Never Say Never to More Dealerships But Be Careful, Urban Science Says

Never say never when it comes to adding dealerships, but approach it analytically, says John Frith, vice president of Urban Science, which uses market data to advise automakers on where to locate dealer points.

“To say not to add dealerships ever is as bad as saying add lots of them without good reason,” he tells WardsAuto in discussing the need to find a right balance. “Thoughtful planning is required.”

Dealership consolidations thinned out thousands of stores in the recession years of 2009 and 2010. Most affected were General Motors and Chrysler. They slashed dealership ranks as part of their bankruptcy reorganizations.

The U.S. dealership count stands at 17,903 as of July. That’s up 0.04% since the beginning of the year, but down considerably from more than 21,600 in 2005.

Too few dealerships inadequately serve the market. Too many gluts it, hurting throughput or average sales per store, a diagnostic indicator of dealer health and profitability.

Although the ideal number of dealerships is subject to debate, the current count is contributing to throughput trending towards another all-time high, according to Urban Science’s midyear Automotive Franchise Activity report.

It projects average sales per store to reach 904 units this year, based on vehicle sales of 16.2 million. That would mark the third straight year the U.S. dealership network set a throughput record.

But Frith cautions against adding stores as a reflex to rising sales. So far, such a reaction hasn’t happened.

“Manufacturers and dealers continue to strike the delicate balance between meeting market demands and achieving profitability levels that have allowed the industry to rebound and thrive,” he says

But he adds: “As dealerships approach throughput of 1,000 units in the short term, manufacturers may be tempted to add rooftops to alleviate some of the pressure. It’s extremely important that instead, they focus their efforts on planning for long-term sustainability throughout the inevitable sales cycle.”

Frith doesn’t foresee throughput hitting the 1,000 mark anytime soon. In fact, he expects the streak will end as early as next year.

“We know that automobile sales patterns are cyclical, where there are pauses in growth” he says. “It’s vital to remember current sales levels are near the peak of this cycle and will drop before growing again.”

Planning for an inevitable downturn will help dealers avoid future financial problems, he says.

Most dealership store increases occurred in Florida (nine); California (eight); and Georgia, Kentucky, Michigan and Tennessee (five each). The report says 94% of markets experienced no changes in store counts.

A wild card of the future is if and when Chinese automakers will enter the U.S. market. There’s been talk of that happening for years.

“You don’t know when or how that would occur,” Frith says. “They may come in and partner with someone. But the effect of them showing up would be an increase in dealerships and a downturn in throughput.” 

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