1 in 5 Car Dealerships could be out of business next year

[Flash G]

DETROIT (Reuters) - As many as 3,800 U.S. car dealerships could fail this fall and into 2009 -- nearly one in five -- because of weak sales, increased operational costs and the credit crunch, according to a forecast released 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 Paul Melville, a partner with Grant Thornton LLP, which issued the forecast.

"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," he said.

Bill Heard Enterprises Inc, one of the biggest General Motors Corp Chevrolet dealerships, filed for bankruptcy on Sunday, citing operating losses, decreased demand for vehicles and lack of credit.

At its peak, Alabama-based Heard's revenue was about $2.5 billion per year, according to the bankruptcy filing.

With U.S. light vehicle sales predicted to drop to the 13.7-million-unit range in 2009, the study said that about 3,800 dealerships, about 18 percent of the total number of U.S. car dealerships at the end of 2007, will need to close.

U.S. vehicle sales are expected to be flat next year with any recovery in demand expected only in 2010, as consumers struggle with tight credit, high gasoline prices and a housing market slump.

The drop in demand has been particularly hard for Detroit-based automakers GM, Ford Motor Co and Chrysler LLC. GM's sales were down 18.5 percent in the first eight months of 2008 while Ford's sales declined 16 percent and sales at Chrysler, controlled by Cerberus Capital Management, dropped 24 percent.

Thornton said apart from new car sales, other sources of revenue for dealers, such as used car sales and financing profits, are also falling.

(Reporting by Poornima Gupta; Editing by Brian Moss)


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[Noisycow]

Not just car dealerships imo, 1 in 5 of all businesses.

[Bavarian Motorist]

Quite scary...

What is the problem with domestic automakers? I can't seem to pinpoint anything objective, except their brand image sucks, their marketing is smelly at best, and they always seem to be the followers instead of the leaders. Questionable styling as well, and too much reliance on nostalgia.

[apk919]

Originally Posted by Bavarian Motorist

Quite scary...

What is the problem with domestic automakers? I can't seem to pinpoint anything objective, except their brand image sucks, their marketing is smelly at best, and they always seem to be the followers instead of the leaders. Questionable styling as well, and too much reliance on nostalgia.

Legacy costs. They gave up too much in benefits and workplace flexibility to labor unions. Now they will go under together...

[PhlypSide]

^^^ not just the running of the business.... but also the general bland and crap selection of seemingly endless SUVs and "beige" FWD sedans and coupes (all staples of rental car fleets) -- sadly even ToyCo is headed down this route with no real sports cars but hey at least they have a few interesting products and are very reliable by comparison.

[apk919]

Originally Posted by PhlypSide

^^^ not just the running of the business.... but also the general bland and crap selection of seemingly endless SUVs and "beige" FWD sedans and coupes (all staples of rental car fleets) -- sadly even ToyCo is headed down this route with no real sports cars but hey at least they have a few interesting products and are very reliable by comparison.

Because of the embedded legacy costs, Detroit automakers cannot make a profit on small, fuel efficient, inexpensive cars. The only vehicles they can make a profit on are large sedans, SUV's, and trucks... not a winning strategy in today's environment.

[Gizmo3000]

Originally Posted by apk919

Because of the embedded legacy costs, Detroit automakers cannot make a profit on small, fuel efficient, inexpensive cars. The only vehicles they can make a profit on are large sedans, SUV's, and trucks... not a winning strategy in today's environment.

It's interesting because Ford apparently does swell over in Europe
-where F-150's are almost unheard of!?

[Abe]

Originally Posted by Bavarian Motorist

Quite scary...

What is the problem with domestic automakers? I can't seem to pinpoint anything objective, except their brand image sucks, their marketing is smelly at best, and they always seem to be the followers instead of the leaders. Questionable styling as well, and too much reliance on nostalgia.

Nothing to do with the brand or image as BMW, MBZ, AUDI, LEXUS & PORSCHE are all feeling the pain.

I was on the retail side of the business for over 12 years and still have various connection with new car retail dealers and one of the many problems are banks.

Banks aren't approving deals like they used to and in a country where the average consumer's fico score is low to mid 600's and the fact that most new car dealers sales were with consumers with an even lesser score, banks are declining deals. Some highline dealers are even having problem with consumers who score 700+. Banks are now looking at EVERYTHING to ensure the consumer does not default on their loan.

