Every day we speak with dealers who are encountering the unique challenges facing the car business. In the following article, Jim Eagan brings more than 30 years of experience working with dealerships to offer recommendations for those trying to navigate through these uncertain times.
Issues Facing Automobile Dealers
As the country deals with our economic challenges on a national basis, the dealerships in the automobile industry are feeling a unique sort of pain. Can there be seeds of opportunity in the middle of this struggle? With good judgment, leadership, and a “can-do” attitude, we believe there are.
Our discussions with auto dealers over the past few months have focused on a variety of challenges that include:
- Lack of available credit for those who want to buy vehicles: This is now a huge and frustrating obstacle to selling vehicles. Although currently a big hurdle, many dealers draw solace in knowing that the lack of available credit issue is a huge national issue right now and it is getting widespread attention because it affects so many industries. Many dealers believe that as soon as the credit markets get relief, doors should open to some pent up customer demand to buy vehicles and other dealership products and services.
- Significant and sudden departure of the banks and the captive financial institutions from retail lease financing. This has seriously inflicted pain on dealerships in traditional lease markets. While the transition has been painful,many customers are accepting the fact that leasing is probably a thing of the past and financing purchases up to five years and beyond is here to stay.
- Determining the appropriate used vehicle inventory mix to stock. This has become a greater challenge these days. Four dollar a gallon gas caught many dealers with the wrong inventory mix. With the relative stability of lower gas prices, some dealers are selling more profitable trucks and SUVs again. In addition, many are excited about the prospect of more fuel efficient products coming on the horizon soon from their manufacturer.
- Losing big money and burning through their cash and equity. Some of these dealers are just about backed into a financial corner and question whether they should just throw in the keys and do a voluntary termination. "What do you do about the real estate?" "What about the careers and income of family members who work in the business?" Most dealers we hear from are fighting back and making the necessary changes to stay in business and weather the storm.
- Concern over the viability of their manufacturer. Dealers are investigating the consequences to them, if their manufacturer filed for bankruptcy (prepackaged or not) protection.
- Challenges selling their dealerships and valuing them appropriately. Many are thinking: "Who might be interested in buying it?" "How much blue sky, if any, should I ask for?" "If I found somebody who wanted to buy my dealership, what is the likelihood that they could obtain financing?" The good news for some dealers wanting to sell is that there are other dealers who are in a buying mood and who would be willing to pay some blue sky to get the right deal done. For dealers not wanting to sell, many are using these difficult times to take advantage of lower franchise valuations for gift and estate planning purposes
- Manufacturer consolidation plans. For dealers who are negotiating a sale with nearby dealers as part of a manufacturer consolidation plan, they are concerned about getting a fair price.
- Financing institutions exiting from floor plan financing. Some dealers have been informed by their financial institutions that they would like to reduce or exit their current lending arrangements. Other dealers are afraid their current financing source may exit the dealership lending market.
- Headcount and operating expense reductions have already been made. Many dealers are in the midst of conducting the third, fourth, and higher rounds of cost structure evaluation. Further headcount and payplan changes would be really painful, they cut to the bone! Others believe that the current times have forced them to make cost structure changes that should have been done long ago.
What Lies Ahead
We fully expect the economy to recover, consumer confidence to re-emerge, and a sense of normalcy to return to the financial sector and capital markets.Two critical ingredients – confidence and credit conditions – must both improve for dealership customers to increase their pace of spending and pave the way for higher dealership grosses and profits.
The upside for dealerships who succeed in surviving to that point is there will be less competition, greater demand for new vehicles, used vehicles, service, parts and body shop purchases, and increased profitability.
Navigating Successfully Through These Uncertain Times
To navigate successfully through these uncertain times and end up a survivor when better days arrive, here are some guiding principles for prudent dealers:
- Provide strong and steady effective leadership to your dealership and personal family members. Dealerships who survive will stand up and resist the tyranny of negatives in the business environment.
- Make consistent good judgments for both the short term and long term. Failure to think decisions all the way through or making decisions based on inaccurate or insufficient facts must be avoided at all costs. Bad judgment, especially in tough times, can be difficult to overcome.
- Adopt an attitude of grit, which is another way of saying unyielding courage. As a breed, dealers are fighters and survivors who find their way out of difficulty. We have talked to numerous dealers about the current situation, and have reminded them that they have been successful in the past and have experience and success weathering the cyclical nature of the car business.
Can We Help You Increase Your Odds For Success?
As a trusted advisor to many dealer clients, Plante & Moran has substantial experience working one-on-one with our clients in developing ways to maximize opportunities out of challenges. We are currently consulting with dealership clients to better cope with the issues and take advantage of the opportunities, including:
- Cost Structure and Profitability Improvement Evaluations — There is a big difference between the total gross profit of any dealership and its bottom line. Almost everything in between is controllable by the dealer. We help dealers make sure that the bottom line is delivered through maximizing effective decisions.
- "Nice to Have" versus "Must Have" Expense Studies — Many dealerships over time, especially better times, attract too many "Nice to Have" expenses that become solidly entrenched in the mindsets of everybody. Our studies assist dealers and management in identifying these types of profit burners.
- Payplan Analysis — Many dealership payplans do not motivate employees to do what the dealer wants them to do. We assist dealers in sorting this all out, developing effective payplans, and conducting financial pro-formas to make sure the plans produce the intended results.
- Vehicle Inventory Dead Wood Analysis — We assist dealers in implementing effective vehicle acquisition controls to minimize costly ordering mistakes.
- Cash Flow & Frozen Capital Evaluations — Oftentimes dealers spend too much time looking at their income statements and too little time focusing on the causes of frozen capital. We help dealers make sure their internal processes sound the bell loudly when cash isn’t moving like it should. We can also be utilized on a periodic basis to identify where cash is being tied up.
- Advertising Expense Effectiveness & Affordability Analysis — We assist dealers in honestly evaluating whether they are getting their biggest bang for the buck from their advertising expenditures and whether they can afford it.
- Buy/Sell Assistance — We assist clients from the earliest stages of when they deliberate whether to buy or sell a dealership to assist them at the closing. Our consulting includes providing clients with pricing/offer negotiation strategies, development of business plan pro formas, manufacturer discussions, tax advising and inter-acting with dealer legal counsel.