Plummeting sales, tightening credit speed up Detroit 3 dealership cuts

Since 1945, Al Long Ford in suburban Detroit had done a brisk business. But last month, owner Tarik Daoud took down the Ford brand blue oval and turned the dealership into a used-car lot.

"We are not losing hundreds of thousands of dollars," Daoud told Automotive News. "We are almost breaking even. We are not closing down out of desperation. But we need to close before it is too late."

Detroit 3 dealers, already weakened by years of eroding market share, got socked in 2008 by a brutal sales slump and a credit crunch. The dire economy is accelerating — and sometimes distorting — the domestic automakers' retail consolidation plans.

But not just Detroit 3 dealers are plagued by depressed sales, frozen credit and reduced profitability. As domestic and import-brand dealers gather in New Orleans this week for the annual convention of the National Automobile Dealers Association, they are less likely to be in a mood to party in the French Quarter — and more likely to swap horror stories.

This special section of Automotive News examines what dealers are doing to survive tough times: slashing costs and debt; looking for new ways to profit from service and parts, finance and insurance, and used-vehicle sales — and for dealers such as Daoud, deciding whether they want to stay in the new-car business at all.

In the Detroit area, five Ford dealers contributed undisclosed sums to help Ford Motor Co. buy out Daoud. But many other dealers weren't so fortunate when they closed.

Last year, about 900 franchised dealerships — two-thirds of them Detroit 3 stores — closed, NADA estimates. This year, NADA expects 1,100 dealerships to close, with more than 80 percent of them holding General Motors, Ford Motor or Chrysler LLC franchises.

Mark Johnson, an industry consultant in Seattle who specializes in dealership acquisitions, says many domestic brand dealers are "in the late planning stage of a resignation."

"Dealers are jockeying to get out of leases and mortgages and to try to stem their losses," Johnson says. "They are calling their competitors, looking to sell a brand off or shut it down and help place employees. They're trying to change mortgages to interest-only and trying to get out of personal guarantees on loans."

In recent years, the Detroit 3 have worked to trim their retail networks, sometimes paying dealers hundreds of thousands of dollars in incentives to merge or surrender their franchises.

Dealership brokers say those incentives dried up as the Detroit 3 ran low on operating cash. Still, dealers who once refused to sell are throwing in the towel.

Richard Malouf, a GM and Ford dealer in North Brunswick, N.J., recently combined his Ford, Lincoln and Mercury franchises under one roof. He also acquired a Chevrolet franchise and now sells the brand at his Cadillac dealership.

"I always wanted the Chevrolet franchise," Malouf says. "But it was never available until (the previous franchise holder) decided to get out of the business."

GM ended 2008 with an estimated 6,426 dealerships, down from 6,653 at the start of the year. Ford Motor estimates it ended the year with 3,790 domestic brand dealerships, down from 4,056 on Jan. 1, 2008.

Chrysler spokesman Stuart Schorr says the company's Project Genesis consolidation plan is making progress. The project is designed to reduce the automaker's dealership count and boost the percentage of stores that sell Chrysler, Dodge and Jeep vehicles.

As of November 2008, Schorr says, the number of Chrysler LLC dealerships had dropped to 3,360 stores from 3,585 at the start of the year. The percentage of dealerships that sell all three brands has risen to 59 percent from 53 percent, Schorr says.

But in some cases, the Detroit 3 are losing dealerships outside of their consolidation efforts — points they might prefer not to give up, analysts say.

"Dealers are just going out of business," says Brady Schmidt, president of National Business Brokers, a dealership brokerage in suburban Los Angeles. "What domestic automakers talked about for years is actually happening now because of economics."

Schmidt says it used to be rare for any dealership to sell for just its hard assets — real estate, equipment, and vehicle and parts inventories. Today, he estimates that one of six dealerships sells without "blue sky" — the value of its intangible assets, including the franchise.

"And they're all domestic stores," Schmidt adds. "We haven't had imports go for no blue sky."

Accountant Carl Woodward works for more than 200 Midwestern dealerships. At the end of 2008, he says, about half of his Ford clients and one-third of his GM and Chrysler clients were losing money.

That's hardly surprising. The U.S. new-vehicle market has plunged from nearly 17 million units a year to a current sales rate of less than 11 million. The smaller figure can't sustain the retail network of better years, analysts say.

"People just can't survive selling so few cars," says Sheldon Sandler, managing partner of Bel Air Partners, an automotive investment firm in Skillman, N.J.

Jim Appleton, president of the New Jersey Coalition of Automotive Retailers, notes that even as dealers' sales volumes grew, their gross profit margins per vehicle declined. As sales have plunged, he says, the profits of Detroit 3 dealers have fallen especially hard.

"They have been pedaling harder and faster just to stay even," Appleton says.

The credit crunch was the final straw, dealers say. Both automakers' captive finance companies and independent lenders are skittish about lending Detroit 3 dealers money to finance vehicle inventories, Appleton says.

That reluctance, he says, "will leave dealers with no option but to close their doors in some cases."

Still, some markets are stable even for Detroit 3 dealerships. The stores are well-established and population growth can support the dealership count.

Bobbi Sparrow, president of the Arizona Automobile Dealers Association, says that state's rapid growth has kept most franchises afloat. Many Arizona dealerships are new and sell multiple brands, Sparrow says.

"We have lost a few dealers," Sparrow says, "but not the huge numbers of other states."

In Rochester, N.Y., "there are a lot of second- or third-generation dealers who can weather the storm," says Brad McAreavy, president of the Rochester Automobile Dealers Association.

At the end of 2002, McAreavy says, Monroe County — which includes Rochester — had 38 dealerships. Today, he says, there are 29 dealerships. But the shrinkage generally has been orderly.

"Four out of the nine were closed," McAreavy says. "The other five moved in with other franchises."

In 2008, the 11-county central Florida market suffered a net loss of dealerships for the first time in 15 years, says Barbara Miller, executive vice president of the Central Florida Auto Dealers Association.

The association's membership peaked at 104 dealerships two years ago but dropped to 94 last year, Miller says. Four dealerships closed; the rest were absorbed by other stores.

Still, the region's losses have been relatively small compared with other metropolitan areas, she says.

Like Florida, California has been hit especially hard by the home mortgage meltdown. Nearly 150 franchised dealerships closed last year in California, leaving the state with about 1,500 dealerships, says Peter Welch, president of the California New Car Dealers Association.

Ninety percent of the shutdowns, he adds, were domestic dealers.

"I wouldn't be surprised if 500 dealerships closed in California in 2009," Welch says.

Some communities have been hit especially hard. Auburn, Calif., lost half of its eight dealerships, Welch says.

Detroit 3 dealers no longer expect blue sky when they sell or close their stores, Welch says. They just hope to unload their inventory.

"It's a triple whammy: the huge curtailment in retail contracts, almost nobody's writing (vehicle) leases, and floorplan has dried up," Welch says.

"This unique climate is going to drastically downsize the dealer body."