Motor Vehicle Dealers

Industry Snapshot

The automotive industry as a whole faced overwhelming difficulties in the late years of the twenty-first century's first decade as the economy sunk into a deep recession and gas prices were highly volatile. In addition, the banking industry was in crisis, creating a credit crunch that brought automotive sales to a grinding halt. Two of Detroit's Big Three manufacturers (Ford, Chrysler, and General Motors) accepted billions of dollars in federal bail-out money to salvage the failing industry, but, nonetheless, by mid-2009, two of the three, General Motors and Chrysler, had filed Chapter 11 bankruptcy. As a result, car dealership profits were down to near 20-year record lows and thousands of dealership across the United States were shuttering their doors in the face of ongoing slow sales.

Organization and Structure

While the central function of car dealerships is, of course, selling cars, dealerships often engage in two related business lines: financing and repairs. In the late years of the first decade of the 2000s, the industry remained highly fragmented with 90 percent of the industry's market share controlled by smaller regional and independent dealers. Small dealerships usually do not have resources to offer financing, but larger chains may grant car loans as a service to their customers and as a source of additional revenue and profit. Many more dealers also furnish maintenance and repair services, typically to customers of the dealership or to owners of cars from the dealership's franchised line.

Pricing.
Pricing has long been a debated issue in auto retailing, and it is one that regained attention as the new superstores eschewed negotiable pricing in their outlets. As in many retail trades, new car retailers priced their products based in part on a manufacturer's suggested prices and in part on other factors, including current demand and incentive programs, which usually resulted in cars selling at less than the manufacturer's suggested level. Sometimes there could be a wide disparity between a car's list price and its usual selling price. In France, for example, auto dealers routinely sold Renault and Citroen models, which manufacturers marked up at a premium to comparable imported models.

A major determinant in traditional pricing was also buyer negotiation--more often termed haggling--based on what the buyer might know about the dealer's costs or prices of competitive products. By the end of the first decade of the 2000s, consumers increasingly paid attention to, and had greater access to, information about dealers' costs, the value of various option packages, and the average mark-up on car prices to cover dealer costs and profit--information that is easily researched on the Internet. This information gave consumers considerable bargaining power and helped keep prices, and consequently, dealer profits, low compared with earlier periods.

Traditional used car pricing usually involved a similar process of negotiation. However, with used cars, the cost and market value could be much more ambiguous. Factors such as a used car's age, condition, and relative popularity figured into its valuation, and while published "book" values were available for comparison, the procedure might be cloaked in much greater subjectivity in comparison to new car pricing. The murkiness of used car valuation is, in part, what made the used car side of the business more profitable, as dealers often had flexibility to mark up trade-ins and other acquisitions at much higher rates than new cars. However, it also led to some abuses, notably when consumers were unaware of the average market price for a car (or the exact condition of all of its components) and a dealer convinced him or her to pay much more than it was worth.

New Car Franchises.
Compared to other retail businesses, car dealerships were unusually dependent on manufacturers in that new cars in Japan, Western Europe, and North America were sold almost exclusively by companies that had been granted one or more dealership franchises by manufacturers. All of the world's leading automakers thus regulated the number and type of retailers who sold their products with increasing scrutiny. Some manufacturers watched with discomfort as consolidators purchased the businesses to which they had granted franchises. A notable dispute erupted in 1997 between Republic Industries Inc., parent company of AutoNation, and automakers Honda and Toyota. The manufacturers attempted to ban Republic from acquiring more than a certain number of their franchise holders within certain markets and over a specific time frame. Toyota, for example, mandated a nine-month waiting period between acquisitions of its franchises and imposed maximum limits of seven separate Toyota franchises and three Lexus franchises per retailer.

New car dealership franchises were usually granted along the lines of the manufacturers' different marketing divisions. This means, for instance, that General Motors Corporation issued separate licenses to market different lines, such as Chevrolet and Pontiac, so a Chevrolet-brand dealer did not automatically have rights to sell Pontiac models.

