As Sales Crash, Car Dealers Skid

0

Of the 137 new-car dealerships that closed last year in California, 32 were in Los Angeles County, long considered the car capital of the nation. This year, it’s expected to get worse.

Already, 24 more dealers have closed statewide since the beginning of January, including two in the county. And that was before the Legislature nearly doubled the car taxes last month to help close California’s budget deficit, adding nearly $400 to the cost of an average-priced new car.

“This is a serious problem for everyone,” said Peter Welch, president of the California New Car Dealers Association, which collected the closure data. “The ripple effect extends beyond just a dealer losing their business, so it’s really devastating all around.”

Indeed, the ripple effects include the 2,100 and perhaps as many as 3,600 dealership employees countywide who have lost their jobs. Also, cities have watched tax bases decrease.

In a way, the carnage is not unexpected amid a steep decline in car sales that has threatened the Big Three domestic automakers with bankruptcy and prompted two of them, GM and Chrysler, to seek nearly $40 billion in federal bailout funds.

Los Angeles County is the largest single market for auto sales in the United States, with new car and light truck sale registrations approaching 650,000 annually. But new car sales fell by 23 percent last year in California, worse than the national drop of 18 percent.

Local dealers said that business is down between 25 percent to 45 percent so far this year, compared with a mediocre 2008, as the conditions that have slowed sales worsen, aside from the car tax hike.

The credit crunch, which has crimped the ability of car buyers to get loans, has now hurt the ability of dealers to obtain inventory. And consumer confidence has only worsened as the county unemployment rate hit 9.9 percent in December, the highest in 14 years.

The state’s New Car Dealers Association now predicts California could end up losing almost one-third of dealerships this year 500 of the remaining 1,500.

“It’s the perfect storm for a dealer’s worst nightmare,” said Mike Gilligan, general manager and co-owner of Cerritos Ford, one of the county’s biggest Ford dealerships. “It just seems like we’ve been slammed on every side.”


Dramatic decline

Although car sales slightly decreased over the past five years, it wasn’t until last summer when gasoline prices nearly hit $5 a gallon locally that car dealers started to shrink dramatically, said Aaron Jacoby, an attorney with the Venable law firm, which represents many Southern California automobile dealers.

“That’s when I first heard clients talking about a soon to be gloomy picture, but I don’t think anyone realized how far south things were going to go in just eight months,” Jacoby said.

Dealers thought they had caught a break last year when gas prices decreased, but then the collapse of the banking industry in September tightened the credit crunch hitting not only car buyers but dealerships.

Dealers typically finance their vehicle inventory from “floorplan” lenders, usually the lending arms of automakers such as GM and Toyota. But Welch said that over the past several months several floorplan lenders have instituted strict new policies that require dealers to pay down principal before cars are sold rather than after.

About 130 additional dealers statewide fear they will be forced to close their doors within the next six months unless they obtain immediate floorplan financing relief, according to a survey conducted by the industry trade group in February.

Now, auto dealers are wondering if people will still buy cars after increases in sales tax and vehicle license fees start to kick in during April to meet the state’s $42 billion deficit.

Passed last month, the new levies will add almost $400 to the price of the average new car, which is about $26,000. Broken down, that’s about $260 from the 1 percent sales tax hike, which takes effect April 1, and another $130 from the 77 percent increase in the vehicle license fee, which goes into effect May 19.

“All dealers agree they’re looking forward to a really good March,” Welch said with a bitter laugh. “They think that anyone who has the money to buy a car will do so now so they don’t have to pay the extra costs.”

Jack Kyser, lead economist for the Los Angeles Economic Development Corp., said the recent meltdown has only exacerbated a problem that has been long brewing: the reliance on a dealer network far larger than sales warranted.

“For decades, American manufacturers dominated car sales and theorized the more dealerships, the better. But as foreign sales rose in the 1990s trumping the domestic brands, especially in compact car-loving Los Angeles, the U.S. makers didn’t scale back,” Kyser said. “You are watching a major industry literally come apart at the seams.”

A couple of years ago, M.J. Vaughn started to see the downturn hit his dealership, Guy Schmidt Automotive Group in Glendale.

Vaughn took over the dealership in the mid-1980s, when domestics ruled the auto landscape, and his business helped General Motors sell 1 million Oldsmobiles a year.

Business remained steady for years and other domestic nameplates he carried Cadillac, Pontiac, GMC and Buick all sold well, especially trucks and SUVs, into the early 2000s. They had been selling about 325 cars a month, but around 2004 sales had declined to about 200 a month, and he started shedding employees and selling property.

By last summer, he was down to one location with 42 employees, from three locations with 187 employees and that’s when he decided to call it quits. He was selling just 85 cars a month, and predicted the lot wouldn’t move enough to make ends meet, let alone make a profit.

“It was the most painful moment in my career. It can feel like a failure because you weren’t able to survive and have to let go all these people you’ve worked so long with,” said Vaughn, 62, who spent 40 years in automotive sales.

“I’m glad we got out just in time,” he said. “We were able to get almost everyone a job elsewhere. But since then, it’s suddenly accelerated even worse than I thought it could.”


Rising tide

Meanwhile, dealers trying to stay afloat have cut costs at every corner, downsizing staff, scaling back advertising, turning off all lights at night, or only giving customers half-tanks of gas instead of full ones when they purchase cars.

“In times like these you just have to be a good entrepreneur and scrutinize every dollar and every decision,” said Gilligan of Cerritos Ford, which shrank its staff and advertising by 15 percent last year. “We know that automakers are trying to shrink down the number of dealers, so it’s kind of like survival of the fittest.”

A mildly bright spot for new car dealers: their used car sales. Sales of secondhand autos are up or holding steady at most lots, dealers said, mainly because they are cheaper than new models. However, the Department of Motor Vehicles reported that 416 used car dealerships closed in California in 2008.

“I think right now all you can do is try to motivate yourself and your employees to just do your best,” Gilligan said. “You can’t control the entire industry but really only what’s on your lot.”

While some dealerships are closing, allowing automakers to slim down their franchise networks under federal government pressure, local dealers are seeing an opportunity to merge or acquire smaller competitors.

One of those dealers considering such a move is Danny McKenna, who owns McKenna Motors, which sells foreign cars such as Porsches, Volkswagens and BMWs, at locations in Norwalk and Huntington Beach.

McKenna wouldn’t disclose the dealerships he’s eyeing, but said he wouldn’t acquire domestic brands because of the risk.

“I’ve seen five dealerships around me tank in the last couple of months. Of course I’m scared to death to stay in the business,” he said. “I know I’m walking into a business problem, but I know it’s the right thing to expand.”

No posts to display