Billionaire investor Warren Buffett surprised many in the auto industry with the purchase last Thursday of the giant Van Tuyl Group of car dealerships, which will be based in Dallas.
The new group will be called Berkshire Hathaway Automotive.
Van Tuyl, the fifth-largest dealership group in the U.S. with annual revenue of more than $8 billion, owns 75 dealerships, mostly in Texas, Florida and California. It’s based in Phoenix.
The privately held group will continue to be run by Larry Van Tuyl, son of group founder Cecil Van Tuyl.
“This is just the beginning for Berkshire Hathaway Automotive,” Buffett told CNBC in an interview Thursday. “I fully expect we’ll buy a lot more dealerships. We’ve gone a long time without getting into automobiles, but Larry’s got an operation that we think could be scaled up a lot from where it is.”
Some people in the industry had heard that the Van Tuyl Group might be sold, but few expected Buffett to be the buyer.
“The return on investments at dealerships is not like other businesses that he has,” said Lee Chapman, president of the Dallas-Fort Worth Metropolitan New Car Dealers Association. “I’m sure he thinks he can take these businesses and apply his special touch to them.”
Car dealerships may not generate huge profits, but they have become very solid businesses since the recession. They have strong cash flow and generally earn net profits of 5 percent or more.
“The Van Tuyl business model is to run large, high-volume stores in Sun Belt markets,” said Alan Haig, president of Haig Partners LLC, a dealership brokerage company. “That is a very lucrative business model because the return on sales increases with higher volume.”
From Buffett’s perspective, car dealerships may look a lot like railroads, said George Hoffer, a business professor at the University of Richmond — and Berkshire Hathaway owns Fort Worth-based BNSF Railroad.
“Railroads have zero entry,” Hoffer said. “You can’t create a new railroad, and if you come up with some better way of doing things, a new competitor can’t come along and emulate you.”
Likewise, car dealerships are protected by state franchise laws that govern where new dealerships can be located and determine how far apart they should be.
“They enjoy a protected market,” Hoffer said. “I was really not surprised by this.”
Moreover, since the bankruptcies of General Motors and the Chrysler Group, hundreds of new car dealerships have left the business or been forced out.
“They are even more attractive investments since the bankruptcies and subsequent culling of dealerships,” he said. “You now have much less intra-brand competition.”
Buffett’s Berkshire Hathaway Inc. already has a presence in Dallas-Fort Worth with subsidiaries BNSF, Justin Brands and Acme Brick Co.
It’s also opening a huge Nebraska Furniture Mart in The Colony, a suburb of Dallas, this spring.
Van Tuyl dealerships have long enjoyed a reputation for being fiercely competitive and producing strong revenue.
More than a third of Van Tuyl’s stores — at least 29 — are in the Dallas-Fort Worth area.