The nation's new-car dealerships are facing their toughest times in 30 years, as an increasingly fragmented industry, high real estate costs and manufacturer pressures freeze cash flows or cause ledger books to bleed red ink.
One automotive research firm, J.D. Power & Associates, predicts that as many as 2,000 of the nation's 25,000 existing dealerships will go out of business within the next two years, with domestic stores - especially those selling General Motors Corp. products - being hit the hardest.The makeup of U.S. dealerships will also change dramatically within the next decade, as Asian automakers building cars both here and abroad establish new franchises. Much of that new business may result from domestic car dealers switching to or adopting import brands, the Agoura Hills, Calif. researchers said.
Much of the growth will be in the Midwest and Southeast. Those areas have traditionally been the strongest markets for GM, Ford Motor Co. and Chrysler Corp., the nation's Big Three carmakers.
But companies such as Toyota, Nissan, Hyundai and Mitsubishi are headed straight into America's heartland now that they have established dealerships on the East and West coasts.
The number of U.S. car dealerships selling domestic or imported vehicles fell from 25,156 outlets in 1987 to 24,938 last year. However the number of franchises, or separate name brands, rose as remaining dealers sought to spread their risks.
But industry analysts caution that many of those "multifranchises" are heavily leveraged operations that could tumble like the proverbial house of cards if things get much worse.
Dealer profits have been dwindling despite a relatively stable market of about 15 million new cars and trucks sold each year since the early 1980s.
"Most dealers last year did not average more than 1 percent in after-tax profits, and for the first quarter of 1989, more than half were in the red," said Ron Tonkin, 1989 president of the National Automobile Dealers Association, which represents about 20,000 dealers.
Tonkin, an outspoken critic of the automakers, said most dealers need to generate about 2.5 percent in net profits to generate a cash flow and stay in business.
"While automakers are making record profits, the public perception is to mentally transfer this to dealers," Tonkin said. "But the truth is they are having their worst time in three decades."
The proliferation of new models during the past two decades is part of the problem, as new brands appear and more types of vehicles are offered to fill every possible buyer niche. That has fragmented the market both by volume and geographic territory, reducing per-dealer business.
"The real estate people have also forced tremendous inflation in land costs, making it almost prohibitive to start or acquire a new dealership point," said Thomas O'Grady, of Integrated Automotive Resources Inc., of Wayne, Pa.
Pressures from automakers themselves are also responsible for profit declines and dealer bankruptcies.
"Automakers have made their dealers an endangered species by transferring their costs to the backs of dealers," said Tonkin, who owns about 10 dealerships in Portland, Ore. "While dealerships have no right to change their franchise contract with the manufacturer, automakers as cavalierly as possible can change it simply by writing a letter."
One of the latest flaps between the dealers and manufacturers concerns the elimination of carryover costs by GM and Ford, under which the dealer receives 5 percent of the cost of vehicle back from the manufacturer once a new model is introduced.
"This enables automakers to sell current model cars well into the current model year," Tonkin said. "Otherwise, dealers would not buy those cars when a new model is right around the corner."
Another is making the dealer pay about 1 percent into a mandatory advertising fund, as well as the perpetuation of cash rebates, which Tonkin says has turned auto dealerships into "three-ring circuses."
"Prices are just too damn high on cars," the NADA president said, citing a 6 percent decline in U.S. car sales so far this year. "Cars should be priced realistically and manufacturers should let us do the selling. They should just stay out of our sandbox."