Car Dealers Are Hating Life Right Now

By Brendan Moore

11.28.2008

It’s difficult for a lot of people to work up much sympathy for someone that owns an auto dealership, or, for that matter, the people that work at an auto dealership. Just about everyone in the country has some bitter anecdote in their past about being wronged by a car dealer in some fashion; whether it was when they were trying to buy a vehicle, get a car serviced, get parts for one, etc.

But, man, these guys have it pretty tough at this moment.

New vehicle sales have collapsed, with the market down almost 32% so far, and after November sales results come out on Tuesday, that decline will almost certainly go to at least 36%. The new vehicle sales forecast for 2009, depending on which one you want to go with, could be even uglier. The previously unbreakable luxury car market has also tipped over in the last couple of months, with luxury vehicles mirroring the same declines as the mass-market segment. The steady drumbeat of bad news shows no signs of abating anytime soon.

Used vehicle sales, until recently a bright spot for dealers, have also plunged, with November sales results expected to show a decline of around 20%. Just as importantly, the average wholesale and retail price of used vehicles has fallen along with sales volume, thereby compressing profit margins considerably on the reduced amount of used vehicles an average dealer can sell. Wholesale prices are the lowest they’ve been in 14 years, according to Black Book, a pricing guide used by dealers. Lower wholesale prices also translate into lower trade-in values given to prospective new-car customers, which in turn short-circuits a lot of new-car deals.

Then there is the carnage in the consumer credit market. There’s the obvious effect; less consumers can get approved to buy a car with an installment loan because of an increase in the minimum credit score required as well an increase in average down payment required. And leasing, the preferred auto financing method for some consumers and businesses, has dried up, with some auto finance companies shutting down their leasing units, and the ones still offering leasing doing so only with much tougher credit requirements and lease contract terms.

But the commercial credit market is also just killing dealers. It’s killing them because they can’t get their inventory of new and used vehicles financed (called floorplan) anymore, and this is driving a lot of dealers out of business very quickly. It’s killing them because they cannot renegotiate terms on their real estate loans for the property their dealership sits on, whether that is because there is no credit available, or, because they now don’t sell enough cars to be considered a viable business, or some combination of both. Many dealerships could hold on until the economy picks back up if their commercial financing situation remained steady and reliable, but that isn’t the case, and so they have to close the doors.

And for many dealerships, that is the only option they have, since their franchise is now without value, and there is no willing buyer for the business at any price. Although this type of scenario is mostly confined to the domestic brands currently, the severe drops in valuation for dealerships overall is also complicating every dealer’s efforts to stay in business until things get better.

Then there is the uncertainty factor. If you are a dealer that has a franchise from one of the Detroit Three, you could be out of business soon no matter what you do, because any one of them could go under in the near future.

Finally, regardless of you feel about auto dealers, none of this is any good from an overall economic perspective. These businesses employ a lot of people on a nationwide basis, and indirectly are responsible for many more jobs among their respective suppliers and customers. And in many small towns across America, its not unusual for an auto dealership to account for 10 or fifteen percent of the local tax revenue base.

Ten years ago, every dealer was loving life – those were mighty good times for everyone in the retail car business. It’s always hard to peer into the future, but given the circumstances now, its difficult to see those sorts of good times happening again anytime soon.

COPYRIGHT Autosavant – All Rights Reserved

For another take on this subject, read “Local Pillars, Auto Dealerships Teeter as Big Three Decline”, an excellent article published 11/30 on NYTimes.com.

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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5 Comments

  1. You’re right, it is hard to feel sorry for someone who owns a dealership. I wish they were all owned and operated by the factories.

  2. Personally I find these types of articles offensive. I am a Chevrolet Dealer in Warrenton, VA. Yes there are a few bad dealers out there, but very few. The record will show that 96% of new car buyers are very satisfied with their dealership experience.

    In addition, for most communities, the local DOMESTIC car dealer is THE MOST CHARITABLE business in your town. Supporting every civic club and school activity under the sun. Sponsoring every type and kind of youth athletic program, Boy Scouts, Girl Scouts and every single kind community activity for kids and families. Local arts festivals and music programs – the list is just too long to continue typing.

    Funny thing is, it seems like 60% of the people who come to me with their hand out for this program and that have never bought a car from me. Did they even give us a chance for their business – NO. If they had they may have learned that Chevrolet really does build a great car that in most cases outsells, outperforms, and is of HIGHER quality than the import they bought. When it comes to supporting the businesses that support them and the activities of their children and community – Oh, well that’s different.

    These are the same people that spew the garbage about Domestics not being as good as imports although they haven’t even been in a domestic showroom(unless they were asking for a donation) or test driven a domestic car in the last ten years.

    In the past ten years that I have owned my business – our contributions and sponsorships of local causes has been in excess of 1 million dollars. I am not a “rich man” or a “big dealer” – we are in a town of 10,000, a county of just over 50,000 and there are thousands of guys like me across the country. Is it to much to ask for a little respect for what we do for our communities. I don’t need your thanks, and you should buy the kind of car you want – but don’t go spreading untruths and doing harm to the businesses that support your community just to boost your own ego.

    TRUTH IS, GM outsells Toyota and every other import maker in the US. In 2007 (a bad year for GM) – GM outsold Toyota by nearly 1 million units. The quality is there, the value for the money is incredible. Get your facts straight or keep your thoughts to yourself.

    Andrew Budd
    President
    Country Chevrolet, Inc.
    agbudd@msn.com

  3. Dear Mr. Budd –

    We at Autosavant have nothing against auto dealers – we simply acknowledge in the piece that some people do have something against dealers. I don’t think that this would come as a surprise to anyone in the business.

    As the author of the article, I don’t wish ill upon dealers like yourself. Indeed, I hope everyone in the car business (including retail dealers) comes out of this meltdown as whole as possible.

    Regarding your comments about domestic vs. import cars, I’m not sure what prompted that reference as nothing pertaining to that subject was in the piece. We mentioned the plummeting value of a domestic franchise, but we didn’t beat up on the cars. Indeed, if you look at our reviews of domestic iron, I think you’ll see we have been very fair in that respect, and in fact, are huge fans of cars like the Corvette, the Pontiac G8, the Malibu, the Cadillac CTS, the Ford F-150, the upcoming Ford Transit and upcoming Ford Fiesta and the Ford Focus. Hey, we liked the Challenger, too!

    Conversely, if you look at the reviews we’ve done of cars like the Toyota Camry, we do not march in lockstep with those who pledge eternal devotion to the Toyota brand.

    In short, we call them like we see them.

    Best of luck to you in your business endeavors, and I say that in all sincerity.

    Brendan Moore

  4. Talk about tough times. Seriously, where did THAT fallacious argument come from. If anything, Mr. Moore stated his disclaimer in the very first paragraph. Sheesh. Prime example of how the markets doin’ eh?

    And for the record, you guys (domestics) have A LOT to account for during the 80’s and 90’s.

  5. This is like a political campaign. You don’t respond to the question asked, or what the interview subject is, you just repeat your talking points over and over, no matter how disconnected they are from the the subject of the conversation. Andrew Budd gets one long advertorial out of it. I don’t think he’s confused, I think it’s simply his chance to make his various points.

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