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S&P: Consolidating US Auto Industry Faces Uncertainty

14 July 1997

S&P: Consolidating US Auto Industry Faces Uncertainty

    NEW YORK, July 14 -- Accelerating consolidation in automotive
retail distribution poses significant risks and opportunities for both dealers
and manufacturers, according to a Standard & Poor's industry overview released
this week in conjunction with its first corporate credit rating on a U.S
automotive dealership group.
    According to the report featured in this week's edition of Standard &
Poor's CreditWeek, narrowing profit margins, the growing role of middlemen
and brokers, the increased popularity of short-term leases, and mounting
capital investment requirements are among the factors conducive to change.
Standard & Poor's expects more consolidation will occur in the auto retail
industry.  At the same time, auto dealers will seek alternative financing
mechanisms.
    United Auto Group Inc., the first automotive retailer to seek access to
the public/144a debt market, received a single-'B'-plus/stable rating from
Standard & Poor's.
    In assessing the credit quality of dealership operators, Standard & Poor's
will focus on such business risk factors as: geographic diversity, regional
market dynamics; manufacturer mix of franchises; quality of dealerships;
revenue composition; performance on customer satisfaction surveys; advertising
strategies; cost controls; and management.
    "The present structure of the retail automotive sector is an anachronism,"
said Standard & Poor's analyst Scott Sprinzen.  The sector is highly
fragmented, with 100 of the largest dealership groups generating less than 11%
of total industry revenues and controlling only about 5% of all franchises.
"The stand-alone franchised dealer has remained the industry paradigm," Mr.
Sprinzen added, "long after most other major consumer durables have come to be
channeled through mass merchandizers in a wide range of outlet types."
    While manufacturers still exert much influence over the present automotive
retail structure, consolidation within the industry is occurring at a rapid
rate, driven mainly by the potential for cost savings.  According to analyst
Ronald Buck, demographics of dealership owners and growing consumer discontent
with the industry are also fueling consolidation.
    The different types of players that have emerged seeking to capitalize on
industry consolidation include: traditional megadealers; used superstores,
which offer a huge and varied inventory; players stressing used/new/daily
rental integration, such as Republic Industries Inc.; and, potential
enterprises of the type proposed by Ford Motor Co., which would replace
existing stores within a region with a few megastores, each carrying all of
the Ford-related brands.
    "All of these different types of players face substantial challenges and
risks," added Mr. Sprinzen.  According to Mr. Sprinzen, these risks include: a
cyclical auto industry; narrow profit margins; dependence on the success of
the manufacturer; the ability of the manufacturer to control such things as
inventory and number of dealerships; the challenge of assimilating newly added
units into existing operations; and, the start-up risks associated with rapid
expansion of nationwide networks.
    Automakers are expected to accept consolidation within the auto dealer
sector with trepidation.  "This could entail significant loss of control for
automakers," added Mr. Buck.  "For example, they could ultimately face
negotiation of prices, incentives, and product mix." -- CreditWire

SOURCE  Standard & Poor's CreditWire