Hope Persists as Adjustment to “New Normal” Continues
— First, the bad news. “2009 was such a horrific year for the auto dealership industry that there’s simply no such thing as going ‘back to normal.’ Enter ‘the new normal’, says Jim Eagan, an automotive consultant and partner at Plante & Moran PLLC who has provided financial and management consulting to more than 300 automotive dealerships. Eagan has just published a whitepaper entitled, “The Plante & Moran Perspective on the U.S. Automobile Dealership Industry Outlook for 2010: Understanding the New Normal.” Following are some of the highlights.
Eagan says that although many auto dealers are pinning their hopes on a positive 2010, and promising signs do exist, 2010 will still likely be one of the three worst years the industry has experienced in the last 30. Simply put, improvement, while present, will be slow and gradual. Further, the individual dealership slug fest of 2009 will continue in 2010 if dealers want to end the year with positive results. According to Eagan, both positive and negative factors affecting auto dealers in 2010 can be defined by category:
- High unemployment, underemployment, and high foreclosures hinder significant improvement in consumer confidence.
- Low consumer confidence fuels low consumer spending for big purchases like new vehicles, as well as purchases in other dealership departments.
- U.S. consumers are heavily in debt, and many consumers’ credit scores have taken a beating. It will take years for them to improve their balance sheets.
- Questions remain on whether the improvements in U.S. economic conditions can be self-sustaining without further government interventions.
- Tax rates are likely to increase.
- Fuel price volatility is not anticipated this year.
- There’s pent up demand among customers that will be unleashed as consumer confidence levels improve.
- Financial institutions remain stressed, and credit availability to dealerships and many customers will remain very tight.
- It’s expected that the Federal Reserve will continue to keep short-term interest rates low, which should keep dealer floorplan interest rates low.
- Auto Industry
- Manufacturer market shares are shifting, which will create dealership winners and losers in the battle for showroom traffic and sales.
- Manufacturer cuts in production will cause inventory shortages and allocation issues for some dealers.
- The supply of quality used vehicles will remain tight; wholesale acquisition costs will remain high.
- The U.S. seasonally adjusted annual rate (S.A.A.R.) for new car and light truck sales is anticipated to increase by about 20 percent in 2010.
- Local Retail Dealerships
- Dealership real estate values are depressed.
- Lean inventories and low floorplan rates should reward dealers with low floorplan interest expenses.
- Customer demand for used vehicle purchases will remain strong.
- Consumers who have been holding off buying a new vehicle will need more routine maintenance performed on their existing vehicles.
- There will be more dealership buy-sell activity, driven heavily by dealers seeking replacement franchises.
- Fewer dealers combined with those seeking replacement franchises will increase “Blue Sky” levels.
Eagan counsels that there are actionable items dealerships can pursue in 2010 to increase their chances of survival and even prosperity.
“Difficult times create worry and fear in the minds of dealership owners and employees, but these mental stresses can also stimulate motivated individuals to adapt and overcome,” affirms Eagan. He offers the following sampling of directives for dealership owners to increase the odds of survival now and prosperity in the years ahead:
- Provide Leadership
- Ensure You Have the Right People on Your Team
- Keep the Right People on Your Team. Look for Valuable Free Agents. Remember the Customer, the Customer, the Customer
- Review Pay Plans
- Optimize Your New Vehicle Inventory Management
- Increase Your Focus on Used Vehicle Merchandising
- Capture Increased Service, Parts, and Body Shop Business
- Maintain Excellent Relationships With Your Financing Sources
- Evaluate Whether This Is a Good Time to Buy
- Evaluate Your Dealership’s Internal Controls
- Embrace Social Media
- Assess Your Estate and Gift Tax Planning Opportunities
2010 will be a rough road to navigate, concludes Eagan, but it also marks the beginning of the rebuilding years for the auto dealer industry.
“There will be disappointments and dealer closures, but on net, much good is sure to come out of the reassessment process in the dealer industry,” notes Eagan. View the 2010 Auto Industry Outlook
whitepaper in its entirety.
About Plante & Moran, PLLC
Plante & Moran is among the nation’s largest certified public accounting and business advisory firms, providing clients with tax, audit, risk management, financial, technology, business consulting, and wealth management services. Plante & Moran has a staff of more than 1,600 professionals in 21 offices throughout Michigan, Ohio, and Illinois with international offices in Shanghai, China; Monterrey, Mexico; and Mumbai, India. Plante & Moran has been recognized by a number of organizations, including FORTUNE magazine, as one of the country’s best places to work.