Survival of Fittest

AUSTIN, TX – Charles Darwin died in 1882, well before the first car dealership opened. But fellow Englishman Paul Melville refers to Darwin’s work in describing what is happening to dealerships both in the U.S. and U.K.

“It is survival of the fittest,” says Melville, a partner with Grant Thornton LLP, a consultancy to U.K. dealers in various areas, including consolidation of operations.

He draws dealership consolidation parallels between what occurred in the U.K. to what is happening in the U.S.

“We’re helping U.S. dealers by using the knowledge we gained in the U.K.,” Melville tells the Consumer Bankers Assn.’s 2007 automotive finance conference here.

U.K. dealerships underwent massive consolidation in the last decade, he says, citing the following numbers:

“The main driver of the consolidation is maintaining profits,” Melville says. “One dealer becomes responsible for a larger area. A lot of dealers closed in smaller areas.”

The U.K. consolidation movement is not over, he says. “I think half the dealers in the U.K. will disappear in five years. Strong dealers want to see more consolidation.”

He says Germany also has seen a “huge consolidation” of car dealerships.

That country once had almost as many dealerships as the U.S. But the German stores were selling 4 million-5 million vehicles annually compared with U.S. dealers selling 16 million-17 million.

“A lot of mom and pop dealers disappeared in Germany,” Melville says.

He says it is inevitable that significant consolidation will occur with domestic-brand dealerships in the U.S. due to their sales and market share losses of late.

“It will either be driven by the auto makers – if they can afford it –

or it will be Darwinian,” he says. “Those who survive will control a lot of business and be well-run, aggressive, tightly managed dealerships. The fittest dealers will survive, regardless of brand.”

Conference attendees say they are seeing changes.

“We’ve seen Ford stores going away,” says Jeffrey S. Turnley, president of the PNC Dealer Finance Corp. “A lot of people are turning in their franchises and not getting any money for them.”

As many dealers struggle with vehicle sales and gross profits, Turnley worries some may resort to dubious finance and insurance practices of the past, such as payment packing and charging exorbitant prices for services of questionable value, such as anti-theft window etchings.

“I fear some dealers will end up on Dateline: NBC again,” he says of a TV news show that exposed shady F&I practices in 2004.

Turnley doubts every auto maker will see increased sales this year, even though “every manufacturer thinks its unit sales will go up and has counseled dealers to build new $9 million facilities that end up costing $12 million.”

“We’re going to be watching that and keeping an eye on the health of dealers,” Turnley says.

Another thing he’s on the lookout for: “If manufacturers can convince dealers to take more inventory.”

Robert Barry, vice president-global investment research for Goldman Sachs, says, “It is hard right now to convince Ford dealers to invest in facilities. Ford (Motor Co.) has a huge hole to get out of.”

Such troubles set the stage for dealership consolidation, says Ken Gibbs, senior vice president-Western region for Chase Auto Finance.

“We’ve seen a number of dealers picking up some dealerships cheaply,” he says.

A result of that is two Ford stores and a Lincoln Mercury store becoming a single dealership, with the whole being greater than the sum of the parts, he says.

“If you are financing the right dealers, they’ll find a way to make money,” says Gibbs.

Like Melville, Ellsworth Clarke, an executive in the dealer financial services division of Bank of America, sees the situation from a Darwinian perspective.

“The strongest dealers will survive and lenders who help them consolidate will be the long-term players,” says Clarke.

Gibbs doubts auto makers will get too involved in consolidating dealerships.

“They will let the points liquidate themselves,” he predicts. “We’ll see more dealerships close shop and give back their franchises. We’ll see more of that in smaller markets.”

Closed dealerships become all sorts of things, says Gibbs. “A Mitsubishi dealership in Cincinnati is now a teen nightclub.”

Some struggling dealers thinking about leaving the business have expensive real estate as a consolation, says Mark M. Pregmon, executive vice president-consumer lending for Sun Trust Banks Inc.

“Dealers in places such as Los Angeles and San Francisco are sitting on expensive properties,” he says. “Rural dealers aren’t in that position. I’m more worried about the vulnerability of single-point dealers.”

James M. Frank, senior vice president of M&T Bank in Buffalo, NY, says he has not seen a single-point domestic brand dealership doing well in the Northeast.

“They are suffering losses,” he says.

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