In the past, all you needed was a heart beat and they'd approve you and I'm sure some banks are paying the price...as they should.

[glb]

Originally Posted by apk919

Because of the embedded legacy costs, Detroit automakers cannot make a profit on small, fuel efficient, inexpensive cars. The only vehicles they can make a profit on are large sedans, SUV's, and trucks... not a winning strategy in today's environment.

Originally Posted by apk919

Legacy costs. They gave up too much in benefits and workplace flexibility to labor unions. Now they will go under together...

correct on both counts. Detroit made a bad decision dealng with unions decades ago, not thinking about the long term (a common US busiiness error).

this amts to over $1500/car for Detroit.

the union gave detroit a break on new hires recently, but the bulk of problem exists.


Light trucks/suvs were huge money makers, some had $14-20k profit. I am told that the cost of buildingone of these was only incrementally higher than building a mid-size family sedan .

A few yrs ago, Chrysler showed a $35/car profit on family cars; many still thought it was simply an acctg trick. Most yrs, no US automaker showed a profit on sedans.

Note that with costs $1500 higher and with surveys showing that americans will pay ~$2 grand higher for a Honda or Toyota, it's got to be tough.

But, they saw nothing coming, another common trait, toyota & honda think way further in advance, over 18 yrs.

gm and ford build some good cars in europe, but is only now starting to bring them over.

[Bavarian Motorist]

Originally Posted by Abe

Nothing to do with the brand or image as BMW, MBZ, AUDI, LEXUS & PORSCHE are all feeling the pain.

I was on the retail side of the business for over 12 years and still have various connection with new car retail dealers and one of the many problems are banks.

Banks aren't approving deals like they used to and in a country where the average consumer's fico score is low to mid 600's and the fact that most new car dealers sales were with consumers with an even lesser score, banks are declining deals. Some highline dealers are even having problem with consumers who score 700+. Banks are now looking at EVERYTHING to ensure the consumer does not default on their loan.

In the past, all you needed was a heart beat and they'd approve you and I'm sure some banks are paying the price...as they should.

All that is true, but it has a lot to do with the brand image and marketing. This loan situation has only been an issue for a year or 2. The decline of domestic automakers has been occurring since long before.


Everyone's feeling it, but not like Ford who saw a 34% drop in sales this September!!!!

[Flash G]

Originally Posted by Abe

Nothing to do with the brand or image as BMW, MBZ, AUDI, LEXUS & PORSCHE are all feeling the pain.

I was on the retail side of the business for over 12 years and still have various connection with new car retail dealers and one of the many problems are banks.

Banks aren't approving deals like they used to and in a country where the average consumer's fico score is low to mid 600's and the fact that most new car dealers sales were with consumers with an even lesser score, banks are declining deals. Some highline dealers are even having problem with consumers who score 700+. Banks are now looking at EVERYTHING to ensure the consumer does not default on their loan.

In the past, all you needed was a heart beat and they'd approve you and I'm sure some banks are paying the price...as they should.

Yep.. the tight credit market is going to sink the car industry... which in turn is going to take down a host of other industries with it.

.

[pla_time]

Originally Posted by Flash G

Bill Heard Enterprises Inc, one of the biggest General Motors Corp Chevrolet dealerships, filed for bankruptcy on Sunday, citing operating losses, decreased demand for vehicles and lack of credit.

At its peak, Alabama-based Heard's revenue was about $2.5 billion per year, according to the bankruptcy filing.

.

I can't speak to the general issues, but the Bill Heard story has been all over the papers here in Atlanta for several months. Apparently, this dealership was almost totally based on consumers with bad or no credit, based on subprime car loans. The dealership has been the subject of state trade practice violations for years . . .
-------------------------------
Here's a recent excerpt:

"The complaint leader

Fifteen times from 1991 to 2007, the Governor’s Office of Consumer Affairs cited Heard dealerships for violating Georgia’s Fair Business Practices Act. Fifteen times, the company promised to obey the law.

But regulators contend the dealerships continued deceptive advertising and sales practices in Georgia and elsewhere, even after paying close to $1 million in fines and penalties in four states. The company agreed to the payments without acknowledging wrongdoing.

Georgia sued Bill Heard Enterprises last year after the company sent 10,000 car owners an “urgent potential recall notice” that appeared to come from General Motors. The lawsuit alleges the company was trying to trick consumers into thinking their vehicles were unsafe — when, in fact, it was simply trying to sell them new cars or service plans on old autos.

