Minority Dealers Battle for Survival

While the recession has hammered thousands of dealers and forced hundreds out of business, minority dealers, as a group, are threatened with extinction as they battle history, auto makers and the economic recession for their survival.

“We’re fighting to make sure we don’t become extinct. It’s an awful, awful situation,” Desmond Roberts tells Ward’s after returning from Washington, where he and other dealers recently met with Congressional leaders to press their case.

Roberts, a Chicago area African-American dealer, is chairman of the National Association of Minority Automobile Dealers. He plans to run for reelection because he’s not ready to give up the fight. So far, his three General Motors Co. and Chrysler Group LLC dealerships are among the survivors.

“Dealers are not asking for bailouts or government loans, just to protect the assets that they’ve accumulated over the years. It’s a very touchy situation,” Roberts says.

Minority dealers didn’t start entering the business until the late 1960s, and it wasn’t until the 1980s that auto makers became serious about boosting their number when they established minority-dealer programs, which helped find store locations while providing financing and training.

However, the programs often fell short of their desired goals. Often, the only locations available to minority dealers were underperforming stores in depressed areas. Minority candidates lacked the capital needed to buy into the more attractive brands and locations.

“We had the worst opportunities in the worst locations," Roberts says. “And 95% of minority dealers are first-generation owners, lacking generational wealth.”

Josefina Hooker, of Cuban ancestry, operates Freedom Pontiac Buick GMC in Odessa, TX. The oil-dependent area didn’t get hit by the economic downturn until April of this year, but now suffers from nearly 9% unemployment.

Damon Lester, President of NAMAD

“All dealers have struggled since the economic meltdown, but I feel minority dealers have fewer resources financially to draw on, and it is very difficult to be able to withstand this kind of a storm,” she says.

”Most stores we were able to acquire were not plum – they had failed in some way. We start out with stores that have usually failed. We also started with limited funds and minimum working capital. As first generation dealers, we usually put everything we had into our start up.”

The recession amplified dealer troubles, with plunging sales and credit almost impossible to find.

“They don’t have legacy funds to borrow on,” says Marjorie Staten, executive director of the GM Minority Dealers Assn. “They are closing because they have no access to finance – no car sales and money floating through their dealerships. Finance arms look at these dealerships as toxic assets.”

After almost four decades of slow progress, minority dealers worry the latest wave of OEM cuts could wipe out any gains.

There were 1,500 minority dealers in 2002. By 2008, that number had dropped to 1,108 and likely will fall below 900 this year, says NAMAD.

The domestic industry will cut some 3,300 dealers by 2010. Some reports estimate 240 minority dealers will be closed among all brands this year, according to NAMAD.

These may sound like small numbers, but consider the pool. Minority dealers represented about 4%-5% of all dealers in 2008, says Damon Lester, president of NAMAD.

GM is eliminating some 2,600, or 40%, of its 6,200 dealerships through terminations and sales of certain brands. It numbered 299 minority dealers as of May, but 50 of these received termination letters this summer, NAMAD says.

Of the 789 dealers Chrysler eliminated in June, 11 were minority-owned stores. Another 39 have declared bankruptcy this year.

“We are reverting backward to the minority dealer numbers of the 1980s,” Lester says – the last major recessionary period in dealer and auto maker history.

Staten echoes concern that the slow gains minority dealers have made quickly are being eroded.

“GM has struggled for 40 years to obtain an equitable representation of minority dealers in its network, compared to the U.S. ethnic minority population (34% per census figures),” she says.

Ironically, not all GM minority dealerships being eliminated will remain closed. “Some are being turned over to new and more prosperous owners,” Staten says.

Hooker, who became a GM dealer in 2001, says she still believes that GM provided the best opportunities for minorities to become dealers. “We don’t want that to go away. If GM succeeds, I succeed.”

The same scenario is happening with Chrysler as it seeks to add 140 points in the wake of eliminating 789 of its dealers this year.

Ford Motor Co. has avoided drastic dealer cuts this year by refusing government bailout money. But it has done its share of dealership paring the last few years, trimming its retail network by about 700 stores.

Earlier this year, Ford disbanded its minority-dealer program. The auto maker informed the 62 dealers in the program they could buy acquire Ford’s interest in their stores for $1 provided they secure the financing and close the deal by Sept. 30. All 62 dealers agreed to the plan.

Lester estimates Ford Credit has agreed to provide finance to about 60% of the 62 dealerships so far. Any stores turned down by Ford Credit likely will not be able to find financing elsewhere.

NAMAD, along with the National Automobile Dealers Assn., after a lengthy battle, convinced the Small Business Administration in April to relax loan standards, making up to $2 million available for operating costs to each of 10,000 eligible dealers.

Under a separate program, the SBA is offering guarantees for 75% of wholesale-vehicle loans ranging from $500,000 to $2 million.

The problem, says Lester, is the banks have yet to start lending the money on a wide-scale.

Another problem is GM and Chrysler do not have their own captive-finance firms, which leaves their dealers at a competitive disadvantage. GMAC, now a bank holding firm, assumed the responsibility of providing floorplan financing to Chrysler dealers after the auto maker declared bankruptcy.

“There needs to be a creation of a captive for both companies,” Lester says. “Otherwise, our dealers are going to continue having problems.”

Lester is looking outside the traditional means to find sources of capital for NAMAD’s dealers. He’s talking to venture capitalists and private-equity firms to convince them to partner with his members.

“Right now, it’s a matter of building their confidence in the industry,” he says.

Some of the import brands may offer opportunities to minority dealers as well. Those such as Hyundai, Kia, Volkswagen (one of the world’s largest auto makers) and Mahindra are looking for dealers to expand their networks. Lester would like to see some of his dealers access those opportunities.

Hooker hopes closing dealers, as entrepreneurs, can get into other stores, or at least save their current dealerships and continue to have opportunities.

“But we have to remember the world has changed as a whole, not just in our industry,” she says.

– with Cliff Banks