This year should be better than 2009, but stay alert
Most dealers I know feel that, unlike past recessions, this recovery will be much slower and with a greater sense of fragility.
But while the economy may be in recovery mode, this does not mean we are out of the woods yet. For many dealers, 2010 will be more challenging than 2009.
The primary challenge that dealers now face is one of patience. They must be able to wait for real economic improvement while remaining focused and strategic in a sales year that, absent “Cash for Clunkers,” should marginally resemble fourth-quarter 2009.
Regardless if you are a metro or rural dealer, domestic or import, luxury or non-luxury, 2010 will be won by those dealers who know their way around both their dealership and its financial statement.
A dealer who feels comfortable enough to turn over daily operations of the store to a general manager and expect everything to be okay as an absentee owner is taking risks.
Dealers just cannot afford to stray from their stores in2010, because ultimately it may become a pivotal and market-defining year. Consider the following potential challenges:
- Banks remain exceptionally skittish and will likely not begin lending at levels that will be productive for dealers. Much like 2009, floorplan lending is limited and working capital lines seem to be a thing of the past.
- Many dealers were rescued from the brink of bankruptcy in 2009 by “Clunkers,” but 2010 likely will lack a similar savior.
- Part of the recovery in 2009 was aided by low fuel costs. Those now are going up. There is a direct correlation between consumer discretionary spending and fuel costs; any comparable increase in prices may stifle the recovery.
- The Fed will likely begin raising interest rates in 2010 in an effort to control inflation. This will impact most dealers' floor planning, working capital and mortgage costs.
- Commercial real estate is not expected to rebound in 2010, impacting the ability of dealers to either tap equity in real estate or allow them to operate on a level playing field compared to dealers who entered the market post-2008.
- High unemployment rates have enabled many dealers to significantly reduce compensation costs (a dealer's largest expense) to provide a competitive advantage over comparable dealers who have maintained compensation plans and level from pre-2008.
- Manufacturers will undoubtedly use the pending economic recovery as an excuse to continue their trend of compressing dealer gross profits through modifications to dealer invoice discounts and back-end money.
- Signs of economic recovery will re-embolden manufactures to return to the pre-2008 dealership facility image programs. Many manufacturers will begin to lift their self-imposed moratorium on pushing dealers to upgrade their facilities (GM exclusive facilities, showroom within a showroom, etc.).
- On average dealers represent approximately one-fifth of states' sales tax revenue. With declining sales, both state and federal governments will likely look to dealers to aid with making up with collection deficits (LIFO Repeal, Franchise Taxes, etc).
- Dealer acquisitions will be primarily limited to large and well-capitalized. This will limit emerging dealers from participating in distressed store opportunities. In many markets, large groups will then be able to solidify their presence.
So, while things may be better than they were a year ago, this is certainly not the time to disregard all the hard effort that got you to 2010. The key to this year is to remain focused on your operations and not get caught up in the recovery hype.
Phil Villegas is a principal at Dealer Transactional Services, LLC. (an affiliate of Morrison, Brown, Argiz & Farra, LLP) in Miami, FL. He can be reached at PV@DTSAUTO.COM or 305-318-8515.
Questions or comments about this column? Send us an e-mail at Dealers@wardsauto.com.