Recession and Credit Crisis and Layoffs and Auto Dealers and Economy and Employment and Retail and Real Estate & Retail

Worst auto market in 30 years might force consolidation

December 8, 2008
New car dealers, usually among the most resilient of all small businesses in weathering economic downturns, are hanging on for dear life this time around, portending a shakeout among Indiana's 520 dealers.

Unlike in previous recessions, many cite the effects of the extraordinary pullback of credit earlier this fall as the biggest bruise to their business. And, among domestic dealers, the problem is compounded by unprecedented worries about the financial viability of Ford, Chrysler and General Motors, the latter two warning of bankruptcy without federally backed loans.

"This one is indeed unique. It's as bad as I've ever seen it," said longtime Chevrolet dealer Gary Pedigo. During the 1979-1980 recession, when it was only a matter of time until double-digit interest rates came down, "you could look down the hall and see light at the end of the tunnel," he said. "Today, you can't see it."

Indeed, "this is kind of like the perfect storm that pulled all the ingredients together," said Lynn Kimmel, co-owner of Lockhart Automotive, which owns Cadillac, Hummer and Saturn stores in the metro area.

Even with credit availability improving, another troubling sign is those who can still afford to buy are electing to defer vehicle purchases, an undercurrent with disastrous potential. They're flat out scared about the economy.

"Once that gets into the fabric of people's psyche, who wants to be a car dealer?" said Mark Uchida, an associate professor and small-business expert at Butler University.

Indeed, some have thrown in the towel this year, including Bud Wolf Chevrolet. Also closing within the last year or so were Sharp Ford, on the south side of the city, and the Payton Wells dealerships in Indianapolis and Anderson.

"Everyone expects more consolidations that will result in fewer rooftops in Indiana, but that number would only be a guess," said Marty Murphy, executive vice president of the Automobile Dealers Association of Indiana.

"Many of the Buick-Pontiac-GMC and Chrysler-Jeep-Dodge mergers have already taken place over the past couple of years."

Most dealers will persevere as long as their credit lines remain OK, shifting into cost-cutting mode during times like these. But for many dealers, the shift is abrupt and painful.

At Dugan Chevrolet Pontiac, in Avon, owner J.R. Dugan responded to difficult times in recent years by cutting costs around the office and reducing staff through attrition. But in recent months he had to lay off 11 people, bringing his head count down to 44 from about 100 during good times.

"This is the first time we've literally had to lay off people," Dugan said. "It's horrible."

In Zionsville, Pearson Ford owner John Pearson had to let go of close to 10 employees as he rides out the funk in the auto industry, which in November suffered a 37-percent decline in sales, resulting in the lowest level in at least 26 years.

The worst off was Chrysler, with its sales down 47 percent. General Motors Corp. sales fell 41 percent and Ford Motor Co.'s were off 31 percent.

But even Japanese automakers that have relentlessly chipped away at Detroit's market share are getting their comeuppance. Nissan sales plunged 42 percent and Toyota sales fell 34 percent, followed by Honda's 32-percent decline.

"Every dealer I have spoken with is resisting layoffs and making cuts in all expenses. They are not going to be quick to fill vacancies that happen through attrition, but are trying to keep their staff employed," Murphy said.

Indeed, Lockhart's Kimmel is loath to resort to layoffs, noting a lot of her staff "has been with us for a long time." Instead, some have agreed to work shorter weeks until things improve.

Fortunately, Lockhart had been setting aside some reserves, in part because sales over the last several years had been unusually immune to the normal boom or bust cycle.

"We all knew that we couldn't keep at the same rate we were maintaining. It hadn't been cycling," Kimmel said.

Dugan agreed. "My dad said the exact same thing three years ago."

Pearson also saw trouble down the road and, like many car dealers — domestic and foreign — is relying more on revenue from service and collision repair.

Late last year, he invested $7 million to upgrade his collision center — which is now an approved BMW collision center — and to add "Quick Lane," a Ford brand of quick repair shops that fix all vehicle brands.

Before that, he added a "buy here, pay here" lot that specializes in serving customers with financial troubles — a fortuitous addition just as a recession hits like a hurricane.

"In a dealership, it's like you're running five or six businesses at once," Kimmel said.

Pedigo said parts, service and collision and other auxiliary businesses may not be enough for some dealers because the downturn in new car sales has hit so hard.

"When business is cut in half, there is nothing that's going to pick up that slack," he said.

Though his body shop has done well, he's noticed that some people who get in a fender bender are taking their car insurance check and spending it on other needs, as long as the car is drivable.

If there's any consolation, some dealers who sell domestic cars are feeling better about the vehicles. Dugan said General Motors has come out with vehicles in recent years "that are seriously second to none," although he concedes GM still struggles to overcome perceptions.

While Pedigo sees big hurdles for domestic automakers to overcome, including union labor obligations that Japanese and Korean competitors don't face, he thinks products like GM's Volt electric car, to be released in about a year, "will revolutionize the industry."

Kimmel said she believes there is pent-up demand to buy, which she said will happen once things stabilize. She's still proceeding with plans to remodel her Hummer property in Fishers to become a Cadillac-Hummer dealership.

Yet some dealers won't survive to see brighter days, Uchida said. And that could mean a big adjustment for many small towns, where, "when the auto dealers are fat and sassy, they are the presidents of the local chamber of commerce. They're political levers of most small towns," Uchida said.

But then, "every town used to have its own blacksmith, its own buggy maker," too, he added. "It's no longer the case."

Murphy, however, says not to underestimate the tenacity of dealers during hard times.

"I am encouraged that our dealers remain optimistic in the face of these challenges, and so many of them are legacies that have the benefit of histories from their parents and grandparents who faced challenges in a different time."
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