One glance at the Ourisman Volkswagen’s showroom in Tenleytown helps explain why traditional car dealerships will soon be a thing of the past in the District.
Outside, new cars are backed side by side against the showroom, their hoods extending to the sidewalk. The small lot is crammed with a couple dozen used vehicles. Most of the dealership’s inventory is kept a couple miles away in an underground parking garage.
Clearly, space is an issue. And that is an expensive problem to have, given the spiraling cost of real estate in the District. That problem is only exacerbated by the shifting economics of car dealerships, which operate on narrow profit margins, making them increasingly reliant on high volumes to be viable.
So Ourisman is leaving Upper Northwest for Bethesda in March. And with its departure, the District will be without a traditional car dealership for the first time in nearly a century. The departure means that the Tesla store on K Street NW — a relatively small space featuring the cutting-edge electric vehicles customers frequently order online — will soon be the only place to buy a new car in the city. Less than a half-century ago, the city was home to 40 new car dealerships, according to the Washington Area New Auto Dealers Association.
“Land is at a premium in many urban environments,” said Steven Szakaly, chief economist for the National Automobile Dealers Association. “Dealer profit margins are pretty slim. Hotels, retail spaces, their margins are much higher. That makes it hard for car dealers to stay in places like D.C.”
The growing dominance of large dealership groups has only increased the pressure on urban car dealers. New, larger dealerships often require brightly lit mega lots that are a more natural fit in suburban settings.
Many of the big-city dealerships that remain, like several in Manhattan, are owned by deep-pocketed manufacturers. The size of new-car dealerships has expanded in recent years as their numbers have declined. The government-managed bankruptcies of General Motors and Chrysler contributed to a loss of more than 2,700 dealerships between 2007 and 2010, and last year there were fewer than 18,000 dealerships left in the country.
“There are huge incentives and really good economies of scale if you can consolidate and become a larger group,” Szakaly said.
Also, the very largest dealers are cornering a growing share of new-car sales. As recently as 2009, the nation’s top 125 auto dealership groups accounted for 16.4 percent of the nation’s new car sales. Last year, the top 125 groups were responsible for 19.3 percent of sales — a growth pattern that is expected to persist, said Alan Haig, president of Haig Partners, an auto dealer brokerage based in Fort Lauderdale, Fla.
“Operating a car dealership has grown more complex,” Haig said, noting that manufacturers are demanding that dealers offer plush showrooms with more amenities for customers. Big ownership groups are often the only ones that have the cash needed to meet those demands, he said.
Not only are dealerships bigger, but they are also more profitable than they have been in a long time. In the years before the 2007 recession, car dealerships cleared an average profit of about $600,000 a year, Haig said. That dipped by more than half during the downturn. But in recent years, the big profits are back and dealers now average nearly $1 million a year in profits.
Those big numbers are drawing new investors to the market, while pushing the value of many of the businesses into the tens of millions of dollars — well beyond the reach of all but the wealthiest buyers.
In October, Warren Buffett’s Berkshire Hathaway announced plans to buy the Van Tuyl group, then the nation’s largest privately held dealership group. The group, which was founded in 1955 as a single Chevrolet dealership, had 78 dealerships across the country and nearly $8 billion in revenue last year, according to news reports.
Buffett said the dealerships are a good investment because each one averages about $100 million a year in business, making their tiny profit margins of less than 2 percent attractive.
But those low margins and the need for a high sales volume all but rule out car dealers in places such as the District, analysts said.
“Low-margin businesses that require a lot of real estate are not what is going to do well in a city like Washington, D.C.,” Haig said. “Those things make it difficult to justify holding a car dealership in D.C.”
The land where Ourisman now stands in Tenleytown has been purchased by Georgetown Day School, part of a $40 million purchase intended to consolidate the school’s campuses.
“People don’t have the property that’s needed for dealers, and nobody wants the zoning in their neighborhood anyway,” said Neil Kopit, Ourisman’s strategic marketing director.
Meanwhile, the Internet has flipped the car-buying equation for many salespeople, making neighborhood connections and location less important. Ourisman still gets a fair amount of business from foreign embassy staffers and other customers who are nearby. But most car buyers do the bulk of their shopping online and only come to dealers to close the deal.
“That is just the way things go,” said Ron Sowell, who has sold cars at the Wisconsin Avenue Volkswagen dealership for nine years. “As long as my service department is in the same place, we will be all right.”