More new-car dealers to close
Posted on Sunday, January 4, 2009
Arkansas Democrat-Gazette/BOB COLEMAN Kyle Berry, 17, (left) and his father Kevin, of Gentry, talk about a truck deal with Ed Bayles, a salesman at the Steve Smith Country dealership in Springdale.
Tom Machen started selling new cars in 1974.
Colleagues selling new vehicles are tapping into Machen's industry knowledge these days.
With things looking grim for the industry, they want to know the danger signs that signal the right time to pull out of the business, said the owner of Machen Motors Inc. in Forrest City.
At the end of July, Machen stopped selling new Ford, Chrysler, Dodge and Jeep vehicles after a three-year struggle to meet his expenses.
Making a profit each month became difficult in part because of the increasing investment a dealership makes to stock a new-car inventory and the related expenses required by manufacturers, he said.
"You used to be able to stock a representative supply of every new vehicle that came out for $1 million. Now, you need $3 million or $4 million to do that," Machen said. "The [sales] volume in small towns is decreasing and the population in the state's Delta region is decreasing."
All combined, the numbers didn't add up, he said.
"The only regret I have is that I should have done it three years sooner," said Machen, who only sells used cars now. "A lot of good money was thrown after bad."
Over the past two months at least 13 Arkansas dealerships terminated new-car sales contracts and, along with it, a couple of hundred jobs.
Adjusting to the new market conditions has meant some dealerships are selling more used cars, but more new-car dealership casualties are expected in the state and across the nation as consumers continue pulling back and domestic carmakers reshape themselves.
Domestic automobile dealership consolidation is an ongoing trend that industry insiders trace back as far as 16 years.
And the one-two punch of high gas prices and the collapsing residential mortgage market in 2008 accelerated the sales industry's fallout. The decrease in sales has been accompanied by tightening of credit.
New-car sales are expected to turn around by the second half of 2009, especially in Arkansas, whose consumers have weathered the housing crisis better than other states, said Paul Taylor, chief economist with the National Automobile Dealers Association.
Until then, smaller dealerships such as Machen Motors Inc. will continue to exit the industry.
"I had at one time envisioned that as I reached 65, I'd be able to sell this dealership, land and building to someone else and that I would retire off that," Machen said.
In trying to keep his business running for the past three years, Machen said, he used up a lot of that money.
"But about the time we decided to get out, nobody wanted a car dealer, there is nobody to sell it to," he said. "There's a lot of uncertainty out there."
DOWNSIZING DEALERSHIPS
The Detroit automakers are encouraging downsizing efforts that can now be seen as part of a larger, industrywide contraction.
Chrysler Corp. with its three brands (Chrysler, Dodge, Jeep) has been shedding sales locations since 2006 when it took action to go into private receivership. It instituted "Project Genesis" - a consolidation program that pared down its dealer network to its current 3,300 U.S. locations.
Shawn Morgan, a Chrysler spokesman, would not comment on future closings.
General Motors Corp., which sells cars in the United States under seven brand names, not counting its Swedish Saab unit, said it can regain profitability if it gets a total of 1,750 dealers to exit the market by 2012.
General Motors had 6,450 dealerships in 2008.
Ford, too, said it will have eliminated about 606 dealers by year's end and will have 3,790 U.S. dealerships remaining to sell its three main vehicle brands.
Dealership consolidation is just one part of a multipronged effort the Big Three automakers are undertaking to remake the industry.
In Arkansas, at least 12 more new-car dealers will exit the market by summer, said Dennis Jungmeyer, president of the Arkansas Automotive Association.
The average dealership employs about 33 people.
"We'll lose 10 percent by the summer, which is pretty substantial," Jungmeyer said.
He said that for the past 10 years manufacturers have pushed toward having fewer dealerships, with larger sales volume.
The 260-member Little Rock trade group he heads is affiliated with the National Automobile Dealers Association, which represented about 13,002 domestic new car and truck dealerships that operated about 26,400 franchised locations in 2007.
ADAPT AND SURVIVE
Consolidating new-car dealerships is being accelerated by manufacturers, in part because of the lack of financial support from the automakers, according to Grant Thornton, a consulting firm specializing in corporate advisory and restructuring.
The Southfield, Mich.-based business predicted that 3,800 domestic dealerships, the majority being Big Three dealerships, will need to close in 2009 to keep the industry profitable.
Some dealers have made changes in their operations to help them survive.
Steve Smith, president of Steve Smith Country, a General Motors and Chrysler sales affiliate in Springdale, said he's not likely to be among the next wave of new-car dealership closures.
While he expressed uncertainty about what's happening at the manufacturing level and thinks Chrysler and General Motors Corp. could wind up merging, the sales industry's future looks promising to the Northwest Arkansas businessman.
"I can't worry about things that are out of my control, I have to worry about staying profitable right here," he said.
About a year ago, Smith adjusted the sales mix on his lot. Steve Smith Country now has a larger inventory of used cars, which Smith says are more profitable anyway.
Smith, who claims to have the oldest General Motors Corp. franchise in the Benton and Washington county region, predicts fewer locations will be good for his business.
"Somebody is gonna make cars and you need a place to sell cars," he said. "People haven't quit buying cars."
SOME WON'T MAKE IT
The last time the industry saw a substantial uptick in the number of new-car dealers going out of business was the recession of 1990-1992, said Taylor, the National Automobile Dealers Association economist. Consolidation had been pushed ever since, he said.
However, the availability of credit during the early 1990s recession was restricted as a way to extinguish inflation, Taylor said.
At the peak of that recession, 700 dealerships shuttered in 1991, according to dealers association data.
With the current recession there's no inflation to combat, he said. In his view, this time the recession resulted from a self-induced reduction in credit availability, in part because of the real estate bubble bursting.
The association estimates at least 700 dealerships will have closed when 2008 numbers come in, and another 900 dealerships will close this year - the majority being of the Big Three brands.
Taylor said comparing newcar dealership closings from the 2000-2001 recession to activity in the 2008 recession was difficult since the U.S. carmakers first pushed zero percent financing in 2001. As a result, the car industry recorded one of its strongest sales years in history.
"Sales in 2001 at 17.1 million units sold was second only to 2000 with 17.5 million units, where sales were driven by the stock market bubble," he said. "They were the two best years despite disruptions in the economy that resulted from the terrorist attacks."
When an industry goes through a recession with fewer sales, some dealerships don't make it and so the closure rate will go up, Taylor said.
"Sales dropped for everybody and for a dealer that was already financially pressed things got more difficult," Taylor said. "You lose some of those dealers in the process."
To contact this reporter:
lwhalen@arkansasonline.com
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