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.
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Photography Courtesy of Chrysler, LLC.

“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 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 infrequently 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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Automakers and dealerships are using more combined markdowns to move the metal. Photograph: Corbis

So the Detroit Three, in particular, have been steadily trying to reduce their retail ranks, hoping that those dealers they keep will be happier and healthier — and drive up prices. Wholesale cutbacks are both painful and costly, as General Motors learned when it closed down the dying Oldsmobile division earlier in the decade. State franchise laws, which have been heavily influenced by dealers around the country, restrict a manufacturer’s options and can cost a carmaker millions of dollars to buy out and then shutter an unwanted outlet (the buildings and lots have value, though, given that they’re often located along busy thoroughfares).

Thus, attrition might seem an expeditious way of accomplishing the cuts the industry feels it needs, without having to buy every dealer out, but the current crisis might not quite work out as manufacturers had hoped, concedes GM’s Taylor. “We don’t mind losing some of our weaker dealers,” he says, but because they’ve invested heavily to support GM by expanding and upgrading showrooms and building up inventory, he says, “we’re also losing some of our best.”

As this story went to press, it seemed increasingly likely that GM would be forced, as part of a federal bailout, to sell, consolidate, or eliminate at least some of its divisions — Pontiac, Saturn, and Saab appear to be among the most endangered. That could wipe out thousands of stand-alone dealerships in Detroit and other parts of the country. And even where such brands are “dualed,” or paired up with other marques, the loss of sales, in the current climate, could affect struggling dealerships even more.

To some observers, the worsening dealer crisis is no surprise. Industry veterans recall that it’s been more than a quarter of a century since the “retail revolution” was supposed to get underway. There have been some marked changes in recent years, including the arrival of corporate dealer networks, such as Fort Lauderdale-based giant AutoNation. Even before the subprime meltdown, independently owned retailers were becoming an endangered species.

And then there’s the Internet. Former Ford CEO Jacques Nasser was a big believer in online retailing, but he underestimated the role of those pesky state franchise laws. With only rare exceptions, cars in the United States are still sold through showrooms. But the Web has nonetheless become a critical part of the buying process. Studies by marketing firm J.D. Power and Associates indicate that at least 80 percent of new-vehicle buyers do at least some of their shopping homework online. It’s not unusual, dealers admit, for a customer to know more about a product, its competition, and the way the vehicle is priced than the typical salesperson.

“The automotive retail system is no longer working,” at least not the way it did for more than a century, says Scott Painter, one of the people who helped challenge that system with several online ventures, including CarsDirect.com and TrueCar.com, a new Web-based pricing service that launches later this year. Online retailing has changed the balance of power, according to Painter and other experts, giving consumers the tools they need to drive better bargains. It’s also pitted dealers against one another — notably those selling the same brands — as never before. And industry observers say that’s driven prices and profits down to unsustainable levels.

So how to survive? “We work on the things we can control,” Fox says. And that means focusing on the things that can generate profits. At his stores, for example, there’s a new emphasis on the still-lucrative parts-and-service operations (though improved quality in recent years has reduced repair orders). And many new-car dealers, such as Serra Automotive, are shifting focus toward the used-car market, which, in the midst of an economic downturn, typically sees an upswing.

The smartest and most flexible dealers are likely to be those most suited to survive the current crisis, but even then, there’s no guarantee. What seems certain is that the world of new-car retailing will become a fair bit smaller before the current economic crisis is resolved.

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