Used Car Dealers.
While car dealers often marketed used as well as new cars, including many that were traded in during the purchase of new cars, used car dealers exclusively dealt in previously owned vehicles. These cars were obtained from wholesalers, auctions, or private individuals. As a result, used car dealers were considered to be independent, required no license from manufacturers, and were able to sell any make and any model.

Background and Development

Automotive retailing throughout the world underwent rapid transformation in the 1990s. In major markets, such as Japan, Western Europe, and the United States, widely fragmented retail structures began to give way to larger, consolidated dealerships. Although demand for new cars was relatively flat during the mid-1990s, squeezing already tight profit margins at dealerships, North American dealerships were posting higher levels of sales and earnings than ever before by the end of the decade. Fueled by these sales, the number of dealerships in the United States grew to 22,007 in 2000, compared to 22,004 in 1999. Although the addition of three dealerships may appear insignificant at first glance, the increase was important as it marked the first such upswing in the United States since 1986. Between 1992 and 1997, the total number of car dealers in the United States had declined about 4 percent.

In Japan, demand at car dealerships was particularly bleak, even though exports in 1997 were bolstered by a weakened yen. Overall unit demand in Japan dropped 5 percent in 1997 as the effects of a new tax and general economic austerity weighed heavily on the country's appetite for new cars. As a result, Japanese car dealers resorted to new methods to entice the price-conscious Japanese public. In all of the major markets, downward pressure on prices, particularly on used cars, further eroded dealers' narrow profits in 1997 and 1998. German imports found success in the Japanese retail market in 2000. Volkswagen Group Japan sold a record 58,481 units, due mainly to its solid local dealer network, as well as to the popularity of the new Beetle.

Drawing the most attention in the decade, perhaps, was the rise of dealership consolidators and so-called superstore chains, which assembled an extensive line of new or, more often, used cars in a customer-friendly sales environment. The superstores, which originated in the United States with such chains as AutoNation USA and CarMax, were based on mass merchandising's category-killer concept, first pioneered in the United States by the likes of Toys "R" Us and later refined by such chains as Home Depot and Office Depot. The goal of these chains was to combine in one place a wide selection of popular merchandise that theoretically had everything falling under a particular retail category in one store that might otherwise be sold by several separate traditional retailers. CarMax, which was launched by the Circuit City electronics category chain, and its counterparts sought to bring economies of scale to the traditionally local and decentralized automotive retail sector. The same was the goal of dealer consolidators, which acquired a large number of dealerships in targeted markets instead of creating a unified brand image for all of their outlets. They then merged back-office administrative operations, including ordering and advertising, while usually keeping the local name and image of the dealerships.

Critics of these chains pointed out that the revenue growth of many consolidators and superstores resulted solely from the rapid accumulation of new sales outlets, such as AutoNation's acquisition of nearly 400 stores in less than 16 years. Because operations like AutoNation had yet to prove their ability to operate any more profitably than their more traditional rivals in the late 1990s, skeptics disagreed over the impact these dealer groups would have on the industry. In fact, despite the publicized frequency of dealer buyouts by consolidators, consolidators controlled less than 5 percent of the market in 1997.

Consolidation did appear to pay off for the largest industry players, however. According to Automotive News, the 100 largest dealership groups sold 2.1 million units in 1999, which accounted for 12.3 percent of sales in the United States, and 2.4 million units or 13.6 percent of sales in 2000. Some analysts predicted that these large dealer groups would control 15 percent of the U.S. market by 2004.

Profitability proved to be a key issue for car dealers in the late 1990s. After the value of manufacturing was subtracted, about one-fourth of the average new car's retail price was left to cover dealer costs and profit. In 1998, the average U.S. new car sold for US$22,000, leaving US$5,500 for the dealer. On the slim margins typical of the late 1990s, profits averaged just 1 to 2 percent of a car's sales price. Between 1999 and 2000, the average price of a new automobile grew only 1.8 percent, the lowest increase since 1991. Many industry watchers, including manufacturers and the emerging consolidators, speculated that room for considerable efficiency gains existed in car distribution that would allow a much higher share of the dealer mark-up to go toward profits. This belief underpinned the business philosophy of the consolidators.

