Can a dealer sell too many cars?

In today's environment, apparently so, as dealers find themselves forced to spend more to generate each vehicle sale and pay higher interest rates on hard-to-get floorplan financing.

“It's not unusual for a dealer to have to put a large amount of cash on a sale,” says Raymond Ciccolo, president of Village Automotive Group in Boston. “The more you sell and grow, the less cash you might have. The banks understand that, but the public doesn't.”

Additionally, auto makers are delaying warranty and hold-back payments (money given to dealers based on floor-plan interest rates), exacerbating the cash-flow problem.

“I've actually had dealers call me saying they are happy when they don't have a good sales week, because they don't have the cash to cover it,” says Michael Martin, president of Dudley Martin Chevrolet in Manassas, VA.

One Audi dealer, only half-jokingly, complains he is selling himself into bankruptcy.

Dealers are adjusting by cutting expenses, especially in personnel, advertising and inventory.

A Southern dealer who sells both domestic and import brands tells Ward's he recently laid off 55 employees to keep expenses in line. “It was painful,” he says.

Dealers in Northern Virginia have all-but stopped print advertising, Martin says. Some of that money is being spent on Internet marketing, but not all, he says.

Similar scenarios are being played out across the country, marketing experts say.

Frank Armstrong, president of the World Omni Financial Corp., recounts how a Southeast Toyota dealer flooded the market in November with advertising in an attempt to capture share, but sold only five more vehicles than in October.

Dealers also are turning away inventory to control expenses and improve their cash position.

The Tonkin Automotive Group's Toyota dealership in the Northwest has a vehicle allocation of 75 but is taking only six right now, says Ed Tonkin, the group's vice president.

In an attempt to boost liquidity, Jon Lancaster, a Toyota and Lexus dealer in Wisconsin, says he's cut new-vehicle inventory by more than half and keeps no more than 70 used vehicles on his lot at any one time.