It Could Be a Very Good Year

Auto dealers, who learned tough survival lessons during the recent hard times, now are putting them to use to make more money as they enter a brighter-looking new year.

They streamlined their operations, cut costs and reduced inventory levels. They are focusing more on used-car sales and back-shop operations, such as parts and service.

By continuing to do those things and more, resolved dealers enter 2011 with prosperous hopes. Although no one expects light-vehicle sales in 2011 to approach the 17.3 million-unit record set 11 years ago, dealers anticipate higher per-vehicle profits.

They have battened down their operations to survive in an ultra-lean 10 million- unit sales year, such as 2009.

So, with 2011 sales projected at about 13 million units, dealers anticipate a profitable year. Beyond that, they envision near-euphoria in about five years when sales are projected to bounce back to nearly 16 million units.

“It will be a very profitable 16 million, a sweet 16 million, if we maintain a business discipline,” says Michael Maroone, president of AutoNation Inc., the nation's largest dealership chain.

For years, domestic auto makers overproduced cars, forced dealers to stock them and used costly incentives to cajole consumers to buy them.

Now, U.S. auto makers have reduced production schedules and lowered incentives. That has created higher transactional prices and an overall healthier market for the industry, says Jeff Schuster, J.D. Power and Associates' executive director-global forecasting.

“Manufacturers have maintained a discipline and prices have increased overall,” he says, pointing to a balance of supply and demand.

But, ironically, some dealers, who had complained about auto makers shoving inventory down their throats, now beef about not being able to get enough new vehicles that sell well.

When new-car sales nosedived in 2008 and 2009, most franchised dealers desperately placed an even greater emphasis on their used-car operations. That's expected to continue, at least for now.

“Until new-vehicle sales reach 12 million again, used will be the most important operations to dealers,” says Stephen Wade, a Utah dealer who is vice chairman of the National Automobile Dealers Assn.

Last year, about 35.5 million used cars were sold, 15 million of them by franchised dealers.

Dealers also are leaning on their back-shop operations to counterbalance the effect of fewer car sales.

“We are expanding our offerings and offering seven-day-a-week service,” Maroone says of AutoNation's 246 dealerships. “We are doing a lot more prospecting and training. We are getting aggressive, innovative and testing the organization.”

If car buyers face higher prices because of low supplies of new and used vehicles, dealers are encountering more frugal customers still smarting from the recession and its ill effects, such as high unemployment and lower housing values.

Car buyers' attitudes have changed, says David Howlett, J.D. Power's senior director-consumer insights and strategy. “They are foregoing with frills, but they expect quality at all price levels.”

Dealers are working hard not only to sell cars but also to put together deals that will get a stamp of approval from financial institutions with stricter lending standards, including high credit scores and big down payments.

The credit freeze of 2008 and 2009 altered auto-financing standards. Some dealers and lenders now meet to discuss what to expect of one another.

“It's never happened before,” says Richard Ackman, director-variable operations for the Germain Motor Co., an 8-store dealership group based in Columbus, OH.

Dealers and lenders convene to discuss topics such as loan-portfolio performances and point-by-point criteria for getting an auto deal financed under today's tighter lending standards.

Overall, Ackman finds the sessions helpful. “We all want the same thing: to put a car deal together.”

That's harder to do now than the pre-recession days of easy financing. “It takes more effort to put a deal together,” says Alex Sarafian, a risk director at Ally Financial.

But there has been a thawing of the credit freeze that hit like an ice storm in 2008.

As the credit industry slowly normalizes, competition among lenders has increased, Sarafian says. “We're definitely seeing more competition and we're trying to reach all credit spectrums. But we're not back to where we were.”

The total national dealership count now is 18,223. That is after a relatively modest reduction of 258 stores this year and a record-breaking 1,603 last year when dealership consolidation was in full swing, following General Motors Co. and Chrysler Group LLC going into bankruptcy and coming out with reorganization plans that called for fewer dealers.

Ten years ago, there were nearly 25,000 dealerships.

Some say the dealership reductions were done for the good of the industry.

“The overall network is healthier and the remaining dealers have better throughput (sales per store),” says John Frith, vice president-retail channel solutions for Urban Science, a consultancy that advises auto makers on retailing matters, including dealership numbers and market locations.

“Rightsizing” the retail networks was necessary to match the number of stores to sales, he says.

But others claim the reductions went too deep and were done unfairly.

“The decision to terminate thousands of independent businesses with no due process was one of the most unconscionable actions in the history of American commerce,” says Alan Spitzer, an Ohio dealer and co-founder of The Committee to Restore Dealer Rights.

The advocacy group helped convince Congress to enact legislation that allowed terminated dealers to seek third-party arbitration. Auto makers prevailed in most of those cases, but arbitrators ruled in favor of 32 Chrysler dealers and 23 GM dealers.

The disputes linger on, however. Several dealers who won back their franchises sued Chrysler for allegedly making it unreasonably difficult to reopen their businesses.

Meanwhile, auto makers want many dealers who made the cut to upgrade their facilities as part of the price of being spared.

Chrysler, for example, is urging more metro-market dealers to participate in its “Genesis” plan of consolidating brands at single sales points.

“Placing all four brands under one roof in modern facilities has resulted in enhanced profitability for the Genesis dealers,” Chrysler spokesman Michael Palese says.

But critics question the need and cost of pitching up elaborate dealerships.

“What is the logic of manufacturers asking dealers to build multi-million dollar facilities when dealer margins are being squeezed as much as they are?” says Dale Pollak, a former dealer and founder of vAuto, an inventory-management software firm.

Moreover, he says buying trends indicate consumers prefer to do most of their car shopping online, going to the dealership only towards the end of the purchase process.