Fueled by low unemployment and high consumer confidence, auto markets in Western Europe and North America reached near record levels in both sales and production in the late 1990s and the early years of the first decade of the 2000s. Although many dealers expected to see a softening of new car sales in 2001 as economic conditions weakened, just the opposite proved to be true. The catalyst for this turnaround was the decision by General Motors to launch a zero-interest financing campaign for new car buyers. The success of the "Keep America Rolling" program, which was put in place to boost sales after the September 11, 2001, terrorist attacks on the United States, prompted other automakers to follow suit. As a result, what had been predicted to be a bleak year for dealers emerged as the second-best sales year in industry history. Dealers found themselves in the unique position of being able to reap the benefits of the expensive marketing campaign, while not having to eat the associated costs, which did undercut earnings for most major car manufacturers in 2001.

By the beginning of the twenty-first century, the Internet had become an important marketing tool for car dealers. According to data compiled by J.D. Power and Associates, a growing number of car dealer Web sites attracted a total of more than 8 million visitors a month in 2001. Research Web sites, such as those operated by Kelley Blue Book, secured roughly 20 million monthly visitors that year. These numbers reflected the fact that although only 5 percent of new vehicle purchasers actually completed transactions online, nearly 60 percent of new car buyers used the Internet to research their purchases before contacting a dealer. Predictions in the late 1990s that the Internet would replace traditional dealers proved false, even as businesses like Autobytel.com began to sell directly to consumers via the Internet. Instead, most of the online players who survived the dot-com meltdown of 2000 worked directly with traditional dealers. For example, in 2001, Autobytel generated about 4 percent of all new vehicle sales in the United States by directing online shoppers either to dealer Web sites or to dealer showrooms.

Globally, the retail industry for automobiles remained highly fragmented, although consolidation began to occur. Further consolidation was likely due to increased capital requirements of dealerships, the limited options open to dealers to exit the business, and the strategy of some manufacturers to strengthen their brand identity by consolidating their franchised dealerships.

In early 2005, car sales in Europe remained sluggish. Europe's largest market, Germany, continued to experience an economic slowdown, and the market for cars matched this trend. German purchasers, once noted for replacing their cars often and buying only the best, were driving cars that were an average of eight years old. In France, car sales were also down 1.3 percent in 2004.

In the United States, the automotive industry remained the largest sector of the retail industry in 2004, with total sales of approximately US$1 trillion. This was equal to about one-quarter of all U.S. retail sales. According to a 2005 study by the National Automobile Dealers Association, franchised new car dealers sold 16.86 million new vehicles in 2004, worth US$714 billion, and 20 million used vehicles, 11.8 million of which were retailed and 7.9 million of which were wholesaled. Dealers expected that profits would subsequently decrease as they watched interest rates and inventory expenses rise in mid-2004.

Industry consolidation slowed in the United States during 2004, but it was expected to continue at a moderate pace. The number of dealerships dropped marginally, but continued on a downward trend, dropping from a high of 25,150 in 1987 to 21,640 dealerships. However, dealerships in 2004 were larger and sold greater volumes. In that year, 6,490 dealerships sold more than 750 new vehicles each per year, whereas in 1985, there were only 3,850 dealerships with sales that high.

Sales of hybrid model vehicles, which use both gas and electric power, were expected to increase each year. While the sticker price of hybrids was still a factor in 2004, it was expected that prices would drop as the technology developed. Even so, hybrids were in demand from environmentally aware consumers and high mileage drivers alike.

In May 2007, Bloomberg reported that Japan's domestic vehicle sales fell for a twenty-second straight month. Sales of cars, trucks, and buses, with the exception of mini-cars, fell 10 percent to 217,911 vehicles in April from 2006, according to the Japan Automobile Dealers Association. This reflected the second worst April since the group started tracking sales in 1978.

