DETROIT -- Dealers' profits remain "fragile," so better support from automakers, lower interest rates from lenders and a lessening of government regulations are needed for dealers to prosper, Group 1 Automotive Inc. CEO Earl Hesterberg told the Automotive World Congress today.
New vehicle margins remain "well below" pre-recession levels, he said.
Automakers "have generally not grasped the importance of this fact or have not taken action to address it," Hesterberg, 58, said. "Brands with stronger dealer grosses have stronger dealer networks and elicit more dealer resources in terms of better personnel, more advertising, and increased facility investments."
Group 1, of Houston, ranks No. 4 on the Automotive News list of the top 125 dealership groups in the United States with retail sales of 97,511 new vehicles in 2010.
Among other factors that have chipped away at dealers' profit margins, Hesterberg cited government regulations; a shift in mix to smaller cars, which have smaller profit margins; and the increasing impact of the Internet, which gives customers more insight into pricing than in the past.
Hesterberg said government needs to consider more carefully the impact its laws have on dealership operations and costs.
"The recent financial reform legislation, the Dodd-Frank Act, has created additional work and expense for dealers," Hesterberg said.
For example, the act requires dealers to send Adverse Action Notices to consumers requesting car loans which are not approved as requested. Hesterberg said Group 1 is sending out more than 9,000 of these letters per month.
"The absurd fact is that the lenders are required to send out the same letter," Hesterberg said. "Good for the post office, bad for us from an expense and customer satisfaction perspective."
He also alleged that rules in Texas, when a husband and wife buy a car, require that they sign documents up to 56 times and initial those forms nine times.
"When dealers are not sending out adverse action letters to customers, getting customers to sign dozens of documents and then hopefully getting all of those documents properly filed, we are sometimes conducting meaningless discussions" with automakers, Hesterberg said.
That's all time, he said, "which could have been better spent on trying to sell more vehicles and satisfy more customers."
Hesterberg said lenders should offer low retail interest rates to dealers even if those dealers don't finance their vehicle inventory with that bank. Financing for a dealership's vehicle inventory is called floorplanning.
"We still find some captive finance companies withhold the best retail finance rates and terms from their dealers" who do not elect to floorplan with them, Hesterberg said. "This was the preferred practice at GMAC and Chrysler Financial, and we all know how that turned out."
Over the past two years, Group 1's floorplan interest rate through its lender syndicate hit a low of about 1.15 percent, Hesterberg said. But the rate from dedicated captive floorplan facilities during that time was 4 to 5 percent, he added.
"Would our shareholders really want us to finance our inventory at an interest rate three times higher" than what Group 1 could find on the open market, Hesterberg asked.
He said retail finance terms should be linked to "the volume of business provided from the dealer to the lender so that the lender has a full spectrum of credit risk and everyone benefits from maximizing sales volume."
Hesterberg said he worries that manufacturers might lose the production discipline they have shown recently. That would lead them to saturate the market with more cars than customers want — and would return the industry to the days of high incentives, lower transaction prices, smaller dealer gross profits and lower residual values.
The large inventories of full-sized trucks last summer combined with the high incentives attached to those vehicles gives Hesterberg pause.
Even the luxury brands are not immune to oversupply, Hesterberg warned.
"The luxury brands seemed to be locked in a perpetual sales contest no different than the Ford vs. Chevy wars of several decades," Hesterberg said. "Quantity seems to be surpassing quality and brand value in terms of emphasis."
Hesterberg warned that as the Japanese brands attempt to recapture sales lost in 2011 after the March 11 earthquake in Japan, there is a "potential for oversupply" of their vehicles.
"Any return to an oversupply condition," he said, "will put more pressure on dealer new vehicle profitability."
Prior to joining Group 1 as CEO in April 2005, Hesterberg was group vice president for North America marketing, sales and service for Ford Motor Co. from October 2004.