Car Dealers Are Hating Life Right Now
By Brendan Moore
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.
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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.