Monthly Archives: May 2009

Death of a Thousand Car Dealerships

Death of a Thousand Car Dealerships – Posted to MySpace May 16th, 2009 at 8:22 am

I have some friends who have been asking some important questions about what is going on in the car industry. With all the interest, I thought I would just share some of the answers with you all.

“How can the car companies close dealerships? I thought they were separate companies”

They are separate businesses. However, they are licensed outlets. If the company wants to pull your dealership, they just stop selling you cars. You see, cars on a new car lot are owned by the dealership (usually on 90 day financing through their own banks) not the manufacturer. Most financing agreements state that if a particular car (they do this by VIN number) doesn’t sell within 90 days, the dealership must repay the loan and OWN the car. This is NOT good for them as almost no dealership has the cash to own all those cars… especially in a down and competitive sales cycle.

Some cars sell better than others and some colors are more profitable. Dealerships always want those high dollar ones but it was ruled anti-trust years ago to favor one store over another. They had to institute an “allocation” system that supposedly spread those good cars evenly amongst dealers according to sales volume and independent customer satisfaction numbers.

Now that sales of all of their cars are down, big dealers (many of which sell other companies cars as well) have been pressuring for a change. By reducing the number of outlets, the manufacturer can assure that the remaining dealers get the cars they want to meet a decreased demand. Also, it becomes less likely that a particular car “ages” over 90 days and has to be bought.

The manufacturers and the banks constantly monitor the inventory of dealerships for aging. Too much aging inventory and the banks stop lending for more new cars (cause they don’t want to be stuck selling something that the supposed pros couldn’t sell). The manufacturers will stop selling ANY new inventory to a dealer if things get too stale as all the built up inventory causes panic selling that hurts all dealers and the future resale of that car. Resale value is calculated from average selling prices so sales at a loss make the brand look bad in addition to making those cars harder to lease.

Car leases are in effect a way for a person to drive a car for the cost of what they devalue it over time. Add in some interest for the use of the leasing companies funds while they own the car and you have a rudimentary automobile lease. Cars with high resale value percentages are actually more affordable to lease because there is less depreciation over the course of the lease. The bank sees high value retention and doesn’t demand as much depreciation be paid over the term. Pricing gimmicks kill leases for most domestic cars. End of year manufacturer rebates tell the bank that the cars sold early in the year weren’t worth what they were sold for and they reduce the values on subsequent years cars for this practice. Also, huge fleet sales and inventory clearance loss leader sales do this as well.

Now, the manufacturers these days have their own banks. Financing good customers was a way to dupe the depreciation cycle. Subsidized interest and lease rates don’t effectively go into the resale value calculations. However, now that sales have slowed, the car company banks are holding huge portfolios of loans that are in effect costing them money. Dollars loaned out a 0% cost you at least the rate of inflation, not to mention lost opportunity costs and cash flow.

Now to the grist. Dealers are paid incentives on volume, customer satisfaction, warranty performance, and a whole host of other benchmarks. However, as shown with dealer incentives and rebates, the domestic companies have been stupid. Every dealership gets paid incentive money even at their baseline. Sell 1 car, get several bonus bucks for miscellaneous stuff. Some at time of sale. Some if the customer fills out a survey. Some at beginning of financing. Some at end of the model or calendar year. If you can reduce the number of dealerships, you WILL reduce the absolute amount of bonuses paid out on a similar sales volume. And trust me, the manufacturers need the cash.

Ask me again later and I’ll explain why the unions are the scorpion on the manufacturers backs causing the cash-crunch in the first place..