Megadealers See Bright Prospects, Some Dark Spots

Looking back at the lousy car sales of two and three years ago, it was mostly about credit, major automotive retailers say.

Of course, many anxious consumers held off buying cars because of job losses, financial uncertainty, lower home values and other ill effects of the recession.

But when credit went into a deep freeze in 2008 and 2009, the auto industry – one of the most credit-driven businesses in the world – struck an iceberg. Sales sank from 16.4 million in 2007 to 13.4 million in 2008 to 10.6 million in 2009.

That disturbing decline reversed last year with auto deliveries of 11.5 million units.

“It was a credit issue that created the sales drops,” says Michael Jackson, CEO of AutoNation, No.1 on this year’s Ward’s Megadealer 100.

The auto industry is regaining its health one day at a time. “It’s a multi-stage recovery,” Jackson says. “The year 2010 was all about restoration of credit, prime and subprime. We knew there was a demand and passion for autos.” With credit improving, “we knew 2010 would be good,” at least compared with the two years before it.

Various projections call for auto sales to reach nearly 13 million this year. Jackson foresees sales of 14 million to 15 million in 2012, “with the recovery of jobs,” and 16 million in a few years, “with the recovery of housing.”

If the auto industry can reach annual sales of 16 million, “it would be fantastic,” he says at a National Automobile Dealer Assn./IHS conference tied to the New York International Auto Show. “If we get to 17 million, well, we’ll manage it.”

“We’ve been through dire period,” says Lithia’s Sid DeBoer

Other megadealers are feeling much better these days, too. Group 1 Automotive, No.5 on the Ward’s Megadealer 100, reports a first-quarter net income increase of 48.5% and revenues of $1.4 billion, primarily driven by a 21.5% increase in new-vehicle sales.

“These results demonstrate our continuing focus on growing top-line revenues in all business segments, while leveraging our improved cost structure,” says Group 1 CEO Earl J. Hesterberg, referring to cost-cutting efforts taken when times were tough.

Jackson doesn’t see a return to the days of easily available credit that propelled annual vehicle sales to what he calls artificially high levels of 17 million units during the last decade.

“Credit will never be what it was before, and that may be a good thing,” he says, questioning the financial wisdom of consumers who remortgaged their homes and used the money to purchase cars.

Luring them to buy were auto makers who offered generous, yet costly incentives to ease inventory gluts caused by overproduction. It didn’t work well.

“You can’t buck consumers,” says Brian Carolin, senior vice president of Nissan North America. “If they are not in the market to buy a car, you can’t force it. You have to shut down the production line.”

Bright as the future may look now, dark spots, such as rising fuel prices, leave some auto industry people nervous.

Gasoline prices of $5 a gallon could represent “the consumer freak-out level,” Jackson says. “If so, we could have major problems in the industry and the economy. Hopefully, we can duck that.”

“I’m bullish,” says Fritz Hitchcock.

These better post-crisis times feel good, but some people remain shell shocked.

“A lot of people were hurt, and are just on the verge of healing,” NADA Chairman Stephen Wade says. “I feel good about where we are going, but it’s a bit unsettling.”

Current inventory shortages linked to the March 11 Japanese earthquake and tsunami represent “the elephant on the table,” says Robert Kurnick Jr. president of the Penske Auto Group, No.2 on the Ward’s Megadealer 100.

“It is an obstacle, and we have to deal with it,” he says of the production shutdowns in Japan and North America. “But because we went through the worst in the last two years, we have some near-term experience to work through it.”

It is ironic that a major inventory shortage should occur as the auto market comes back, but dealers are adjusting to that predicament, says Sid DeBoer, chairman of Lithia Motors, No.10 on the Ward’s Megadealer 100.

“The dealer body is responding to fewer cars to sell,” he says. “I’m an optimist. We’ve been through the dire period.”

The overall economy is in relatively “good shape,” he says. “Eighty percent of people have really good jobs. That’s what is driving expected auto sales of 13 million this year.”

Another driver is a pent-up demand from the delayed purchase “of 10 million vehicles,” DeBoer says, estimating the number of lost auto sales the recession caused.

Another dealer optimist is Fritz Hitchcock, head of Hitchcock Automotive Resources, No.63 on the Ward’s Megadealer 100.

“I’m bullish,” he says of today’s auto market. “Business is coming back. Everybody is enjoying an upsurge. My profits for the first quarter are up 45%.”

A vital sign of auto-industry health is dealer profitability. Auto makers cannot do well without a retail network making money, Kurnick says. “It’s impossible.”

Car buyers are returning, but with a new attitude, say executives who run major dealership chains.

Today’s customers are more conservative, Jackson says. “They are more frugal and prudent.” He cites “a different psychographic.”

Wade also senses “a more conservative mood” among buyers. “People are concerned about debt, about gasoline prices. A lot is on their minds. They still want the Jeep Grand Cherokee with all the bells and whistles on it. But they wonder if they can afford it.

“I grew up with my father telling me about the Great Depression,” he recalls at the NADA/IHS conference. “Now, I’m telling my kids, ‘Look in front of you.’”

In many parts of the nation, America’s love affair with the automobile remains strong, says DeBoer whose firm operates several stores in the heartland. “In rural America, where we sell a lot of vehicles, people love their cars more than their houses.”

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