Deal or No Deal?

Although Detroit's auto dealers are in better shape than their counterparts across the country, the national credit crunch is putting a squeeze on prospective buyers. How local dealerships are alternating their sales approach at the dawn of a new automotive age

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“The pressure was on,” recalls David Fischer, CEO of the Suburban Collection, the Troy-based auto retailer with 43 shops in Michigan and Florida. As the gray skies descended over Michigan — literally and figuratively — during the final weeks of 2008, Fischer’s retail network kept pushing to accomplish the seemingly impossible. Despite the steady worsening of the American automotive market, Suburban had come through the first three quarters scoring an increase in same-store sales. But with the overall market tumbling more than 30 percent in the fourth quarter, could Fischer and his team maintain any semblance of momentum?

It wasn’t going to be easy, he realized, especially with lenders tightening up credit because of the global financial meltdown. But, Fischer says, “We had credit sources no one else had,” which Suburban had started developing at the first sign of economic trouble more than a year before. Whether that was the move of a savvy businessman or just dumb luck, it isn’t entirely relevant. Having cash ready for frustrated buyers was just enough to push Suburban to an all-time record in 2008. Now, Fischer adds, the challenge is to keep things going
in 2009.

Certainly, if Suburban slips, it’ll be difficult to find fault. It’s already one of the few automotive retailers in Michigan — indeed, anywhere in the United States — to see any upside in the current downturn. A wounded economy, tight credit, job cuts, rising prices — it’s a precarious situation that U.S. consumers cannot ignore. October and November new-car sales plunged to an annualized rate of barely 10 million, a sharp and shocking contrast to the annual 17-million-vehicle levels that marked the first half of the decade.

According to data from the National Automobile Dealers Association, roughly two new-car dealers a day closed their doors last September. And NADA reports the attrition rate has only accelerated since then. Even some of the nation’s biggest outlets are proving vulnerable, including Bill Heard Enterprises, a 90-year-old chain with 13 showrooms stretching from Arizona to Georgia. Heard generated sales of $2.5 billion last year, or about 7 percent of the total U.S. volume for Chevrolet.

The Detroit Auto Dealers Association says only one of the trade group’s members closed shop in 2008 — Al Long Ford Inc. in Warren no longer sells new cars, but does offer used vehicles. Detroit’s dealers have “weathered the storm better than other parts of the country,” says Joe Serra, president of Serra Automotive in Grand Blanc, and senior co-chairman of DADA’s big event, the 2009 North American International Auto Show. But, Serra adds, “That fear is out there.” And it’s well-founded, warns Chrysler Vice Chairman Jim Press. “When you take one-third of the market out,” he says, “the number of dealers has to be reduced.”

Still, closely tied to the industry — and often propped up by special sales programs for corporate employees, such as the well-known A, B, and X plans — tri-county dealerships can count on fleet sales and other activities to keep their sales staffs busy — or at least busier than in many parts of the country. It also helps that Detroit is a long- and well-established market, says Doug Fox, auto show co-chair and president of Ann Arbor Automotive.

Michigan dealers are “generally well-capitalized,” he explains, “and have lower overheads than dealers in newer, emerging markets, like Las Vegas or Phoenix.” But Fox is quick to concur with Serra, warning that, in the current economic environment, even the healthiest retailers are worried.

What’s notable about the current recession is the breadth of its impact. In downturns past, Detroit Three brands — which tend to appeal to a less-affluent, blue-collar-buyer base — routinely felt the impact more severely than import marques, such as Toyota. In fact, some upscale nameplates, such as Bentley, BMW, and Ferrari, actually gained ground. Not so this time. The current crisis is taking a toll on the entire automotive spectrum, top-to-bottom. It certainly doesn’t help to be closing factories in Detroit and other parts of the country. But when Citicorp cuts tens of thousands of jobs, the impact spreads into the white-collar markets that support the imports and high-line marques.

What’s more, the credit crunch is making it difficult for even the most secure buyers to get a loan, dealers lament. More than a few banks around the country have reportedly either pulled out of the auto market or tightened up loan policies markedly. In traditional downturns, that’s where the automakers’ so-called “captive” finance subsidiaries, such as General Motors Acceptance Corp. (GMAC), would have stepped in. But even accessing those sources has been more challenging. “Credit is still available,” says Fischer, “although it’s not as easy to get.”

Last year, when a consortium of lenders held up a $30-billion credit line to Chrysler LLC, the automaker’s captive finance arm was forced to abandon its popular leasing program. Other makers, banks, and lending companies have followed suit. Leasing has proved a major means for propping up sales — in good markets and bad — because it permits customers who like to trade in frequently to slash their monthly car payments. That’s been especially important over the last decade, as more and more American motorists have migrated to high-line brands. Leasing accounts for roughly three-quarters of BMW’s business, with marques such as Mercedes-Benz and Lexus close behind.

That’s been a “major problem” for domestic high-line divisions, as well, according to Jim Taylor, who headed GM’s Cadillac division until recently and is now CEO of GM’s Hummer brand. Metro Detroit luxury-car dealers report that leasing routinely accounts for up to two-thirds of their volume — sales they’re struggling to retain through any manner possible.

High-line brands also benefited from the boom in property values, since federal law often makes it possible for a homeowner to use equity lines to finance a car and then deduct the interest. “That’s dried up,” says Bob Carter, general manager of Toyota Motor Sales (USA)’s flagship Toyota division. The impact has been most severe in places where the subprime crisis has hit hardest, such as California and Florida, but it isn’t helping here, either.

In decades past, companies such as Ford and GM raced to line up as many dealers as possible, arguing that the more outlets they had, the more sales hungry retailers would generate. That logic turned upside down in the ’80s, with the rise of leaner brands, such as Toyota, which currently has about 2,000 showrooms in the United States — half as many as Ford, even though it now outsells its American rival. If anything, that means one Ford showroom is likely to undercut another, driving down the typical “transaction price” — a fancy term for what the average customer actually pays. Meanwhile, since the Ford dealer is likely to move less metal each month, he’s more inclined to devote more of his time and capital — nevermind his best salespeople — to a brand, such as Toyota, which generates more sales and profits.

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