, which it's the largest line item on the balance sheet. It makes me feel like, I don't see how franchise dealers that are single-point locations can truly compete in the long run here, even in the short run, frankly. It just seems like you need so much sophistication and economies of scale at this point. I think it's a really uphill battle for these single-point dealerships. What do you think?
JL: I totally agree. I think the smaller mom & pop dealers, it's going to be that even if they are truly exceptional operators, not having the economies of scale like we spoke about. In addition, you have more stores, you have more cost efficiency. If you can run an office out of one location, and you don't have to hire three accounts receivable clerks and HR, you're saving 20, $30,000 a month right there. These smaller stores, it's either adapt and outperform with an edge. But even if they adapt and outperform with an edge, it's still going to be difficult by not having those efficiencies like a larger dealer has. I think you've already seen a ton of consolidation. Those are also what we target, the smaller dealers and markets that we like. For instance, if we like a certain Metro New Jersey market, we'll identify, Hey, this is not publicly-owned or this is not large group-owned. Let's create a relationship with the seller, not just approach them and say, "Hey, sell me your dealership." It's, "Hey, you know, let's become friends. Let's understand each other. And when you're ready to maybe part ways with your store, give me the first shot." That's worked wonders for us over the years, and I believe it will continue to be that way.

Which car brands are on the decline

CDG: You mentioned brands you like, but I'm curious, what brands don't you like right now from a dealer's perspective or from a consumer's perspective? What brands do you think are on the decline and for what reason?
JL: I think right now, domestics are in a tough position and I'm a Chevy dealer. We love Chevy, but the domestics have sort of found themselves in a little bit of a spot where it's very expensive for them to produce vehicles. Whether that be union labor issues or whether that be the way they source their supply chain. Now, the Koreans are excellent with that, right? I think it's important to understand, who is positioned which way. I believe hugely in Chevy. They take care of the dealer. I believe Ford is a domestic where you can look at it and say, okay, they've got domestic headwinds in production, but they're also sort of alienating their dealers. Right?
CDG: How so?
JL: Jim Farley with his anti-dealer profit campaigns and his EV – "Hey, you're going to sell direct to consumer or we're not going to give you EV." I think the good, progressive OEMs have learned that dealers are their best customer, and dealers are their best source of growth. If you want to just go and alienate dealers, you're going to find yourself in a hard position, especially with franchise law. Franchise law basically means that dealers cannot go direct to consumer. OEMs have to go through dealerships. There are associations like NJCAR and PAA, and every state has its own lobby association that battles on behalf of dealers to ensure that no OEM is going to try to ever cut them out. Any instance where that happens, the local lobbyists step up and they do what needs to be done. So personally, I maybe would have looked at a Ford deal two, three years ago. I won't even do due diligence on a Ford deal now. Some may say, hey, you may miss an opportunity. But if I can't trust that the upper management is going to take care of the dealer, how can I invest our hard earned dollars into that brand?
CDG: Yeah, it makes total sense.
JL: Yeah. Nissan, on the other hand, Kerrigan recently showed that Nissan dealer demand is increasing and Nissan multiples have remained steady. So, the multiple is kind of going higher. Dealer demand has gone up, which means that I believe now is a great time to identify and buy Nissan. But that doesn't mean just buy it in rural West Virginia. It maybe means look at the good markets where they used to sell 200, 300 Nissans and they're now selling 70 or 80. And maybe there, some of those deals make sense, especially if you have an efficiency in that market. So, Domestics. I think Subaru is challenging to understand. Subaru is a phenomenal product. It's got a cult-like following, for sure. But I do think Subaru multiples got a bit ahead of themselves and a bit elevated. Subaru got all the way up into the 7 to 8x range. Me personally, if you're offering me a Subaru store or a Hyundai or Kia store, I'm going to take the Hyundai or Kia store.
