WILL HIGH FUEL PRICES HURT DEALERS?

Consider the economic impact of increasing fuel prices on our buyers.

If the average vehicle in the U.S. is driven approximately 12,000 miles per year and the average miles per gallon is 15 miles per gallon, the annual cost of fuel, 800 gallons, is $1000 at $1.25 per gallon.

At $1.50 per gallon the annual cost increases to $1,200. At $2 per gallon, the annual cost increases to $1,600. So, the difference between $1.25 per gallon and $2 per gallon for the average vehicle is only $600.

We can probably live with that, but, wait just a minute. What is the vehicle count for most households. Two? Three? Multiply the number of vehicles by the increased singular cost and the impact starts to become fairly significant.

Realizing the average customers' increased annual cost, let's examine the potential impact of this increasing fuel cost to the average automobile dealership.

During 1999, the average NCM client, excluding high-line import, sold 1,214 new vehicles. Of those sales, 612 or 50.4% were vehicles based on truck platforms.

Of those, 242 units, or 32.8% were conventional light truck sales (19.9% of our total retail sales volume).

Another 209 units, or 29.7% were conventional sport utility vehicles (17.2% of our total retail sales volume).

These two segments alone represented 62.5% of all of the truck sales, and trucks represented more than half of our total retail sales. OK, so what?

As noted, trucks represented 50.4% of the total retail sales volume, but probably more important, trucks represented 55.2% of the average dealership client's total new vehicle gross income.

One other note, of all of the vehicles leased by the average dealership, trucks represent 54.3% of the total and 56.4% of the retail lease gross.

One area that we are unable to break down by segment is F&I, but needless to say, it too represents a significant income opportunity as a result of our truck and SUV sales.

The question that needs to be addressed is this:

What happens to your dealership net profit if your conventional truck sales and SUV sales are reduced substantially? I might be overreacting by being concerned with this, but what if I'm not knee-jerking?

What is the multiple effect of this potential reduction? The most obvious would be in the area of increased floor plan cost. Rates are already up. Most domestic dealers I work with were able to end 1999 with a net credit in their floor plan interest account.

This was largely due to the high demand for trucks and SUVs. If these vehicles begin to sit on your lots as opposed to coming in and going out very quickly, what happens to those floor plan credits? What about advertising cost? Is it not true you earn credits based on deliveries, and let's not forget pre-delivery which is also a revenue source.

Again, I may be overreacting but isn't it better to be proactive than reactive?

When interest rates rise, the manufacturer can offer rate subvention programs to the consumer and keep the market going to a degree, but what can the manufacturer do to control fuel prices? Nothing that I am aware of.

One more area that seems to pop up every few years is CAFE (Corporate Average Fuel Economy) which penalizes automakers for manufacturers vehicles for vehicles with poor fuel economy. If the national fuel supply begins to tighten and reserves are tapped, won't the U.S. government be forced to take action, and will this not impact our business?

During a recent meeting, a client made mention of his "Plan B." He noted that, as a result of advanced planning, he would be ready to implement the plan as opposed to having to design a plan while under pressure.

Is this a time for panic or over-reaction? No, but it is a good time to close your office door, sit down and identify policies and procedures that might need to be enacted if business does take a premature downturn.

This is an election year and most industry analysts predict another good year, but as has been said, if you are going to make a mistake, it is better to err on the side of caution.

Good selling!

Tony Noland is director of international operations for NCM Associates. He has 30 years of automotive retail experience.