Terry Rafih sees nothing but growth potential for his retail automotive business when he looks across the border into the United States from his base in Windsor, Ont.
Rafih — CEO of Rafih Auto Group, with 19 rooftops in Ontario—re-entered the U.S. market in March when his group bought three luxury-brand dealerships in northeast Ohio.
“Canada or U.S. to me is the same. It was an opportunity that came up,” said Rafih, who a few years ago sold two Mercedes-Benz dealerships along the East Coast of the United States. “If another opportunity comes up in the U.S., we would be more than willing to look at it.
“Geographically, it’s important. The U.S. is a big country. So is Canada. So ideally the Midwest region of the U.S. is the area that we are focusing on at this point.”
As dealership consolidation continues and many groups look to grow, some Canadian dealership groups are entering the United States to diversify location and automaker brands. Sibling publication Automotive News identified at least six Canadian auto retailers that have forged into the United States with recent acquisitions.
CROSS BORDER, HIT WALL
But running businesses in two countries can be difficult, as AutoCanada Inc., the country’s lone publicly traded auto dealership group, has learned.
In April 2018, the Edmonton-based corporation bought nine of 10 dealerships in the Grossinger Auto Group of Chicago for $135 million. The deal included eight dealerships in the Chicago area and one rooftop with multiple premium and luxury brands in Normal, Ill.
But just months later, with its 2018 second-quarter earnings, AutoCanada had to take a $44 million impairment charge to write down the value of the U.S. business.
And in its first-quarter earnings, AutoCanada noted challenges with high cost structures in its U.S. operations. Operating expenses exceeded gross profit by $7.2 million.
In May, the company — with 66 franchises, including 14 in the United States — announced a plan that would involve cutting operating expenses at its U.S. dealerships and “optimizing our U.S. portfolio with a view to creating a sustainable platform in the U.S.”
Paul Antony, AutoCanada’s executive board chairman, told analysts in an earnings call in May that the company thinks some U.S. dealerships can be profitable in the near future, “while some stores will not be able to attain profitability within a period of time that’s acceptable to us.”
Antony described the need to change U.S. pay plans by moving away from guaranteed employee salaries to performance-based pay. He also noted problems with advertising budgets and overpaying vendors in “an astronomical fashion.”
AutoCanada declined to say how many stores it wants to shed, although Antony told analysts that AutoCanada will be looking to improve dealerships within 12 months.
Chris Murray, an analyst with Toronto-based AltaCorp Capital, said some nuances differentiate the U.S. and Canadian markets. But with AutoCanada’s U.S. acquisition, he said, “There were really some issues with the due diligence at the front end.”
M&A FIRMS CROSS BORDER
With buy-sell interest across the U.S.-Canada border, some merger and acquisition companies are opening offices in Canada. In March, the Tim Lamb Group from Columbus, Ohio announced new offices in Edmonton and Toronto.
In the fall of 2017, Dealer Solutions North America of Markham, Ont., expanded into the United States with a Detroit-area office.
Company CEO Farid Ahmad said in an email that some of the larger dealership groups are buying stores in the United States, while a few smaller groups have purchased one store.
“We believe this will continue to grow,” Ahmad said.
Last year, Alpha Auto Group of Toronto bought Wilsonville Toyota and Wilsonville Subaru in Oregon. In 2017, OpenRoad Auto Group of Vancouver purchased a luxury dealership in Bellevue, Wash. A year before, Birchwood Automotive Group of Winnipeg acquired a Chevrolet-Buick dealership in North Dakota.
Another company to jump over the border is HGregoire. In 2010, the Saint-Eustache, Que., company began its U.S. journey with used-vehicle stores in Florida, a state where it warehoused convertibles to ship to Montreal in the summer.
In March, HGregoire opened HGregoire Nissan Delray in Florida after acquiring its first franchised new-vehicle store in the United States.
HGregoire President John Hairabedian said its growing network of used-vehicle store in the United States gives the company access to an abundance of inventory that’s needed for Canada. A weak loonie relative to the U.S. dollar has driven American dealers seeking a discount on used vehicle to Canadian auctions, keeping supply low north of the border.
In recent months, HGregoire has expanded its U.S. presence, opening a used-vehicle store in Orlando, Fla. Another is planned to open in Miami this year.
U.S. CONSUMERS DIFFER
While American and Canadian buyers share similarities, Hairabedian said HGregoire has had to adjust to the U.S. market.
Consumers there expect to have a vehicle they buy delivered to them almost instantly, while deliver can take up to two days in Canada.
The types of vehicles HGregoire stocks in Quebec and Florida also di fer. The group’s top-selling brands in Florida include Mercedes-Benz, BM and other luxury vehicles; while in Quebec, customers like more mainstream brands.
“We’ve seen more buyers gravitate toward affordable luxury in the U.S., and in Canada we see buyers g toward fuel economy, electric cars a smaller cars,” Hairabedian said.
For Rafih, managing businesses across the border is easier with technology. In Ohio, Rafih Auto Group also named Helder Rosa, who had 14 years with previous ownership, as vice-president of operations. And a plane ride to Ohio is just 20 minutes, Rafih said.
“It’s very easy for us to visit the campus and help in managing or directing or assisting the team that’s there,” he said.
John Irwin contributed to this report.