CDG: Wow.
JL: Most of the time, not all the time. It depends on the market. Ultimately, if you think of just raw math, if you're paying 7 to 8x on a store that's making 3 million. That's 21 to 24 million of cash outlay versus a 4 to 5x making 3 million is 12 to 15 million. So you have to spend another 8 to 10 million to maybe generate similar returns. To me, I think it eats into your IRR, it eats into your compounded return over time. I think Subaru will be just fine. I just can't see myself paying a seven multiple for something that I believe might be closer to in the five, five and a half range.
CDG: Yeah, I mean, Subaru, Toyota, they're at the top of the market. They've been there. You mentioned Kia, Hyundai, Nissan. There's just more upside with those brands.
JL: Yeah, when we were largely acquiring Kia and Hyundai deals, Kia and Hyundai was maybe a two multiple, maybe a one and a half, two multiple. So anytime you can acquire something–
CDG: Yeah, it's unbelievable seeing how far they've come.
JL: And look, what have they done? They've executed, right? They've built the right cars at the right time. The Telluride is unbelievable. The week it came out, it was flawlessly executed. And they're hotter now than ever. Something that's very interesting is, I was in the Palm Beach area a couple months ago, and I heard multiple wealthy people saying Kia Telluride is unbelievable. My wife drives one. My cousin drives one. And I'd never heard that before. You'd always hear, "Oh, but it's a Kia," And what Kia did with their logo change was they basically changed the customer perception, and it was flawless execution. I remember you even had a post, people are searching "KN." People thought it looked a little off. But, it was more so Kia basically making the statement that, hey, this is not the old Kia. This is the new Kia of the future and watch what we do. I think a lot of brands can learn a lot from Kia and Hyundai. Not just how they're building cars and how they're designing cars, but what they do and how they take care of dealers. When I say that, my Kia – and I'm on Kia Dealer Council – even if I wasn't, my local Kia VPs, regional and national, they will take my call at midnight if I have a call and they'll address a concern on the spot. Whereas, I guarantee you try to get a Honda executive on the phone, you will not hear from them for some time.
CDG: Really, really interesting. We're in the midst of getting a Sienna and, you know, the family's growing. We need more space and whatnot. I get a lot of DMs. And so a lot of people were asking me, they're like, "I'm really curious why you chose Sienna over Carnival." It's Kia's version of the minivan. I actually found that fascinating because you go back 10 years, that would never even be a comparison. That's a joke. But now, and I'll be honest with you, my response was frankly that that was where I got a deal first, and it made sense. Listen, you can't go wrong with Toyota, obviously. But truthfully, it was a good question. I was like, wow, I didn't expect to get that from so many people in my DMs.
JL: Here's a great example. I have a client who has a Kia Carnival SX, which is the higher level ones. And going back to turn, only the dealers with above 85, 90, 95% turn were getting those Carnivals. So, they were in very short supply and they're still in very short supply. People ask why? More microchips to build them. Harder to build, harder to source. It might be harder to source the windshield glass or the navigation components or the leather components that are used in that vehicle. But, a client came to me looking for a Telluride SX and they had a Kia Carnival SX lease. About two years in, they were already about 25,000 over miles, which will generally cost you 15, 20 cents a mile. This customer has about $12,000 equity in that lease on the Carnival SX that they're over mileage by 20, 25,000 miles on. Now they've got $12,000 in equity that they could use towards their Telluride. So what does that tell you? It tells me that demand is extremely strong, that Kia themselves didn't realize how strong these would hold up, What I've noticed over the last one, two, three years is minivans are extremely strong. And I do not see the demand fading for them anytime soon.
CDG: Yeah. Minivans are hot. People were telling me, "Oh, you're going minivan gang?" I said, "Listen, I'm a dealer. To us, the minivans are like the Rolexes. We get those things, they fly off the shelf. So I value it very highly.
JL: Absolutely, yeah. Especially the way they're making them now with the seats go all the way back and they've got full TVs.

