The Vanishing Minority Dealer

Damon Lester has a tough assignment — help the nation's minority-owned dealerships survive.

He is the president of the National Assn. of Minority Automobile Dealers at a time that is particularly dangerous to his constituents' business future.

Domestic manufacturers' efforts to reduce their dealer bodies coupled with plummeting auto sales along with a lack of access to much-needed capital threaten the existence of many minority-owned dealerships.

NAMAD and other minority dealer organizations are pushing for solutions that include investment from private equity groups; a reworking of the Small Business Admin.'s definition of a small business; and a revolving $500 million line of credit established by the government.

To say minority dealerships are in danger of extinction is not overstating the problem, say dealers working on solutions.

“The state of minority dealers is tenuous at best,” says Greg Jackson, president and CEO of Prestige Automotive Group, one of the largest minority-owned dealer groups in the country.

Minority dealers are in “an extremely precarious position,” says Desmond Roberts, owner of the Chicago-based Advantage Automotive Group, NAMAD's chairman and a National Automobile Dealers Assn. board member.

Their existence is in such danger NADA and NAMAD held a panel during the NADA convention in February to highlight the problem and potential solutions.

Several years ago, some auto makers committed to increasing their minority dealer base to 15% of their total number. Hyundai Motor America Inc. is the only one close to that with 10.14% of its dealerships being operated by minorities.

In fact, since 2002, the overall number of minority-owned dealerships has decreased, according NAMAD data, from 1,264 in 2002 to 1,194 in 2007 (These numbers represent actual dealerships, not franchises. See chart on page 36).

The decline mostly has been fueled by a downturn in the number of African-American-owned dealerships — from 532 in 2002 to 391 in 2007. The challenge lies not only in adding new minority dealers, it's making sure the ones in place today survive.

The numbers likely will get worse for all ethnic groups, NAMAD board members say.

Dealership numbers overall are declining. Some experts believe market conditions this year will force many dealerships out of business, perhaps as many as 1,500 between 2008 and 2009.

The industry saw similar downturns in 1980 and 1991 when nearly 1,000 dealerships closed down in each of those two years.

“Lately, it's been very difficult for the company to increase its count (of minority-owned dealerships),” says Ford Motor Corp.'s Minority Dealers Association Executive Director and CEO A.V. Fleming. “We've been trying to maintain the count that we have.”

E. Dale Early, owner of Deerbrook Forest Chrysler-Jeep, Kingwood, TX, a member of NADA's board of directors and a vice president of Chrysler's minority dealer association, says these are “interesting” times for all dealers, and dealer counts likely will drop across the board.

Early understands the reasons manufacturers are reducing their dealer counts, but he says his biggest concern “is to make sure the decline is not done in a disproportionate way.”

At the NADA convention's panel discussion, Roberts urged manufacturers to “exercise some patience with their minority dealers.”

Minority dealers refrain from assigning too much blame to the manufacturers for the small representation within the dealer body. The leadership at many of the minority dealer organizations appears to be realistic about market conditions today and the inevitability of a continued decline in numbers.

Much of that is because of Lester who has worked hard to create a more collaborative relationship with manufacturers since he assumed NAMAD's top spot in 2006. Auto executives often call him to run ideas past him.

The tenor of NAMAD's previous leadership was more in your face and aggressive and not as willing to look at creative solutions, according to one insider.

Despite Lester's work, there still is much frustration with manufacturer efforts. Domestic auto makers have had formal programs in place to develop minority dealers as far back as 1974.

The problem, though, is that the automotive retail system is not conducive for manufacturers dictating who gets dealerships.

Minority candidates have little access to capital. As a result, minority candidates have little choice in the franchises or locations of those franchises. It's “take what you can get” and hope it works.

Historically, minority dealers are handed poor performing stores located in areas with little potential for growth, in part because those are the outlets that are most likely to become available.

In many cases, the minority dealer, receiving most of his or her funding from the manufacturer, is an owner in name only and answers to the auto maker or regional manager.