By 2007, there was a growth in import dealerships in some of the strongest U.S. domestic markets. According to The Dallas Morning News, import dealers were "getting bigger and better" while becoming the largest group of area auto retailers. Many of the import dealerships were determined to improve their service departments and offering heightened levels of customer service including vehicle delivery services and concierges.

In its "2007 Market Data, Dealer Data" report, Automotive News shared significant financial and census data. In 2006, the average U.S. dealership's net pre-tax profit amounted to 1.5 percent of total sales per the NADA. The number of import-exclusive U.S. dealerships rose by 223 in 2006 to 6,127. There were 21,761 new vehicle dealerships at the beginning of 2007, which was down from 328 for the same time in 2006.

In 2007, the National Automotive Dealers Association asked the U.S. Senate to bring more transparency to the used car buying process by requiring insurance companies to provide consumers more access to data on their vehicles. Information about severely damaged, stolen, and flooded vehicles was of particular interest. Concerns grew out of the fact that many vehicles that were totaled or flood-damaged by Hurricane Katrina were rebuilt and back on the road. A vehicle with a salvage title could be easily "cleaned" or "washed" in a state with weak title disclosure rules. The association made an appeal for insurance companies to do more to prevent title fraud.

According to The Dallas News, both domestic and import dealership employees received approximately the same levels of pay and benefits. The pay received by managers related to dealership size more than to brand. Sales increases at import dealerships meant salespersons there had the opportunity to earn more through their commissions. Developments in Dallas were believed to mirror occurrences throughout the United States.

One of the most successful dealership owner discoveries was that investing in employees benefited everyone. Detroit Auto Dealers Association President Joe Serra ran a profitable business that was ranked twenty-first by Automotive News, which earned more than US$800 million, selling 20,715 new and 10,283 used vehicles in 2006. "I have partners in each of the stores. I'm an investor," Serra told the Detroit Free Press. Serra believes in helping employees and even has a scholarship program for their children. AutoNation Chief Operating Officer Mike Maroone said, "His dad [Al] was one of the first mega-dealers, Joe's just taken it to the next level."

Current Conditions

During 2008, an economic recession hit the U.S. economy, the banking industry found itself in crisis, and the availability of credit dried up. Consumer spending slowed significantly, unemployment rates rose, and good credit terms became harder to secure--if credit sources could be found at all. In addition, despite billions of dollars in bail-out money, both Chrysler and General Motors filed for protection under Chapter 11 bankruptcy on April 30 and June 1, 2009, respectively. At the end of 2008, CNW Marketing Research, Inc. reported that the number of franchised automotive dealerships fell to 19,000.

According to the National Automobile Dealers Association, the workforce of the new auto dealership industry dropped by 50,000 jobs in 2008 as dealers looked to cut costs. Industry leader AutoNation, Inc. eliminated 3,650 positions in 2008. Employment numbers continued to fall in 2009 as more dealerships closed in the wake of General Motors' and Chrysler's bankruptcy announcements. Chrysler announced that it would close approximately 790 dealerships of its nearly 3,200 dealers as part of its bankruptcy proceedings.

In 2008, U.S. sales of new automobiles fell to 13.2 million, down from 16.1 million in 2007 and the lowest total since 1992. Dealerships found no relief in the first half of 2009. Year-to-date (YTD) sales of all light vehicles in May 2009 totaled 3.95 million units, compared with May 2008 YTD sales of 6.22 million. Although all makes saw declining numbers, General Motors and Chrysler fell dramatically. General Motors' May 2008 YTD total sales volume was down by 46 percent; sales volume of domestic cars fell over 58 percent. Similarly, Chrysler's May 2008 YTD total sales volume was down by 42 percent; domestic car volume was down by 44 percent and imported cars fell off by 63 percent.

Market research firm A.T. Kearney, as cited in American Metal Market in May 2009, suggested that light vehicle sales traditionally fall during recessions. However, because consumers delay major purchases such as new cars during difficult economic times, demand becomes pent up. Eventually, as the economy rights itself, that demand is unleashed. Consequently, A.T. Kearney predicted that new car sales would fall by 24 percent during 2009 to 10 million units but would rebound to plus-16 million by 2012.

