"Right now there's only one thing that a dealer should be interested in and that is how fast and how low can you get your expenses, and how much cash can you get underneath you?" said David Kelleher, president of David Dodge-Chrysler-Jeep-Ram in suburban Philadelphia. His dealership has largely been shut down, and he was forced to furlough without pay 57 employees last month. And his previously thriving business has been hemorrhaging money. "Even with the doors closed, it costs me a quarter-million dollars a month just to operate my business."
Plea to load up now
Some are suggesting dealers may need to keep at least one eye focused a little farther down the road.
"Please, do not turn down your allocations," Ed Sheehy, president of Southeast Toyota Distributors, told dealers in a monthly video message at the end of March. "I implore you to accept everything you have earned, because the day will come in the not-too-distant future when you will want every one of these vehicles, and more." He said Toyota's suspended production had "effectively eased most of the short-term inventory pressure that we will feel."
Sheehy encouraged dealers to load up now, even telling them to rent an extra storage lot if necessary. "Do not let shortsighted manipulation of your pipeline completely kill your chance to participate fully in the rebound.," he said. "Any pain you feel by taking more than your normal time strategy tells you to take will be very short-lived. And at current production, we will still be hard-pressed to fuel the demand that is coming on the back side of this thing."
Asking dealers facing a crisis time to load up on inventory isn't new. Jim Press, former Chrysler president, pleaded with dealers to do something similar to keep factories working — and cash flowing — just two months before the automaker declared bankruptcy in 2009.
Such pitches appeal to most dealers' innate sense of competitiveness, of not wanting to be disadvantaged because the dealer down the street or in the next town has a better inventory, says Earl Stewart, dealer principal of Earl Stewart Toyota in Lake Park, Fla. But being a successful dealer requires self-discipline and the experience to know what might be ahead.
"I've been around too long and seen this too many times," Stewart said. "You just do what good businessmen are supposed to do during times like this: you watch your expenses, you save cash, you don't overreact. When the crisis is over — and they do always end — there's a big lag in getting back up to speed."
While the production shutdown is having its own impact on manufacturers' finances, automakers have a vested interest in keeping their dealerships financially healthy today and prepared for tomorrow, says Brian Smith, COO of Hyundai Motor America.
"We're sitting down with dealers and saying, 'Look, here's the best picture we have for what April, May and June look like. And here's what we know is going to happen in terms of the pipeline of vehicles.' Everybody's been announcing some plant shutdowns along the way, so we're just trying to make sure we overcommunicate with dealers so they have a clear picture of what that looks like," Smith said. "We're sort of looking at a one for one as a starting point and saying at least if you're selling 100 vehicles in the next few months, you want to make sure you're replacing it, as a starting point. And then some dealers are going to move beyond that and others will say, 'No, I'm OK.' We're just trying to be the best partner we can right now for the dealers."
When the crisis abates, he said, "It's likely to be a pendulum swing; there's going to be a lot of pent-up demand. People have had to delay lease returns or extend contracts and are going to want to come back. So there's many dealers that are saying they still want to keep the flow of vehicles coming. We're sort of looking at a one-for-one as a starting point and saying at least if you're selling 100 vehicles in the next few months, you want to make sure you're replacing it."Ryan Grenmore, president of the O'Brien Auto Team of Bloomington/Normal, Ill., said he agrees that there will be pent-up demand in the market when it returns, but he said his 90 days of inventory is good enough for now.
"I do believe there's going to be some pent-up business. I don't know to what degree — no one knows. I think everybody in the country is overstocked right now, unless you're a Subaru dealer or a really high-volume Toyota dealer," said Grenmore, whose group includes Honda, Nissan, Hyundai, Genesis, Kia and Mitsubishi franchises. "I can tell you I'm not going to be taking a bunch of cars. There's too many variables. I don't even have all the staff [needed] to take the cars in."
Dealers ultimately will make their decision whether to stock up based in large part on whether their floorplan expenses are manageable. Several automakers and lenders have offered to help struggling dealers by either deferring floorplan payments or offering subsidized floorplan interest.
But someday, even those debts come due, said John Luciano, general manager of Street Volkswagen in Amarillo, Texas.
"I don't see us coming back to a 17 million [vehicle selling rate]; I see us coming back to a 14 or 15 million rate, and staying there for a while. If the market doesn't come back, then pretty soon you start asking yourself, what all these cars are worth," he said. "All of this floorplanning help and deferment is wonderful, but ultimately, you're going to have to pay."
Jackie Charniga, Laurence Iliff, Urvaksh Karkaria and Hannah Lutz contributed to this report.