The Auto Channel
The Largest Independent Automotive Research Resource
The Largest Independent Automotive Research Resource
Official Website of the New Car Buyer

Grant Thornton LLP Says Decline in Number of Car Dealerships Will Accelerate

PHOTO (select to view enlarged photo)

SOUTHFIELD, Mich., Oct. 1, 2008 - The decline in the number of new car dealerships will accelerate this fall and into 2009 as weak sales, increased operational costs and the credit crunch continue to take their toll, according to Grant Thornton LLP Corporate Advisory and Restructuring Services.

"An increasing number of dealers are simply closing their doors because sales have plummeted, credit has dried up, the overall retail environment is increasingly challenging and potential investors are sitting on the sidelines," said Paul Melville, a Grant Thornton LLP partner. "In addition, the domestic automakers who badly need retail consolidation are not spending much of their scarce capital on the problem because the economy is doing it for them."

Earlier this year, Grant Thornton said more than 2,700 dealerships would need to close in order to maintain sales per dealer at last year's level of about 750 units. Now, with light vehicle sales on average predicted to drop to the 13.7-million unit range in 2009, the firm estimates that 3,800 dealerships will need to close.

"Significant consolidation is necessary, especially among Ford, General Motors and Chrysler retailers, because U.S. sales already have declined more than one million units this year," explained Melville. "The 'Detroit Three' account for more than 85 percent of the total decline, and their sales per dealer were already well below the industry average."

According to the trade journal Automotive News, the average U.S. new-vehicle franchise reported 322 new-vehicle registrations in 2007. Toyota Motor Sales accounted for 1,628 units per franchise. Ford Motor Company's domestic brands reported 236 registrations, followed by GM's domestic brands at 202 and Chrysler at 169.

Not only are new car sales down, other sources of revenue for dealers, such as used car sales and financing profits, are also falling. For example, CarMax, Inc. reported that its average used vehicle-selling price declined six percent in the second quarter ended August 31, with double-digit declines in comparable store unit sales.

"We see more unprofitable dealers closing their stores outright, but if franchise values were to fall 20 percent, that could be enough to stimulate mergers and acquisitions activity," Melville said. "Value investors are also looking for new opportunities, and they will find them in the real estate owned by dealerships."

He sees several potential scenarios developing:

Consolidation Accelerates: Domestic automakers have been encouraging their dealers to consolidate, especially in metropolitan markets like Chicago, Boston and Los Angeles. However, credit availability for potential buyers, the increasing cost of floorplan funding, lack of financial support from automakers, the general reluctance of dealers to sell at depressed values and the unrealistically high price demands by sellers has slowed the orderly progress of voluntary consolidation.

Melville predicts the deal-making environment will improve in the early part of 2009. "Prices will come down as the weak market continues to erode franchise values, and as liquidity returns, we see more consolidation deals proceeding," he said. "At the same time, more potential buyers for prime commercial real estate will appear."

An Increase in Sale/Leaseback Transactions: Dealers who need to raise cash to fund operations or make facility improvements may want to consider entering into a sale/leaseback arrangement for their real estate.

"While the credit crisis could make a sale/leaseback strategy difficult to execute in the near term, dealers should begin considering the option now so they are well positioned when the financial markets stabilize," Melville said. "One strategic use for the cash would be for dealers to create stand-alone service facilities to better compete with independent repair shops and lessen their dependence on new vehicle sales."

Dealers Subdividing Real Estate: "Many dealers, especially those who sell domestic brands, own more real estate than their potential sales justify," Melville said. "If they are in prime retailing corridors, they may be able to subdivide their land, preserving enough space to operate a leaner and potentially more profitable business, and sell the balance to investors for redevelopment.

"Developing new sources of revenue and unlocking the value of their real estate should be priorities for all dealers," he concluded.