Golden Age Ahead

Using headlines from the last 12 months as a barometer, investing in the automotive-retail sector is a really dumb move. The reality, though, is far different. There may not be an industry with a greater upside than franchised new-car dealerships.

It's true that times have been tough. It's an industry that will have lost about 3,000 new-car dealerships in two years. Several large dealer groups whose revenue reached into the hundreds of millions — some even into the billions — litter the landscape as failed businesses.

Dealers are under pressure from their finance companies, and continue to have trouble securing floor plan financing, which provides the funds to buy new vehicles from the manufacturers.

Sales plunged from 16.1 million in 2007 to 13.8 million in 2008, and likely will finish out 2009 with approximately 9.8 million — a 6.3 million decline in two years.

So why the optimism? Dealerships are variable-cost businesses. Except for the rent or facility costs which are fixed, dealers quickly can reduce the cost of doing business. The biggest costs are personnel and advertising. In difficult times, dealers can adjust fairly quickly.

In the last several months, many dealers have cut costs to where they can be profitable in a year in which 8 million to 9 million vehicles are sold.

Giddy might be too strong a word, but executives at the public dealer groups are bullish on the future. Expect some, if not all, to report a profit in the third quarter.

Imagine what happens in 2010 when most analysts are predicting sales to surpass 11 million? Ward's is on the low end, calling for 11.3 million sales. Others are as high as 12 million.

If sales do jump that high, dealers are going to be sitting on a lot of cash. The question, says one CEO, is whether we can maintain the spending discipline we're showing now.

The industry still will lose several more dealerships, mainly because of continuing pressure from floorplan lenders.

The wild success of “Cash for Clunkers” likely granted some dealerships a stay of execution. They were able to make some money while clearing out stale inventory, but the next couple of months will be tough for them.

Added to that, there are mortgage issues to contend with. GMAC is getting out of the mortgage business, requiring dealers to find other lenders, which are few and far between. That alone is putting numerous dealers out of business.

Despite the problems, the industry is nearing the end of the shakeout.

By 2011, automotive will be an attractive sector to invest in, at least on the retail side. Fewer dealers means more profitable dealers. Dealers will have more money to invest in training and technology becoming leading businesses of the 21st century.

In the next three to five years, we'll watch a new golden age of automotive retail emerge. We may never again see the 16-17 million new vehicles sold, but at 14-15 million, this will be a very healthy industry.