||Auto Dealers Adjusting to New Business Environment
Auto Dealerships Are Making Money Again, But in Markets That Lost the Largest Percentage of Dealerships, the New Normal Means Different Things
The reduction of the dealership network over the past four years has left survivors in prime financial shape.
The average dealership net pretax profit as a percentage of sales was 2.1 percent in 2010, the highest since 1986, reports the National Automobile Dealers Association. The net pretax profit was 1.5 percent in 2007 before the economy crashed.
Dealers have learned to make more money with fewer sales because the downturn forced auto retailers to streamline operations. Low interest rates have slashed floorplanning costs.
But while financial results have improved at individual dealerships across the industry, Detroit 3 dealerships in some markets are still waiting to reap the benefits of the dealership consolidation.
The anticipated increase in sales and service business -- and a corresponding boost in profits -- that was supposed to kick in after the dealership consolidation has yet to happen.
In 2007, among all domestic and import brands, the average U.S. franchise posted 322 new retail registrations. In recovery year 2010 -- with fewer Detroit 3 dealerships and lower industry sales volume -- that dipped 11 percent to an average 286 per franchise, based on retail registration data from R.L. Polk & Co.
Although one of the reasons given by General Motors and Chrysler for eliminating nearly 2,800 dealerships was to increase dealership throughput, all of the surviving Detroit 3 brands except Buick (up 3 percent) and Ford (off 4 percent) suffered larger per-franchise losses than the industry average.
Despite the lack of gains in throughput -- and loss of share in some of the markets that absorbed the largest percentage of reduction in dealerships -- surviving Detroit 3 dealers say they are making the best of the new, leaner retail networks.
The economic recovery is fragile. Some of the factors helping to revive profits -- historic low interest rates and high used-vehicle values -- are variables beyond dealers' control, such as gasoline prices and the economy.
Dealers also worry that renewed factory pressure to improve dealerships could burden them with debt, undermining the efficiencies they put in place during the recession.
"Bad times breed good habits," says Tyler Corder, CFO of Findlay Automotive Group, a group of 24 dealerships based in Las Vegas. "The challenge is to sustain that when times get good again."
The last time dealership net pretax profit margins were this good was in 1986, when Ronald Reagan was president, the average price of a new car was $12,950 and gasoline hovered around $1 a gallon, government data show.
World Class Automotive Group in Spring, Texas, helped Ford close down four Ford and three Lincoln stores in Dallas and Houston to increase volume at its own five Ford stores.
"Profits are soaring," says World Class CEO Randall Reed. And Reed's Chrysler-Dodge-Jeep store, which "took a beating" during the bankruptcy, is "now on absolute fire," he says.
"That was the whole intent after bankruptcy when the dealer body was shrunk," says Randy Berlin, global practice director for Urban Science in Detroit. "This was the intended result." Urban Science acted as a consultant for General Motors and Chrysler when the automakers' rejected dealerships sought reinstatement through arbitration.
Over the past three years, the U.S. dealership population saw the biggest decline in history, from 21,461 stores on Jan. 1, 2008, to 17,653 on Jan. 1, 2011, according to the Automotive News Data Center.
The vast majority of those losses were among Detroit 3 brands. As of Jan. 1, there were 18,744 Detroit 3 franchises, a 35 percent drop from the 28,724 franchises that were around at the start of 2008, Automotive News Data Center statistics show.
Urban Science used its own data to compare dealership count in U.S. markets for 2007 -- the year before the market crashed and dealership consolidations began in earnest -- and 2010, after consolidations were mostly finished.
The 10 hardest-hit markets lost 23 to 27 percent of their dealerships and 24 to 32 percent of their franchises, the consulting firm found.
Several of the markets -- such as the Allentown, Scranton and Reading areas of Pennsylvania and the Canton, Ohio, area -- consist of older, industrial cities in the Northeast and Midwest. Urban Science's Berlin notes that the South, with its growing population, suffered fewer declines.
All of the purged areas had way too many dealerships, he says.
Andy Daub, a partner in the Brown-Daub Auto Group, a group of seven mostly domestic-brand stores clustered around Bethlehem, Allentown and Easton, Pa., says there are still too many dealerships.
He says vehicle sales are on the rise but still about 10 percent lower than they were in 2007. Last year, Daub says, the group sold 4,000 new and 6,000 used units.
Post-recession profits are better, but only because inventory is tight and his organization cut back expenses, he says.
"I hope it lasts," Daub says. "But some market changes are based on factors out of our control."
It will take more than a slimmer dealership network to sustain the industry's fatter profits.
"New-vehicle sales are improving, but new-vehicle gross profits generate less than 40 percent of the total gross profit of a dealership, and in many cases generate less than 30 percent of gross profit," says Carl Woodward, a Bloomington, Ill., accountant with more than 200 dealership clients in 15 states.
"Though new-vehicle sales are important, the other departments collectively are more important," Woodward says.
The service and parts and used-vehicle departments have contributed heavily to dealership's glowing results.
In 2010, NADA says, the average dealership's absorption rate was 59.6 percent, the highest in more than 10 years. The absorption rate is the percentage of dealership overhead covered by gross profit from service and parts.
"There has been more emphasis on such things as dedicated oil change lanes, aftermarket parts sales and display areas and other efforts to obtain more service and parts sales," says Paul Taylor, NADA's chief economist.
The tight supply of used vehicles has raised values and helped increase profits in used-vehicle departments. In 2010, the average retail gross profit per used vehicle jumped 28.6 percent year over year, to $2,214.
But the most critical boost to profits has come from historically low interest rates, which caused a plunge in floorplan expense, the interest dealers pay to finance vehicle inventory.
In 2010, NADA says, the average dealership's floorplan expense fell to the point where it was canceled out by factory incentives, resulting in a credit balance of $39 per new unit retailed.
As gasoline, food and other prices rise, dealers fear federal fiscal policy will change and interest rates will climb to stave off inflation.
"At some point, interest rates have got to go up," says Corder of Findlay Automotive.
Dealers also have improved profits by whacking expenses and paying down debt.
"Right now we're up over last year with fewer stores than we had," says Chris Saraceno, vice president of Kelly Automotive Group in Emmaus, Pa. "We lost two Saturn stores."
Sentry Auto Group, which retails Ford, Lincoln and Mazda vehicles from three Massachusetts locations, also is more profitable on lower volume.
"For instance, we still spend heavily on advertising, but we spend less on a per-car basis than we did five years ago with no loss of effectiveness," says Chris Lemley, Sentry's president.
NADA statistics show the average dealership's net debt-to-equity ratio was 0.97 percent in 2010, the lowest since 2005, and the average return on equity was 24.8 percent, the highest since 2003.
But in addition to gasoline prices and product shortages, dealers recognize pressure from the factories to launch construction projects could put a stop to their progress.
"Many dealers have been asked -- or forced -- to make upgrades in recent years," says NADA's Taylor, explaining the recent multiyear climb in the average dealership's debt-to-equity ratio.
Dealers complain that as industry sales rebounded, the factories have resumed applying pressure to remodel or rebuild dealerships.
Overall, though, dealers say they're in better shape to meet economic challenges they expect to face this year. And they're cautiously optimistic the recovery will continue and business will boom.
(Source: Automotive News, 05/17/11)
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