For car dealers, tight credit is fueling a 'catastrophe'
DETROIT -- They may be folks you love to hate, but it's hard not to have sympathy for car dealers these days. These business owners are manning the bucket brigades in an auto industry meltdown.
"Things are going disastrously," says Ray Ciccolo, owner and CEO of Village Automotive Group in suburban Boston. "Most car dealers were down over 30% last month, and that is a catastrophe."
Many won't survive. Almost 600 of the about 20,000 U.S. new car dealers have shut their doors this year, and an additional 2,000 will close within 18 months, predicts Mark Johnson, president of a Seattle consulting firm that helps auto dealers buy, sell or merge operations.
In September alone, 61 dealers — two a day — closed shop or downsized to used car lots, says the National Automobile Dealers Association (NADA). Wounded by gas prices that killed sales of their most profitable SUVs and trucks, dealers are being hammered as the economy depresses sales of all models.
Even people with good jobs feel poorer and less confident to take on years of payments for a big purchase. Those who still would are finding it harder to get credit — General Motors credit arm GMAC now requires a credit score of 700 or better for a car loan.
Banks' reluctance to lend also is squeezing the dealers, who need regular loans (called "floor planning") to finance inventory.
"This is a very big, complex issue that's all wound up around itself," Johnson says. "We are definitely up to our neck in this."
Not helping: September sales showed that despite easing gas prices, many buyers still want gas-stingy and cheaper small cars — which have small profit margins — or demand huge discounts on trucks, SUVs or luxury cars.
That's if they're shopping at all. A poll done by WPP Lightspeed this month found that only 10% of Americans plan to buy a car in the next three months.
It may be hard not to gloat when a car dealer gets the short end of the deal, but when they go out of business, that can be bad news for consumers. Fewer dealers fighting for your business means you'll end up paying more for cars.
The plight of car dealers is being watched closely by economic analysts because vehicle sales are a key indicator of the economy's health. The auto industry overall supports one in 10 U.S. jobs, according to the Alliance of Automobile Manufacturers. Dealers alone employ more than 1.1 million and generate nearly 20% of retail sales in most states.
Fewer sales by dealers lead to cuts in auto production. Fewer hours or jobs for assembly-line workers. Fewer parts required from supplier companies. Fewer hot dogs sold to shift workers in plants across the nation.
Not to mention more defaults on mortgages — which got the ball rolling on this economic mess in the first place.
Working harder to close a deal
On a recent Saturday in Los Angeles, the day started slowly at Galpin Ford. At about 11 a.m., salesmen in starched shirts and ties chatted in the near-empty showroom. Terry Miller, the sales manager, says business began drooping last year. "When the mortgage issues began and gas prices rising began at a similar time … we realized (there was) a slowdown."
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