Grant Thornton Identifies Key Programs Necessary to Slow the Pace of Auto Dealership Failures in 2009

SOUTHFIELD, Mich., January 21, 2009: Two missing links in the bailout of the domestic auto industry are consumer stimulus actions and concrete steps to quell anxiety about making big-ticket purchases during a recession, according to Grant Thornton LLP's Corporate Advisory and Restructuring Services group. With weak sales expected in 2009, especially in the first half, there are a number of steps automakers and legislators can take to spur demand and reduce what could be a huge wave of dealership failures this year, the firm said.

"Many automakers are reducing their costs and launching attractive new products. Recent government action is improving the liquidity positions of GM and Chrysler, and improving credit availability through GMAC and Chrysler Financial. But the consumer has limited incentive to shop for a new car," said Paul Melville, a principal at Grant Thornton. "Taking action to reduce consumers' fears and anxiety will help all industry stakeholders, but none more so than the dealers. Months of depressed sales have many hanging on by their fingertips."

According to Grant Thornton's U.S. Dealer Analysis, average annual new vehicle sales per dealer have ranged from 740-750 units for much of the last decade, or about 60 sales per month - a level last seen in 2007.

In October 2008, the firm estimated that a net reduction of 3,800 dealerships would be necessary for the average sales per dealer to match 2007's results. However, U.S. sales have declined more than what was predicted at the time. Now, with 2009 U.S. sales projected to be 11.4-11.7 million units, a reduction of more than 5,000 new vehicle dealerships would be necessary.

The actual number of new vehicle dealerships that the firm says may close in 2009 is about 2,500 stores, due in part to restructuring actions dealers are taking to remain viable, including reducing inventory costs, overhead, selling expenses and more. Still, that's more than 10 percent of the total number of new car and light truck dealers in the country.

"The best dealers are true entrepreneurs and amazingly resilient, but they can't purely cost-cut their way to prosperity," Melville said. "New products and creative sales promotions by the automakers aren't stimulating enough demand, so it's time to consider stronger medicine."

According to Melville, there are several possible remedies automakers and legislators could pursue, including:

-- Pay "Cash for Clunkers" - In France, consumers are now being paid to scrap older, less environmentally-friendly vehicles when they purchase a new car. In the 1990s, similar programs in Europe helped support industry volumes during the recession of the early 1990s.

-- Roll Back State Sales Taxes - Enterprise zones, where state sales tax rates are reduced, have been proven to stimulate retail sales in depressed urban centers. Similarly, sales tax reductions for new vehicle purchases could stimulate demand.

-- Make Auto Loan Interest and Sales Taxes Deductible - Such a program, which already has been proposed by the National Automobile Dealers Association, may help make new vehicle purchases much more affordable.

-- Expanded Tax Credits for Fuel-Efficient Vehicles - Currently, only a handful of diesel and hybrid vehicles are eligible for federal tax credits tied to fuel economy, and the benefits mostly accrue to imported vehicles. Making this credit available on vehicles that achieve at least 30-mpg highway would stimulate sales of dozens of Ford, GM and Chrysler products offerings.

-- Introduce National Credit Unemployment Insurance - A national program for all new car buyers that would cover their monthly payments in the event of an unexpected job loss, possibly funded by an "above the invoice" fee of 1-2 percent of each vehicle's wholesale price and government stimulus funds, would do much to reduce job security fears. "Above the invoice" line items, such as dealer advertising fees, do not appear on a new vehicle's window sticker, and they have a negligible impact on monthly payments.

"One or more of these programs included in the stimulus programs already under consideration by the Obama administration would provide the grassroots confidence and support the auto industry needs to accelerate its recovery. America's car dealers will do the rest," Melville added.