Looks like the auto industry might need the next bail out. There is a lot of out standing debt there for sure. Dale
(Oct. 21) - They may be folks you love to hate, but it's hard not to have sympathy for car dealers these days. These business owners are manning the bucket brigades in an auto industry meltdown.
"Things are going disastrously," says Ray Ciccolo, owner and CEO of Village Automotive Group in suburban Boston. "Most car dealers were down over 30 percent last month, and that is a catastrophe."
Many won't survive. Almost 600 of the about 20,000 U.S. new car dealers have shut their doors this year, and an additional 2,000 will close within 18 months, predicts Mark Johnson, president of a Seattle consulting firm that helps auto dealers buy, sell or merge operations.
In September alone, 61 dealers - two a day - closed shop or downsized to used car lots, says the National Automobile Dealers Association (NADA). Wounded by gas prices that killed sales of their most profitable SUVs and trucks, dealers are being hammered as the economy depresses sales of all models.
Even people with good jobs feel poorer and less confident to take on years of payments for a big purchase. Those who still would are finding it harder to get credit - General Motors credit arm GMAC now requires a credit score of 700 or better for a car loan.
Banks' reluctance to lend also is squeezing the dealers, who need regular loans (called "floor planning") to finance inventory.
"This is a very big, complex issue that's all wound up around itself," Johnson says. "We are definitely up to our neck in this."
Not helping: September sales showed that despite easing gas prices, many buyers still want gas-stingy and cheaper small cars - which have small profit margins - or demand huge discounts on trucks, SUVs or luxury cars.
That's if they're shopping at all. A poll done by WPP Lightspeed this month found that only 10 percent of Americans plan to buy a car in the next three months.
It may be hard not to gloat when a car dealer gets the short end of the deal, but when they go out of business, that can be bad news for consumers. Fewer dealers fighting for your business means you'll end up paying more for cars.
The plight of car dealers is being watched closely by economic analysts because vehicle sales are a key indicator of the economy's health. The auto industry overall supports one in 10 U.S. jobs, according to the Alliance of Automobile Manufacturers. Dealers alone employ more than 1.1 million and generate nearly 20 percent of retail sales in most states.
Fewer sales by dealers lead to cuts in auto production. Fewer hours or jobs for assembly-line workers. Fewer parts required from supplier companies. Fewer hot dogs sold to shift workers in plants across the nation.
Not to mention more defaults on mortgages - which got the ball rolling on this economic mess in the first place.
Working harder to close a deal
On a recent Saturday in Los Angeles, the day started slowly at Galpin Ford. At about 11 a.m., salesmen in starched shirts and ties chatted in the near-empty showroom. Terry Miller, the sales manager, says business began drooping last year. "When the mortgage issues began and gas prices rising began at a similar time -- we realized (there was) a slowdown."
Customers trickle in, looking at the new Ford Flex crossovers and largely ignoring closeout 2008 pickups. By 1 p.m., most of the staff are trying to work deals.
It's a challenge. Many buyers with SUVs to trade in owe more than they're worth, says Tawny Arnaud, Galpin's vice president of sales. They have loans of up to 72 months, even though they've gotten used to trading in every 36 months, rolling debt from one car into another. Some owe up to $15,000.
"We do everything we can to structure (the deal) so it won't happen again," Arnaud says.
Arnaud says Galpin's promotions focus on convincing buyers that they can get credit. Business is slower but hasn't died, he says. "The dealers just have to work that much harder to get their customers into a car."
For starters, customers need to pony up a bigger down payment. RDQ Economics, using Federal Reserve data, says the typical loan in August was for 88 percent of a car's price vs. 95 percent in July, and a steep drop from 101 percent in 2006 - when buyers could wrap taxes, fees and even some of their old car loan into the new loan.
"We've not had trouble getting customers financed, but terms have been restrictive, down payment requirements higher," says dealer John McEleney of Clinton, Iowa, new chairman of NADA.
Even creditworthy buyers are being hit with higher interest rates, "And in some cases, that makes the payment go up enough that the customer just can't do it," he says.
Lenders are unlikely to let buyers borrow more than the car is worth again, says Melinda Zabritski, director of automotive credit for Experian.
Close to $25 billion in auto loans are at risk of default, she says, about 3 percent of nearly $796 billion in open loans. The quality of credit on open loans also is deteriorating. People who had good scores when they got a loan have seen those scores drop because of personal financial troubles.
"It's an alarming trend," Zabritski says, adding that new buyers with spotty credit are paying higher rates because of this.
Jim Weisbecker, general manager for Belle Glade Chevrolet in West Palm Beach, Fla., says he's seeing the effects firsthand.
Customers who could have gotten a loan at 5.5 percent just a few months ago now are being offered loans at 8 percent to 10 percent. Buyers with typical credit scores of 625 to 725 - scores generally range from 300 (poor) to 850 (excellent) - got loans easily just six weeks ago, he says. Now, "It's shifted radically."
