The credit crunch has made vehicle loans hard to get in the US and dealers consequently are being forced out of business by a combination of consumer and business financing woes and falling vehicle sales as nervous buyers hold off making large purchases.
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The issue has been reported recently by the US TV networks’ national news broadcasts. Last night (30 September), NBC Nightly News highlighted the difficulties faced by a Florida dealer and quoted a senior executive of a top nationwide dealership group as saying the business climate was extremely difficult and that many more outlets were likely to stop trading.
Dow Jones Newswires on Wednesday said that, though the Detroit-based automakers have been looking to reduce their bloated retail networks, the sudden loss of dealers threatens to create more turmoil for the struggling firms.
Paul Taylor, chief economist for the National Automobile Dealers Association, told the news agency that almost 600 car dealerships had closed so far this year, and as many as 750 would likely be shut down by the end of the year.
Up to 300 or so new shops would open in 2008, so the net loss would be 300 to 600 dealerships, the report said, noting that a smaller annual reduction of 75 to 200 dealers is normal. Across the US, there are about 20,700 auto dealerships, according to NADA.
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By GlobalDataBill Heard Chevrolet, the nation’s largest dealer for the brand, went out of business last week, Dow Jones said.
The report said losing dealers could cost automakers more sales and profits on top of the current slump and also hamper plans to strategically shrink networks by phasing out dealers in uncompetitive markets.
The automakers need to retain dealerships in competitive, profitable markets and the failure of a chain like Heard’s can leave them without representation in key locations.
GM this week said it was studying whether it makes sense to either try to find buyers for the Heard dealerships or find other ways to consolidate the dealerships into other outlets, Dow Jones said.
The decline in the number of new car dealerships would accelerate this autumn and into 2009, Grant Thornton Corporate Advisory and Restructuring Services said in a statement late on Wednesday.
“An increasing number of dealers are simply closing their doors because sales have plummeted, credit has dried up, the overall retail environment is increasingly challenging and potential investors are sitting on the sidelines,” said partner Paul Melville. “In addition, the domestic automakers who badly need retail consolidation are not spending much of their scarce capital on the problem because the economy is doing it for them.”
Grant Thornton said earlier this year that more than 2,700 dealerships would need to close in order to maintain sales per dealer at last year’s level of about 750 units. With light vehicle sales now on average predicted to drop to the 13.7m unit range in 2009, the firm estimates that 3,800 dealerships will need to close.
“Significant consolidation is necessary, especially among Ford, General Motors and Chrysler retailers, because US sales already have declined more than one million units this year,” added Melville. “The ‘Detroit Three’ account for more than 85% of the total decline, and their sales per dealer were already well below the industry average.”
Citing Automotive News, Grant Thornton said the average US new vehicle franchise reported 322 new vehicle registrations in 2007. Toyota Motor Sales accounted for 1,628 units per franchise, Ford domestic brands reported 236 registrations, GM’s domestic brands 202 and Chrysler 169.
Not only are new car sales down, other sources of revenue for dealers, such as used car sales and financing profits, are also falling. For example, CarMax reported its average used vehicle-selling price declined 6% in the second quarter ended 31 August, with double digit declines in comparable store unit sales.
Property values also have taken a hit. According to the Moody’s/Real commercial property price index, prices ended a four month decline in July, but were down more than 11% from their October 2007 peak.
“We see more unprofitable dealers closing their stores outright, but if franchise values were to fall 20%, that could be enough to stimulate mergers and acquisitions activity,” Melville said. “Value investors are also looking for new opportunities, and they will find them in the real estate owned by dealerships.”
He sees several potential scenarios developing:
Consolidation accelerates: Domestic automakers have been encouraging their dealers to consolidate, especially in metropolitan markets like Chicago, Boston and Los Angeles. However, credit availability for potential buyers, the increasing cost of floorplan funding, lack of financial support from automakers, the general reluctance of dealers to sell at depressed values and the unrealistically high price demands by sellers has slowed the orderly progress of voluntary consolidation.
Melville predicts the deal-making environment will improve in the early part of 2009. “Prices will come down as the weak market continues to erode franchise values, and as liquidity returns, we see more consolidation deals proceeding,” he said. “At the same time, more potential buyers for prime commercial real estate will appear.”
An increase in sale/leaseback transactions: Dealers who need to raise cash to fund operations or make facility improvements may want to consider entering into a sale/leaseback arrangement for their land and buildings.
“While the credit crisis could make a sale/leaseback strategy difficult to execute in the near term, dealers should begin considering the option now so they are well positioned when the financial markets stabilise,” Melville said. “One strategic use for the cash would be for dealers to create stand-alone service facilities to better compete with independent repair shops and lessen their dependence on new vehicle sales.”
Dealers subdividing property: “Many dealers, especially those who sell domestic brands, own more real estate than their potential sales justify,” Melville said. “If they are in prime retailing corridors, they may be able to subdivide their land, preserving enough space to operate a leaner and potentially more profitable business, and sell the balance to investors for redevelopment.
“Developing new sources of revenue and unlocking the value of their real estate should be priorities for all dealers,” he added.
