Low Inventories

The Lawrence Marshall dealerships in Hempstead, TX, shut down last month, the latest high-profile victim of the ongoing credit crisis.

It's another indication the retail model is changing in this country. The day of big inventories on dealership lots is coming to an end. In its heyday, the Marshall stores were mainstays on the Ward's Dealer 500 ranking, often selling as many as 9,000 new vehicles a year. It sold Chevrolet, Cadillac, Ford, Hyundai, Chrysler, Dodge and Jeep brands from one large complex.

The group carried large inventories and marketed itself as the store that “clobbers big-city prices.” It made up with volume what it sacrificed in gross profit. It was able to sell vehicles at $100 over invoice, and made its money selling tons of them. When Marshall closed, it had thousands of vehicles on its lot.

Floor-plan lenders, though, now frown upon the practice of dealerships carrying large inventories. As sales collapsed, dealerships such as Marshall found themselves losing money with no way to generate cash. The lenders are calling in the markers, putting numerous dealerships out of business.

Nobody is immune. A Northeast dealership tells me the bank auditors are in their stores weekly going over the books. The March Hodge Group, the nation's largest minority group, watched over the holidays as GMAC's trucks pulled up to three of its stores, two Saturn and a Pontiac Buick GMC dealership, and took the vehicles away.

Dealers such as Bill Heard, Denny Hecker in Minneapolis and Lawrence Marshall - there will be others — who depend on volume will have a tough time surviving the current economic crisis.

Public groups are cutting inventory orders by as much as 60% to keep from tripping the loan covenants with the banks. They all are selling, consolidating and shuttering stores to cut expenses.

Dealers are trying to survive, and carrying significantly less inventory is a way to do that.

The problem is auto makers need dealers ordering vehicles in order for the industry to rebound. Chrysler LLC pushed hard to convince dealers to order 78,000 vehicles last month. The auto maker was successful after extending the deadline twice. Its message to dealers: order the vehicles or we all go down. Following the franchise meeting at the National Automobile Dealers Assn. convention, Chrysler dealers Jim Arrigo, Hayden Elder and Chuck Eddy told me they were ordering their allocation knowing Chrysler Financial could come down hard on them later for having too much inventory.

In short, dealers are under pressure to carry the inventory while the financing firms are saying “no way.”

Ultimately, we are watching a complete restructuring of the automotive retail model in this country. And nobody is sure what it will look like two to three years from now.

In the meantime, some dealers need to craft an exit plan that makes sense, because the unfortunate truth is that being in this business might not make much sense right now.

For those planning on hanging on, devise a plan that incorporates carrying less inventory, without hurting sales.