How consumers can find good deals

CDG: It's wild, yeah. So, speaking of demand, we have lots of dealers that listen to this. We have lots of vendors, investors, and many things, but we also have lots of consumers and car shoppers. I'm really curious to hear, what can consumers do to maximize the deal they get from a dealership?
JL: That's a good question.
CDG: Basically, in layman's terms, people want a good fucking deal. How do they get it?
[Laughter]
JL: I think consumers are smarter and more well-researched than ever. You've got you on Twitter, which I love, obviously. But consumers, they have so much information at their fingertips and they know that they're not going to get a Kia Telluride SX for invoice. It's not going to happen because the market is efficient. You can't go and buy Berkshire Hathaway stock at $150 a share if it's $350 a share. Consumers, they understand and they research. What I suggest is A, dealers need trades, right? So if you have a trade that you're borderline on, always try to bring it to the table. That's a huge edge as a consumer and a dealer will always be willing to step up in a trade. Additionally, a bank will generally give you a better APR if there's a trade in the mix, especially an open credit line trade. Additionally, I would say, just be real with the dealer. "Hey, I'm looking for a Kia Forte and I want to be here." I believe good dealers that operate with integrity are going to do their best within their process to get you the deal that you need. Especially the dealers with more scale. If I sell, say, 7, 800 new Kias a month, I may be willing to take that shorter deal that the little small rural Kia dealer only sells 40 isn't willing to take because they just don't have the inventory. So, I would shop your larger platform dealers. I would always try to bring a trade to the table. I would definitely always do your research. Trust, but verify. Ask questions. Ask the internet sales department questions on what's your day supply? If my day supply on a vehicle is five, you're not going to get a great deal on it because there's too much demand. But, if I have 60 Kia Fortes, I'm going to give you a great deal on that car. You may get a great deal on a low day supply car if we're short a number or if we have a high objective in a certain month. That doesn't mean we're going to do that deal the last day of the month. But mid-month, we may be willing to take a little bit shorter, lighter of a deal if it's a month where our objectives might be higher.

Forecasting car prices

CDG: Yep. Some great alpha. So, flipping to the macro before we wrap up. What do you think prices look like by next year? Specifically new versus used. These things have been so volatile here. Over the last year in 2022, we saw use car prices sort of come down linearly every single month. Then boom, we had a pop in January, and it's sort of been going up since then. New car prices, of course, have been coming down, not equally distributed across the board. The Asian brands are still selling for above MSRP in most places, and there's shortages. The domestic brands are now offering more incentives on certain models and makes, but on an aggregate, what do you see for prices on the used side and on the new side within a year?
JL: This is a very tricky question. It's tricky because we still have increasing cost of capital. Any time an OEM has to pay a higher [vigorish] to hold their own capital, the supply that they're putting into the market is going to probably be priced a little bit higher to offset their carrying cost, number one. Number two, inventory levels definitely remain constrained. Used car inventory levels, new car inventory levels are slowly increasing, but certain segments are increasing much more than others. For instance, your smaller sedans. You might be seeing more supply of those because they're easier to produce than your Pathfinders or your Tellurides or your Traverses because those cars just take more to produce. I believe that inflation and higher rates are going to stick around for a bit. I believe the cost to produce vehicles is going to remain quite high. I think that vehicle prices on the new car side will stay elevated for the next 6 to 12 months, but I think after 6 to 12 months, they will come down and level out a bit. The other thing is that OEMs are very strategically not placing too many incentives on vehicles. They're instead trying to use that money as subvented rate money. So if you can still get 0% or 1.9% as a consumer, it's worth more to you than getting $1,500 in rebate cash. The OEMs recognize this, they recognize what segments are hot. So I don't foresee Carnivals and Tellurides and Palisades tanking in price anytime soon. I don't foresee used car prices really going that much lower over the next 12 months. 12, 24, 36, yeah, you might get a little bit of a decline. I think once the economy takes a little bit of a step back. But again, the SAR was what? Two, three years ago. It was supposed to be 18, 19 million and I think it was maybe 11 or 12 million.
CDG: For the audience, by SAR, you just mean how many new cars sold in a year, which should have been closer to 19 million, but really we sold 11. So we've just had this crazy underproduction of vehicles.
JL: Correct. Also you have de-urbanization. You have people moving from Manhattan into New Jersey or into Connecticut. You have people moving from San Francisco and LA to Arizona or to Seattle, or whatever it is and what happens. They stop taking transit and they start driving their car more. It's like a double effect of demand side where the demand side is driving price. Supply, even if OEMs can ramp up supply, you still have that demand component, people need cars, and the average age of the vehicle on the road is, I don't know, 13 years. So, I think the other thing that people aren't really talking about is twofold. Number one, warranty costs and warranty prices to consumers and, cost to service your vehicle at 30k [miles] – What happens with inflation? Labor costs go up and your cost to service your car is going to go higher. I think that will also force people into buying new cars. If they have a 60k service and they need to put up $2500 to change their injectors or their throttle body or whatever it is, they might just buy a new car. So, I think that will create more demand and you may see strong new car sales prices for 24 months. It wouldn't surprise me at all. Also EVs, what about EV battery costs? I had a customer the other day, it was $36,000 to replace their battery. You know, you don't hear Elon Musk talking about that, but down the line, that's a factor.
CDG: Elon gave the pod a shout out.
JL: Nice.
CDG: So, Elon, if you're listening, we've got to get you on the pod, talk a little bit about the economy, the EVs, and what's happening.
JL: Yeah, and what's your plan for battery costs? And if a customer needs to replace a battery in two, three years, are you going to give them a tax credit into a new car? Are you going to give them any credit into a new car? Or are they just going to have to stomach that massive cost to replace that battery?