"The answer is, a whole lot less people are financing," Weisbecker says, noting that before the credit crisis, about 80 percent of his customers took out loans, and those buyers aren't coming in now.
Like consumers, many businesses are just not in the mood to buy cars in the current economy.
Jim Svetz, owner of the Muddy Cup Coffee Houses in upstate New York, is looking at ways to make the two cars in his fleet, both with more than 100,000 miles, last as long as they can.
"It would be nice to get new cars, but we're doing the best we can to keep these two going before we even think about affording a new car," he says. "As people slow down their spending, we're looking at hunkering down and hopefully getting through the recession."
Business buyers also may be reluctant to tap available credit.
Paul Lauttamus, who owns a security and communications company in West Virginia, delayed plans to buy new SUVs so he'll be able to borrow to buy troubled companies and grow.
"We didn't want to tie up future access to credit," he says.
Other businesses are having trouble getting good interest rates, or getting approved for credit at all.
That includes dealers.
Some banks are calling dealers and telling them they'll no longer finance their "floor plans," the loans that cover the cost of their unsold cars. That leaves dealers scrambling for alternative lenders or going out of business.
Johnson says he's consulting with "hundreds" of dealers whose banks called to say their loans soon will go away.
"There's this mass assault on dealers, mostly the domestic dealers," whose sales have been hit hardest this year, he says.
Fewer dealerships likely
As sales decline, fewer dealers can remain profitable.
A recent study by consulting firm Grant Thornton showed that for average dealer sales to match last year's average, about 2,000 dealers need to close. With sales imploding, the firm has raised the number to 3,800.
Unfortunately for troubled dealers, that means makers of the cars they sell aren't motivated to prop them up - particularly Detroit's Big Three, which have many more dealerships than foreign makers do.
Paul Melville, a partner at Grant Thornton, says they "badly need retail consolidation" to have healthy dealers. "Significant consolidation is necessary, especially among Ford, General Motors and Chrysler retailers," he says, "because U.S. sales already have declined more than 1 million units this year."
The domestic automakers want their dealer numbers to be more like those of Toyota or Honda. Toyota has fewer than 2,000 U.S. dealers; Ford, for example, has almost 4,000. Result: A typical Toyota dealer sold 1,628 vehicles in 2007, says Grant Thornton, while Ford stores averaged 236. GM dealers averaged 202. The average for all new car dealers was 322.
"All the domestic manufacturers want their store counts and revenue counts to look like Toyota and Honda, because many less dealerships means selling more per outlet," Johnson says.
Dealer-oriented state franchise laws make forced thinning of the ranks by automakers very expensive. But now the financial crisis is doing it for them, Johnson says. It "has really hastened this way beyond their imagination."
The consumer may not be a winner, however, as less competition allows a rethinking of the common dealer business model: high volume built with aggressive pricing and touted in TV, radio and print ads aimed to draw customers from miles around to a lot with acres of new cars.
That model has led to the big sticker-price discounts shoppers have come to expect but leaves dealers little margin for error.
Just how little was apparent last month when Bill Heard Enterprises, a chain with 13 Chevrolet dealerships from Georgia to Arizona and a 90-year history, abruptly shut its doors.
The self-described Mr. Big Volume had been weakened by problems including a dispute with consumer regulators but accounted for 7 percent of Chevy sales in the USA and had about $2.5 billion annual revenue when auto sales were booming.
"The business model of huge, irrational inventories and huge, irrational marketing budgets with razor-thin margins, a la the Bill Heard model, is obsolete," says Mike Jackson, CEO of AutoNation, the USA's largest chain of dealerships. "It's dead. It will not survive this downturn."
Jackson says the future of car sales - coming soon - will be one in which fewer dealerships have less need to wheel and deal. They can hold the line on price, pumping up the profit per car, and focus on customer service.
"At the dealer level, a shakeout needed to happen," he says. "It will be painful. It will be ugly. But it is also long overdue."
Rebound? Maybe 2010
The pain looks likely to last through next year. The current economy makes a sales rebound look unlikely before 2010, analysts say. "All the problems of the economy are wrapped up in auto sales," says Mark Zandi, an economist at Moody's Economy.com.
Meanwhile, the remaining shoppers are taking their time making a decision and hunting for the best deal.
Eric Marks, CEO of a management consulting firm in Newburyport, Mass., wants an all-wheel-drive vehicle because he's having trouble maneuvering out of his driveway in snowy weather. But he faces the twin problems of higher interest rates for a car loan and lower trade-in values, which drive up the end price for a new car.
He's also seen the dealer meltdown. The dealer who sold his wife a Chevy Tahoe a few months ago has gone out of business.
"It was an 'aha' experience" about how bad things are getting, he says.
Even though he wants a new car, he says, he's determined to get a good deal. So for now, like many potential car buyers, he says he'll wait on the sidelines.
