Small dealerships lack the clout and capital to compete

Even the owners of midsize groups recognize the trend. Carbone Automotive Group ranks No. 94 on Automotive News' list of the Top 150 dealership groups based in the U.S. with 10,936 new-vehicle retail sales last year. Yet in September, it was sold to Lithia Motors Inc. so the business would survive.

"Ten years down the road, we don't want to be the 13-point dealership group feeling that pain from the larger groups the way the smaller ones are now," said Enessa Carbone, who was CEO of the Utica, N.Y., group. She is now a Lithia platform vice president. "That seems to be the trend of the future."

Here are the six areas in which small dealers say it is increasingly difficult to compete with larger groups:

Some smaller dealers say their voices get drowned out by bigger dealers that have the manufacturers' ear. The small players struggle to get inventory and can't discount new cars to hit stair-step incentive programs for bonus cash the way bigger players can.

"While the factories aren't supposed to treat dealers differently, they do," said buy-sell adviser and former dealer Stuart Lasser. "They favor dealers that are bigger and more successful and move the metal."

Lasser owns Lasser Advisory Services in Morristown, N.J. He said single-point or small-group dealers, even those with strong franchises, struggle to compete unless they are in a niche or rural market. Lasser represented five selling dealers in transactions this year through mid-September. Each had three or fewer stores. He said three of them chose to sell because of bigger rivals financially outmuscling them, combined with the factory showing little interest in their plight. Other buy-sell advisers echo those observations.

"The biggest complaint I hear is that smaller dealers are not getting the inventory from the manufacturers," said buy-sell adviser George Chaconas of Performance Brokerage Services in Tampa, Fla. "They're squeezing them out." 

Chaconas said some manufacturers also pressure smaller dealers to spend millions to upgrade their dealerships. Many of those dealers cannot afford to do so, he said. 

Former Florida Nissan dealer Mike Bakich said that in the early 2000s "the heat was on" from the factory to update his store. So he spent $4 million and rebuilt it, he said. Over the years, Nissan would press him to do minor upgrades regularly to the tune of a few thousand dollars each time. He could afford it, he said, but he understands that many dealers his size "just don't have the funds or capital to do it." 

There are also programs aimed at reconfiguring the dealer body, which might hurt smaller dealers. 

Consider Cadillac's retail program, Project Pinnacle. It would divide Cadillac's 925 dealers into five tiers based on projected annual sales and assign each tier a level of standards and incentives for hitting targets. Stores in the lowest tier would carry no inventory. 

They would sell new vehicles through a "virtual showroom" and provide service. Critics say the program would disproportionately aid large stores in desirable locations at the expense of smaller retailers, which could go out of business. 

Cadillac has said that stores representing 98.7 percent of the brand's retail volume have enrolled in Project Pinnacle, with most of those that didn't being small stores. Cadillac did not disclose the number of stores rejecting the deal.

Smaller dealers can make profits, but they say they need a level playing field to do so. That playing field is anything but level when bigger dealership groups can afford to move metal the way the manufacturer wants to achieve market-share gains, smaller dealers say.

"The manufacturers are dictating more and more how you're going to retail vehicles and what you're going to need to do to make a profit in their retail model," Tino said.

Bakich, 82, agrees. He had been a Nissan dealer in central Florida for 46 years with two sons in the business. But he and his sons agreed it was increasingly difficult to compete with big dealerships in nearby Orlando. So in May, he sold his store, Lake Nissan in Leesburg, Fla., to a 10-store dealership group.

"The big stores are the volume dealers," Bakich said. "The larger dealers can start out the month discounting vehicles to meet stair-step incentives. I can't do that. It wouldn't be affordable in the long run. I couldn't stay in the game much longer."

Gubbels faced the same problem.

"I can't take a loss on my first four cars to get to my stair-step to survive." A bigger group, he said, can "play the economies of scale and shift inventory around."

Several manufacturers were asked to comment on these issues, and most did not respond. An exception was Nissan North America. Spokeswoman Kristina Adamski wrote in an email: "Nissan enjoys mutually beneficial relationships with a diverse dealer body that includes both small, independent dealers and large, public groups."

She declined to comment on dealer programs or the "performance of individual dealerships."

A smaller dealership in a small market does have some advantages. In some cases, it can attract managers who want a rural, family-oriented community.

But there is the flip side.

"Sometimes you find the perfect person, you get to the interview phase and they fly out to look at your dealership," Gubbels said. "I have had people not even get out of the airport before they say, "No. I thought you were a lot bigger. I'm sorry.'"

Compounding that, many small dealership groups cannot afford to staff a human resources department to help recruit, train and retain top talent. Without strong HR, it's a challenge to foster a culture that attracts women and minorities, Carbone said.

Smaller groups also struggle to have a centralized office to comply with federal and state regulations.

That task falls to the dealer, adding tremendous stress.

Just ask dealer David Ayers, 58. He and his brother, Fred Ayers, 61, owned Ayers Chevrolet in Dover, N.J., since 1986. They sold the dealership, about 40 miles west of Manhattan, in January to a large group, Ayers said. It's now Nielsen Chevrolet. Ayers said selling the dealership that his grandfather bought in 1958 has been a huge relief.

"There are a lot of regulatory issues to keep up on," Ayers said. "The whole notion of liability should something go wrong out there was a little overwhelming at times, so some of the pressures of the business were more than the return was."

The bigger players also have bigger advertising departments and budgets, said buy-sell adviser Chaconas. They can use technology and social media more efficiently to tap new customers, sometimes hundreds of miles away.

"We can't do it at the same volume," Gubbels said. "Bob the farmer orders his vehicle; we take it to his farm, do the trade, sign the paperwork and take the trade back into town. We do it as a courtesy. The big dealer groups do it to sell more cars."

Lithia's CEO Bryan DeBoer said size does have advantages, especially when looking to form partnerships such as the recent one with Carbone. He touts Lithia's ability to gain cost advantages with vendors, get better interest rates with banks and share best practices among its 152 stores.

"The other thing is the ability for people to grow. That's the greatest leverage point you can get," DeBoer said. 

That's because the secret to success is the people who work at a dealership. It is where bigger groups can trump smaller ones by keeping workers, thus saving on training costs and fostering strong morale, leading to stellar customer service, he said. 

But not all big groups see the consolidation of smaller stores into bigger ones as better. 

Open Road Auto Group in Bridgewater, N.J., bought the Tinos' Chevrolet store and Subaru store. Open Road sells about 30,000 new and used vehicles a year and will own 18 dealerships as of Nov. 1, said President Michael Morais. He said it is not any easier to hit factory stair-step programs by manipulating inventory or offsetting a loss at one store with profits from another even when the group is large. 

"Each store has to stand on their own," Morais said. "We're not going to go after market share and say we'll use some of Honda's profits to pump up Mazda."

But Morais agrees with DeBoer's assessment of the benefits of being bigger.

Plus, he said: "Bigger is safer."

"It's a diversified portfolio, and while every brand is doing well right now, when the market constrains, there'll be brands that do well and brands that don't," he said.