Future Bright for Survivors

DETROIT — It's a great time to be a car dealer, despite the troubles many of them have seen, says Sheldon Sandler, who facilitates the buying and selling of dealerships as CEO of Bel Air Partners.

Maybe it's not so hot now for dealers representing General Motors Co. and Chrysler Group LLC, which eliminated thousands of their retailers last year — with more cuts to come — as part of those auto makers' post-bankruptcy reorganization plans.

But Sandler predicts more stability and higher margins for the surviving dealers who, reacting to the recession, “have cut fat out of their dealerships and are not going to be quick to add overhead again.”

Dealers in the best shape run big operations with diverse brand portfolios and stores in various markets, he says at the Automotive News World Congress here. “It has dawned on everyone that being a single-point dealer or a dealer with two Saturn franchises is too risky.”

After what the industry has weathered in the storm of 2009, “the trend is to take as much risk out,” he says.

Dealers operate with a variable-expense structure, “meaning they can cut expenses on a dime,” Sandler says.

Consequently, agile dealers reacted quickly to the drastic drop in sales by reducing personnel, readjusting compensation plans, cutting inventory and launching innovative Internet strategies.

“Dealers can be flamboyant individuals, but on the financial side of life they are very conservative,” Sandler says.

When new-car and even used-car sales go soft — as they did dramatically with the former and less so with the latter — dealers can switch the emphasis to other aspects of their business.

“They have parts and service which are increasingly important as new-car margins become smaller,” Sandler says.

With leaner operations and less competition, surviving dealers are positioned to enjoy more stability and higher profits, even though they may sell fewer cars than before, he says.

The automotive retail network system “has been around for 90 years — and it works,” Sandler says.

One long-time automotive system that doesn't work and demonstrated that disastrously is the “production push” model, says Mike Jackson, CEO of AutoNation, the country's largest dealership chain.

“No one had screamed more for the death of production push than me,” he says at the conference held in the same complex where GM is headquartered. “It is a system where labor is a fixed cost, and you stuff the channel with inventory like you would a Thanksgiving turkey.

“Then you use incentives to push inventory, but at the same time you damage the brand and vehicle residuals.”

Jackson credits the government task force — established to oversee GM and Chrysler after a federal financial bailout — with killing the dragon.

“They didn't give a bridge loan and have it go to the same stupid business model on the other side,” he says. The domestic auto industry came to terms with the reality “that you can't keep producing vehicles people don't want.”

Japanese auto executives show much more astuteness in identifying and pulling the plug on poor-selling vehicles, Jackson says. “When I meet with them, their first question is, ‘What sells and what doesn't?’ There is no room for games.”

“The Japanese are more rational, agrees Walter Huizenga, owner of Gezon Motors, a Grand Rapids, MI, dealer that sells Volkswagens, Nissans and Mitsubishis. “They look at what works, while the Chrysler dealer across the street from me is being forced to take on 90 more cars.”

The way to quickly respond to market product demand is with a manufacturing process that can quickly stop making one vehicle and start making another when necessary, Jackson says.

“There is a whole new skill set this town needs to take on,” he adds. “We have a whole new chance.”