An auto maker, with much fanfare, often will stage a grand opening of a new minority-owned store, but a few years later the minority owner may be forced out due to a lack of cash and resources.

“Ford supports us in a lot of different ways,” Fleming says. “But they went through so many budget cuts, it's been difficult for them to keep their field help in place.

“And a lot of our dealers are in the dealer development program, which has had significant cuts, like other Ford departments.”

While Ford's dealer development program is not minority-specific it is one of the ways Ford tries to increase its minority-dealer count, Fleming says.

Lester wants manufacturers to communicate better in alerting NAMAD to opportunities when they arise. He has several qualified candidates waiting in the wings for dealerships.

“That is one of the messages we need to convey,” he says. “Often, we don't find out about opportunities until after the fact.”

What are the solutions?

Lester says the most important area NAMAD is working on is to increase the access to capital for minority dealers.

He's on several fronts.

One, he is working with the Congressional Black Caucus, headed by U.S. Rep. Carolyn Cheeks Kilpatrick (D-Michigan) to recreate a program initiated by President Jimmy Carter in 1980.

Responding to personal entreaties by dealers such as Mel Farr Sr., Carter provided a $400 million loan package to help ailing car dealers in 1980. According to Lester, the program lasted seven months.

Minority dealers received only $14 million of the $400 million. More than 90% of the minority dealers obtaining loans paid them back in full, Lester says.

If her gets what he wants, the Small Business Admin. will establish a revolving credit line of no less than $500 million for minority dealers that qualify based on certain financial criteria.

NAMAD currently is working with U.S. Reps. Danny Davis ((D-Illinois) and Gregory Meeks (D-New York), both members of the Congressional Black Caucus, to draft a financial assistance bill.

Lester hopes he can have the initiative in place by the end of the year, although he admits it will be tough in an election year. “I don't want to have to start the process all over again next year,” he says.

A second initiative also involves the SBA and will help all dealers, not just minority-owned stores. NAMAD and NADA are pressing the SBA to redefine what a small business is — at least, for car dealers.

Currently, the definition is based on the amount of revenue or gross receipts a business brings in. While many dealerships operate as small, family-run businesses, the amount of revenue far exceeds the standard set by the SBA, mainly because vehicles are big-ticket items.

NAMAD wants to see the standard for a small business to be based on numbers of employees.

Private equity is a third area Lester sees as a potential source of capital for minority dealers. He's been able to put together one large deal with AutoStar, a subsidiary of iStar Financial.

NAMAD also has a partnership with Wachovia, which has provided more than $309 million in capital to minority dealers since 2005.

The challenge is that investors have little interest in funding acquisitions or loans for domestic brand stores — and those are the ones that need the most help, says Lester.

Lester admits there is a real sense of urgency dating back to 2004, when he first noticed a dramatic decline in Ford's African-American dealers.

But why should minority dealers be saved seems like a fair question. The industry is consolidating. As overall sales slide, domestic auto makers have suffered the most and they are scrambling to downsize their businesses.

Yet a commitment to minority dealerships is a tenet of every top automotive executive. The reasons resonate throughout the industry. Dealer bodies should reflect the ethnic makeup of consumers. Nonetheless, minority dealers find themselves in one of the most difficult business climates in memory.

According to NAMAD, people of color comprise almost one-third of the population and purchase 15% of new and certified used vehicles, but ethnic minorities represent less than 5% of majority owners of dealerships in the U.S. Chrysler reported that it had 178 minority dealers who made up 5% of its dealer network and accounted for almost 8% of sales. They generated $7 billion in revenue.

According to the 2007 report, The Buying Power of Black Americans published by Target Market News, black households alone spent $33 billion on new and used vehicles in 2006.

If minority dealerships fail, many other organizations in the community suffer also, such as charities, banks and other small businesses.

“It is important to the minority community that minority dealers be saved. Many of them provide valuable opportunities,” says Marjorie Staten, executive director of General Motors Minority Dealer Assn. “If black and minority dealers are challenged, those communities will be challenged as well.”
— With Derek Stark and Frank Washington

Minority Dealers 2002-2007