Auto Dealers: 7 Narrow-Moat Companies to Know

Tariffs have slowed auto dealers’ postpandemic recovery, but consolidation in the space continues.

The auto dealer industry is highly fragmented. Although we cover all six publicly traded new-vehicle franchise dealers, they sell only about 7% of US new light vehicles annually. The sector remains primarily one of entrepreneurs rather than large corporations.

Public dealers have seen a modest boost in share since 2020, and the top 10 firms’ share is now about 9%, up from about 6% to 7% at the turn of the century. We expect continued gradual consolidation via acquisitions and from new franchises awarded to the largest firms because they can best fund automakers’ expensive store imaging requirements.

		Annual Share of US New Light-Vehicle Sales

Source: Automotive News, dealers’ 10-K filings and earnings releases, and Morningstar estimates. Data as of Aug. 25, 2025.

Still, a highly fragmented sector means a long growth runway for the largest players via organic growth, acquisitions, and expansion into new verticals.

Get the full report: 2025 US Auto Dealer Industry Outlook

3 Key Themes Driving the Auto Dealer Industry

We see three themes at the center of the auto dealer industry:

**1. Profits are stabilizing but still lower than they were during the chip shortage from 2021-23. **Before 2020, a strong operating margin level, including floor plan interest (interest cost to buy inventory), was around 4%. Covid-19 and the chip shortage decimated new-vehicle inventory and gave dealers a surge in new-vehicle pricing power through 2022, sending margins to levels that would have been absurd to model before 2020 (7%-8% earnings before interest and taxes). US new light-vehicle inventory remains below prepandemic levels of 3.5 million to 4.0 million units. The pricing power surge is over as inventory has been rising this year, but operating margins should stay higher than prepandemic levels, especially after permanent headcount reductions in 2020.

		Profits Stabilizing but Lower Than Covid Years

Source: Morningstar. Data as of Aug. 22, 2025.

**2. The auto dealer industry isn’t as cyclical as you may think. **Dealers do more than sell new vehicles, though new vehicles are the foundation for other segments. They sell used vehicles of any brand, not just for their new-vehicle franchise brand. A new-vehicle customer may have a trade-in that the dealer can then sell as a used vehicle. Normally, used vehicles bring higher gross margins than new vehicles, but for now, that has reversed, with the chip shortage elevating used-vehicle procurement costs. A buyer must have a new vehicle serviced at the dealer for warranty work, which, along with finance and insurance products at the point of sale, brings lucrative profits.

		The Auto Dealer Industry Is Not as Cyclical as You May Think
	



		Gross margins (%) by segment in 2024 for franchise light-vehicle stores.

Source: Morningstar valuation models. Data as of Aug. 25, 2025.

**3. The sector is gradually consolidating. **As the US urbanized and the Detroit Three lost their dominance, larger dealers have needed to serve more people in order to do well. The sector has consolidated over decades: Some have exited the industry because of insufficient throughput (volume per store), expensive store imaging requirements, and automaker bonus payouts that can be too hard to reach. The sector has seen a 64% reduction since 1950, but the biggest dealers are set up well to keep consolidating via acquisitions while receiving new franchises (called open points). California, Texas, and Florida have 21% of stores.

		The Auto Dealer Sector Is Consolidating Over Time

Source: National Automobile Dealers Association. Data as of Aug. 22, 2025.

What Tariffs Could Mean for Auto Dealers

Auto dealers have expressed optimism about sales amid US tariffs, because:

• The automaker is bearing the tariff cost (by cutting prices before a vehicle is imported).
• Some vehicles are not tariffed when built (because they are assembled in the US).
• Vehicles still need service despite tariffs on parts.

The 2026 model year may bring price hikes to consumers, though.

Still, we note that tariff exposure isn’t uniform across dealers because it depends on which brands they carry.

For example, Penske Automotive Group PAG does not do much Detroit Three business but has a lot of German brand exposure.

And for dealers that do franchise with the Detroit Three, there may be a lessened impact because these automakers have high compliance with the United States-Mexico-Canada Agreement, and auto parts compliant with this agreement will not be tariffed when shipped into the US.

However, non-US content, including Mexican- or Canadian-made Detroit Three vehicles, still faces a 25% tariff when the vehicle is imported into the US.

Penske, Asbury ABG, and Group 1 GPI got help this summer with the 15% tariff deals for Japan and the EU, meaning that those brands pay lower tariffs than an American automaker does from Mexico. However, the Trump administration recently announced that this 15% rate for EU vehicle and vehicle parts imports will not begin until the EU introduces legislation to lower its tariffs on US industrial goods, so the 27.5% rate remains in place for now.

Our Outlook: New-Vehicle Sales Recovery Will Take Beyond 2025

At about 2.5 million units, the US light-vehicle inventory for now is not back to where it will likely settle after the pandemic.

Low inventory, along with leasing’s mix of annual new light-vehicle sales still below 2019 levels, gives reason to think new-vehicle sales will rise in the next few years, though not rapidly. Many consumers who bought in 2020-23 during poor availability may not have bought the exact vehicle they wanted, so they could return to the market early.

Still, much higher interest rates than in recent years and high prices are holding some consumers back.

		Morningstar's US New Light-Vehicle Sales Forecast (Millions)

Source: Morningstar. Data as of Aug. 22, 2025.

As of first-quarter 2025, average interest rates for vehicle loans were markedly higher than they were in first-quarter 2021: 63% higher for new vehicles and about 37% higher for used vehicles.

This sticker shock has led many used-vehicle customers to delay purchases altogether (according to CarMax KMX), while some new-vehicle buyers are trading down to compact cars.

Monthly loan payments are also substantially higher than they were before the pandemic: As of first-quarter 2025, new-vehicle payments averaged $745 a month (35% higher than first-quarter 2019), and used-vehicle payments averaged $521 (33% higher than first-quarter 2019).

A few interest rate cuts would help the auto market, especially the used-vehicle market. Even future increases of up to 500 basis points would mean less than a $100 a month increase in the monthly payment for new and used loans.

In terms of new verticals, three of the dealers (AutoNation AN, Penske, and Sonic SAH) have launched their own used-vehicle stores, all under separate brands. Asbury and Lithia LAD have also done this in the past but abandoned the effort for various reasons.

Other examples of diversification into new verticals include:

• Lithia bought a stake in vehicle fleet manager Wheels in 2024 and is expanding its own captive finance arm, Driveway Finance. The firm says that the loans originated by Driveway will be 3 times as profitable as third-party loans.
• AutoNation also has its own captive finance arm and said in April 2024 that the loans it writes have about 2.5 times the profit (over the life of the loan) of a third-party loan it arranges in-store. AutoNation also signed a nonexclusive robotaxi service agreement with Waymo in 2017.
• CarMax Auto Finance’s $17 billion-plus loan receivables book adds about 200-250 basis points of EBIT margin in a typical quarter.
• Penske has nearly 50 truck stores.
• Sonic has added Harley-Davidson motorcycle dealerships and powersports.

7 Main Players in the Auto Dealer Industry

Of the seven firms that we cover in the dealer space, six are franchise new-vehicle retailers that also sell used vehicles, while CarMax only sells used vehicles.

All seven firms have a narrow Morningstar Economic Moat Rating because of their cost advantage and intangible asset moat sources. Lithia also has the efficient scale moat source because of its ownership of stores in smaller cities, where it can be the only store for a brand for miles.

		US Auto Dealers With Narrow Moat Ratings

Source: Morningstar Direct. Data as of Aug. 25, 2025.