Why Did Warren Buffett Buy A Car Dealership? Why Might He Find The Car Dealership Business Appealing? by S&C Messina
The “obvious” reasons that many point to regard 1) gaining a point-of-sale for GEICO’s auto insurance products and 2) some thesis about a “contrarian” bet on autos in the U.S., etc. etc.
What’s less obvious and something that I’ve looked into doing was buying a car dealership to acquire a source of “float” through the sale of extended warranties and service contracts that are often sold by new and used car dealerships. I couldn’t believe it when Warren Buffett went ahead and did it. The lag and duration of such warranties and contracts usually number several years; for vehicles that rarely break down or require minimal service, this is a multi-year borrow. In some ways, this can operate in a controlled ponzi-like fashion where new fees/premiums earned are funding the costs of repair and service from older policies/contracts. That’s a costless, revolving float.
These extended warranties and vehicle service contracts (VSCs) are not regulated as insurance by the department/division of insurance in some states. Hence, the capital requirements can be less intensive, and the rules regarding eligible investments using such premiums can be lax. Most dealerships just take these premiums or service contract fees as profits to take home; the dealer markup on this business (not counting the insurance premiums/float) can be 50% as shown below. Hence, these products are indeed a source of float, just like gift cards, etc. For Warren Buffett, this can be another source of funds and leverage for his investments.
I have been getting contacted about this question and took off the contents and further details originally posted below. I’ve found it’s much easier and less confusing to walk through the nuances in person, over the phone or face-to-face. People were misunderstanding a lot of the previous details, so please feel free to reach out to me if you wish to review the content and walk through the various items via phone or meeting. Contact us here.