Franchised dealers – factory-authorised new vehicle outlets – will be the hardest hit of all used commercial vehicle retailers here in the UK with the slowdown in new vehicle registrations and the fall in residual values impacting on their already-dwindling profitability, used vehicle pricing specialist EurotaxGlass’s said on Wednesday. Meanwhile, analysts Edmunds.com reckons car dealership profitability across the Atlantic is down 25% after new car sales slumped 20% and the National Automobile Dealers Association (NADA) urged the federal government to implement the US$700bn economic recovery plan as quickly as possible.
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George Alexander, who edits Glass’s Guide to Used Commercial Vehicles, suggested that, while independent UK CV dealers are relatively well placed to respond quickly to the changing economic climate, the likely fate for franchise holders will be dictated primarily by the restrictions on the vehicle types which can be offered to an increasingly selective market.
“Franchised dealers are almost uniquely vulnerable to a market downturn,” he said. “They suffer all the disadvantages – such as falling inventory values and fewer customer enquiries – yet are restricted in how they are able to react to such hostile conditions. The franchise agreement encourages dealers to invest in big sites, meet corporate standards and take on massive amounts of debt. These commitments, however, leave dealers poorly placed to trade their way out of difficulty.
“Such prestigious outlets are often unsuited to, or possibly prevented from, offering an array of competitive products to tempt cash-strapped customers. To make the most of the prevailing economic conditions, dealers need the freedom, and the necessary finances, to stock older vehicles which represent a profit opportunity, rather than just new and late-plate examples that rapidly become distressed sales.”
While the focus on the bottom line is sharper than ever, Alexander warned against a knee-jerk reaction from dealer boardrooms.
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By GlobalData“In previous downturns staff numbers have been reduced to cut costs. There has been little evidence of this unwelcome practice in recent months, and management teams would be wise to remember that the expertise lost as a result of such an approach will be difficult to replace when economic prospects improve in 2010.”
A spokesman for the UK’s Retail Motor Industry Federation said: “Franchised commercial vehicle dealers are at present offering competitively priced new vehicles, supported by their manufacturers to offset heavy demand from the used market. However most are still carrying a limited selection of the best-selling used models.
“Commercial vehicle dealers in the franchised sector focus their investment in their servicing facilities, with the full support of their manufacturer partners.”
Based on comparisons of total gross profits from new vehicle sales this year and in 2007, Edmunds.com concluded that 25% of gross dealer profits had been lost so far this year.
The Los Angeles-based analyst said 30% of dealers dropped from more than 55 monthly new sales in 2007 to fewer than 55 this year and, of the 70% of dealers who saw a drop in total gross margin this year, 28% lost more than half of their gross margin.
“The Big Three US automakers have been trying to get rid of their weakest dealers for years, but the weeding-out process has gone far, far more slowly than automaker executives have wanted,” reported Dale Buss for Edmunds’ AutoObserver.com.
“Now, this year’s double-whammy of economic shocks – explosive gasoline prices that stunned consumers, followed by the current financial crisis that is constricting credit at every level – has already begun culling out US car dealerships at a rate far faster than General Motors, Ford and Chrysler brain trusts could even dream was possible by their methods.”
As just-auto reported last week, recent casualties include Bill Heard Chevrolet, the nation’s largest dealer for the brand, which went out of business at the end of September.
“Not everyone suffers when the chips are down,” said Edmunds CEO Jeremy Anwyl. “Good dealers will thrive as shoppers become ever more careful about where they spend their money.”
There are over 20,000 car dealerships in the US employing over 1m people, accounting for 18% of total retail sales and paying hundreds of millions of tax dollars to state and local governments each year, according to 2007 NADA data.
Last night, NADA chairman Annette Sykora said the federal government needs to implement the $700bn economic recovery plan as quickly as possible to end the credit freeze.
“The rescue package is designed to free up credit markets. But it’s too early to know whether the fix will work,” she said. “One thing is certain – this action is better than no action.”
Sykora emphasised that it was becoming increasingly difficult both for US dealers and consumers – even for those with good credit – to obtain financing with the situation contributing to shaky consumer confidence. More than 94% of buyers rely on financing when purchasing a vehicle.
“The credit crunch on Main Street is real,” Sykora said. “If the country can break the credit freeze on Wall Street, then [dealers] can help revive the economy on Main Street.”
“Credit is the lifeblood of our industry,” Sykora added. “Dealerships need it to finance inventory from the manufacturers. Consumers need it to buy cars.”
The current credit crisis coupled with other economic factors has already forced some auto dealers to close.
“We’re likely to lose up to 700 dealerships this year,” Sykora said. “Some of these [closings] stem from the challenges faced by the Detroit Three.”
Before the financial crisis set in, some profitable dealers closed because the value of their land was so high, Sykora added, but many other closings are being driven by the real-estate meltdown.
NADA, based in McLean, Virginia, represents about 20,000 new car and truck dealers, with nearly 43,000 separate franchises, both domestic and import brands.
