The industry is consolidating. That statement probably comes as little surprise. The entire automotive aftermarket is consolidating. New car dealers, tire vendors, parts distributors, paint distributors, software providers and collision repair shops are all consolidating. But were you aware that industries tend to follow a predictable path of consolidation, referred to as the consolidation curve?
Big companies are acquiring smaller companies using affordable capital to grow. This growth creates economies of scale. And economies of scale allow larger companies to provide goods and services relatively more efficiently and at a lower marginal cost than their smaller competitors.
Consolidation will continue because it is a virtuous cycle where success attracts additional investment that generates further business advantage. A growing consolidator will continue to acquire for two main reasons. First, each acquisition presents an opportunity to further build economies of scale to propel further competitive advantage. Second, disciplined acquisitions increase the value of a business in excess of the cost of the acquisition. This is generally referred to as accretive acquisitions or multiple arbitrage in the financial world.
What are the stages of consolidation?
There are three stages of consolidation. Well actually four, but the last stage represents stability rather than consolidation. The stages are:
Stage 1: Fragmentation
Stage 2: Acquisitions
Stage 3: Expansion
Stage 4: Maturity
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