Berkshire's Model Moves to Cars

As the market moved way past emotional fatigue with the Pimco story, Warren Buffett is beaming about his acquisition of the $8 billion van Tuyl auto dealership empire.

Certainly, generational transfers of ownership are an attractive timing feature of getting into the business, but it has to be an attractive business and one of the best in breed.

What's attractive about auto dealerships?  Americans, and indeed much of the world, have automobile ownership built into our genes, and it has spread down into more multivehicle households than anyone would have predicted years ago.  It is a consolidating business, with GM having too many dealerships, yet their vehicles will need to be sold.

The service portion of auto dealerships is far south of sub-optimal, and waiting for innovation.  Perhaps Berkshire can spark real growth in this business, which is where most dealers make their money. Even this business can become more attractive for consumers to go to their dealerships as opposed to their neighborhood shops if the dealers would stop gouging.

Finally, the financial services aspect of dealerships is dominated by the manufacturers captives, but with Berkshire as a large auto insurer through GEICO, there are many paths to rolling out more products through relationships at the dealer floor and at the insurance office.  This is probably where some of the immediate magic will come from.

Increasing scale will only give Berkshire's new auto CEO more leverage to build a better model of the auto dealership.  No matter how hard the business is, or how bad the economic times, dealers make a profit.

All of these features suggest that this new frontier for Berkshire is a promising one.  I still don't get the newspapers, though.