Heard’s lawyers denied “willful” violations. The lawsuit’s status is unclear now that the Heard dealerships have closed.

Bill Heard has engaged the Office of Consumer Affairs in continual combat for much of the past decade.

In 2003, Heard’s son, an executive with the company, asked Gov. Sonny Perdue’s office to fire the agency’s director; the governor soon replaced the official, but aides denied a connection. For years, Heard has accused the agency of “selective enforcement” by targeting his dealerships. While he acknowledges the agency gets a disproportionate number of complaints about his company, he contends it’s because his competitors instigate them.

Last year Heard asked the consumer agency for a report on complaints against his five Georgia dealerships and five large competitors. During the previous two years, the agency said, 113 complaints were filed against Bill Heard dealerships. The five competing dealers generated a total of 10.

“There is no question that, in terms of complaints and unhappy consumers, this was indeed the leader,” Bill Cloud, a spokesman for the consumer agency, said of the Heard dealerships.

Heard told the Journal-Constitution in 2004 that consumer complaints often came from the customers who couldn’t qualify even for subprime loans.

“They’re going to be mad if they don’t get the car financed,” he said. “Maybe not real mad. But they’re not going to be warm and friendly, you know. They’ll be concerned, maybe, that they did feel that they were put down if they didn’t get financed.”

[apk919]

Originally Posted by apk919

Because of the embedded legacy costs, Detroit automakers cannot make a profit on small, fuel efficient, inexpensive cars. The only vehicles they can make a profit on are large sedans, SUV's, and trucks... not a winning strategy in today's environment.

Originally Posted by Gizmo3000

It's interesting because Ford apparently does swell over in Europe
-where F-150's are almost unheard of!?

Ford's cost structure is entirely different in Europe...

[FLuXeXigeS]

Originally Posted by Noisycow

Not just car dealerships imo, 1 in 5 of all businesses.

+1

[Feffman]

It's no secret Ford, GM and Chrysler have been downsizing their dealership numbers either voluntarily or through general demise. I've a good client who owns a Ford dealership and he's always noted, they don't compete against Toyota, Honda, GM, etc., but rather the other Ford stores in the area. Thus GM, Ford and Chrysler closing stores as market share for the Big 3 has shrunk.

Feff

[mp3moose]

Bill Heard is/was an awful, awful dealership.

[SweetDaddyD]

From the first post. Regarding Bill Heard, the largest volume Chevy dealer in the world going out of business.
What the article fails to mention is they were extreme schiesters with over $50 Million in lawsuits against them. The state has sued them multiple times (and won) for deceptive advertising. (and that is just our state) GMAC pulled their credit from them. They are trying to save face by shifting blame rather than standing up and declaring themselves magnificent bastards that got what they deserved.
They would issue fake recall notices to get people in their doors and work them over. In days of old they would of been publicly hung in the town square for their business practices.

Good riddance.

[doug_porsche]

Isn't a contributing factor that supply capacity is overwhelming true demand.

I have said for years that there are two or three too many manufactures, if you just look at production capability. With that surplus capability, they had to come up with creative financing to get the product out the door.

[SweetDaddyD]

Originally Posted by doug_porsche

With that surplus capability, they had to come up with creative financing to get the product out the door.

Or... A quality vehicle.

I have not seen Honda, Toyota, BMW, etc needing to resort to giving away cars.

[Abe]

Originally Posted by Bavarian Motorist

All that is true, but it has a lot to do with the brand image and marketing. This loan situation has only been an issue for a year or 2. The decline of domestic automakers has been occurring since long before.


Everyone's feeling it, but not like Ford who saw a 34% drop in sales this September!!!!

Yes, the decline of domestic automakers have been going down for a long time however, not to the point where it's at now when GM & Ford are losing tons of money and selling off some of their lines to other companies....maybe Chrysler tho.

The piece of the pie is/was so huge that even with the success of Honda & Toyota in the US, the big 3 were still profitable but with gas prices sky rocketing and the way the economy has been, it's no surprise that what made the big 3 so succesful is the very same thing that might ruin them if they do not get their act together and that's SUV's and it's now the reason why you are hearing about Dodge and their EV car.

To me, the irony of all this is that I have no doubt if gas prices went down and the economy was back on track, you'd still see the big 3 ramp up productions on trucks and suv's and brand imaging would mean nothing to the better half of the country.