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Auto Dealer Agony

May 21, 2009 Dealerships & Salvage No Comments

Auto Dealer Agony

daytona-lm_2It is almost impossible to imagine that auto dealerships would be in such chaos today.  Dealerships, particularly for the domestic brands, are closing by the hundreds and thousands. 

Auto dealerships have been economic engines of success.  Yes there have been some failures as manufacturers and products have disappeared over the past 100 years.  For decades owning a dealership has been a “license to print money” in the opinion of your Editor who happened to have a dealership for 10 years.

Historically, auto dealers have been great community citizens.  Dealers have sponsored little league and many sporting events along with a multitude of civic and community activity.  Event sponsorship was because they had money to do it an they were part of the local “fabric of society”

Massive Power

Dealers made massive amounts of money and that permitted them to gain massive political clout in Local, State and Federal levels.  Big business personified and amplified because Dealers had discretionary money to allocate on many fronts including Political Action Committees or PAC’s. 

Dealers added product lines and new stores for new franchises.  Sales increased and reasonable infrastructure investment produced a significant Return On Investment or ROI.  This was The Go Go Days of 16 to 17 million annual sales.

Sales Collapse

Current sales rates of 9.5 to 10 million units is not enough to support a dealership base designed to sell 14 to 17 million units annually.  Doing the math makes it clear that a lot of people are going to be let go and that ultimately dealerships will have to close.  Reduction in units will put weak manufacturers, or manufacturers that do not have the product people want to buy at financial risk because they are not selling enough product to pay their bills.

Supply Side Economics

Looking deeper reveals a very real and precarious position for a large percentage of older dealerships that have not been updated.  Every reader of the Automotive Tribune recognizes that dealerships are closing daily and that stores that have been in place for decades are modern corpses in the local landscape.  The vision of a dead dinosaur would probably be more appropriate.  Lots of old stores that sold a small number of units with facilities that have not been upgraded since the 1960’s or 70’s will most likely be closed with The New Detroit Plan evolving with Washington, GM and Chrysler.

Giant dinosaurs exist tooBill Heard had mega stores and Mr. Big Volume hit the wall.  Mega dealer Denny Hecker allegedly owes $600 Million including about 1/2 a billion to Chrysler Financial and $104 million to Hyundai Financial.

News Flash – Titanic Bumps Iceberg

After bumping an iceberg the fate of the Titanic was quickly determined by intelligent people who initially believed sinking was pretty much impossible.  This same logic could be applied to many dealers today.  An unprecedented number of dealerships will sink, with or without hitting the iceberg.  Some will survive only by heroic efforts.  It is absolutely clear to everyone in the car business that the current times are absolutely predictably perilous.

News Flash – Luxury Car Palace is A Sea of Debt

Palace Facilities for luxury cars are in trouble.  Some facilities cost $30 to $40 million to build.  These are very new facilities and will very likely  have  big carrying costs associated with the structure.  This financial condition will lead to some spectacular failures.  Especially, if automotive customers decide that it is more socially justifiable to drive a Ford, Chrysler, GM, Toyota, Honda or Nissan instead of the high line Lexus and BMW products.  There has not been a lot of fallout yet but some of these luxury car retail dinosaurs will definitely go under

Winning Dealerships

Winning for the immediate future is not going out of business.  Current dealership management must stress rigid financial controls throughout the business with aggressive inventory control to keep the floor plan down and maintain an effective personnel policy while recognizing the unique importance of service as maintenance revenue increases with an older fleet on the road.

To win right now is to survive.  If a dealer can survive until the spring of 2010 then sales will likely pick up.  There is massive pent-up demand for cars and this condition will increase.  However, economic conditions and general economic fear on the part of the general consumer means that car purchase decisions will be delayed.

2010 will be a turn around year for the dealerIf a dealer is doing well today they have the right product for their customers and they are not financially leveraged to the point of failure.  Successful dealers today are establishing a solid  business reputation.  Successful dealers today will be very profitable dealerships when the car buying public returns.

Any dealership that survives the current situation should prepare for things getting better in 2010.  Having a viable and up to date business plan will ensure that the dealership management is positioned for the Inevitable Melting of the Titanic Iceberg.

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