Wrapping up

CDG: This has been awesome, dude. Really learned a lot and I think people will really love this episode. Tell us about, if people want to learn more about Raceway Auto Group or yourself, where can they go to learn more?
JL: So, Raceway Auto Group, we have multiple Kia stores. I've got Raceway Chevy in PA. We've got stores in Burlington, New Jersey. We've got stores in Allentown, PA. You can learn more about me at any of our Raceway Kia websites or LinkedIn. I'm always open to engaging with customers. I think customers now more than ever, they understand that every dealer has different value propositions. And if me as a dealer are going to give you three years of oil changes, lifetime car washes, loaner cars, and other benefits throughout the life of your vehicle ownership, that's worth a lot to a customer. We provide Uber and Lyfts for customers for service appointments. So I think price is a byproduct of value. And I know myself, personally, the way I believe I can continue performing is to provide massive value to my customers and to my employees. Any store you walk into of mine, I think you'll feel the environment, you'll feel the energy and the culture. I instill in my people to take care of your customers, to give back to the community, and to do right by people every day, even when somebody's not watching. So, if you need a Kia, Nissan, Chevy, Audi, I didn't really touch much on Audi, but I have Audi in Wyoming Valley, PA. We love Audi as a luxury brand. You personally, you've experienced Audi. They are tremendous cars. I'm very, very bullish on Audi into the future. Yeah, happy to take care of anybody personally. You could email me at jake@racewaykia.com. I will personally help you make a deal. I'll get on the phone. I'll work the bank to get your deal done. A lot of people say, "Oh, he's an executive level guy. Why would he help me?" But honestly, I miss closing deals and working the desk. There's nothing better than that. So, any chance I get to work with a customer, to me, is a beautiful thing. Reach out to me. Also, I've got a website, SellUsYourLease.com. We'll buy leases for cash so you can see your equity and we'll take your lease, we'll pick it up, and we'll cut you a check. There's my plug. Appreciate the time.
CDG: This was awesome. Had a blast, and thanks for coming on.
JL: I appreciate it. Thank you, man.
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