Industry Leaders

AutoNation Inc.
Fort Lauderdale, Florida-based AutoNation, which has roots as a waste disposal company dating to the 1980s, rose quickly in the mid-1990s to become the world's largest, flashiest, and most controversial automotive retailer. Under the leadership of H. Wayne Huizenga, who was also the founder of market-leading Blockbuster Video and Waste Management, AutoNation embarked upon a string of dealership acquisitions. Simultaneously, the firm bought up a number of the largest car rental firms in the United States and Europe.

AutoNation was reputed to buy out franchise dealerships at substantially higher valuations than had ever before been practiced in the industry, particularly during the initial years of operation from 1995 to 1997. Indeed, when Ford Motor Company tried a small-scale experiment to buy a few of its dealers, it found that dealers were unwilling to accept Ford's conventional buyout offer because they apparently wanted sums on par with AutoNation's high-stakes acquisitions. Although AutoNation was by no means the only aggressive consolidator in the United States, it came to symbolize the tumult facing the industry. In early 1998, a leading auto industry trade journal featured an issue with extensive coverage of how smaller dealers were responding to competitors like AutoNation. Most sentiments were against the consolidation trend, although some industry executives expressed the surprising view that nearby superstores were helping their conventional businesses because their heavy advertising and novelty attracted more car shoppers to a central area, many of whom also browsed traditional dealerships along the way.

By the beginning of the twenty-first century, AutoNation had divested its car rental holdings and closed its 23 used car megastores. Believing that it had grown too quickly, the firm also decreased its number of dealerships from 290 in 1999 to 282 in 2000. Franchises also were pared down from 395 to 375 over the same time period, further dropping to 358 by 2004. During 2004, the company retailed 650,000 new and used cars of 35 different brands. Sales that year increased slightly to reach approximately US$19.4 billion, and net income continued to show signs of improvement.

By 2007, AutoNation reported owning 254 new car franchises with approximately 25,000 employees in more than 16 states. It also offered high-tech sales policies and online sales options through AutoNation.com and individual dealer Web sites. Additional AutoNation offerings included maintenance and repair services, auto parts, and vehicle financing and insurance. The company reported sales of approximately US$19 billion for 2006. It had budgeted $400 million in 2007 for share repurchases and capital investments.

AutoNation followed the entire auto industry's downward trend in the late years of the first decade of the 2000s. Revenues fell off to US$17.7 billion in 2007 and fell again in 2008 to US$14.1. More alarming was the sharp decline in the company's reported total net income, which dropped from a gain of US$278.7 million in 2007 to a loss of US$1.2 billion in 2008. The company reported diluted earnings per share--which were US$1.39 and US$1.38 in 2006 and 2007, respectively--as a loss of US$6.99 per share in 2008. The company;rsquo;s common stock, traded on the New York Stock Exchange, took a serious hit, falling from a high per share price of US$23.19 in the first quarter of 2007 to a low of US$3.97 per share in the fourth quarter of 2008. To paint an even darker picture, by 2008, AutoNation's total assets had declined by nearly US$2.8 billion since 2005 and, over the same period, its long-term debt had nearly tripled to US$1.2 billion.

Penske Automotive Group.
Penske Automotive Group is the second largest automotive dealership in the United States, behind AutoNation. The company operates approximately 156 dealerships in 20 states as well as 148 international franchises, primarily in the United Kingdom, but also in Puerto Rico and Germany. About 64 percent of income is generated by U.S.-based sales, and 36 percent is generated internationally, primarily in the United Kingdom. Imports such as Audi, BMW, and Honda account for all but about 4 percent of Penske's sales.

Reacting to the collapse of the retail automotive market during 2008, Penske cut about 1,400 jobs, representing approximately 10 percent of its workforce. Similar to AutoNation, Penske Automotive's stock also dropped dramatically, from a high of US$24.62 per share in the first quarter of 2007 to a low of US$5.04 in the fourth quarter of 2008. Total sales for 2008 were down also, from US$12.8 billion in 2007 to US$11.6 billion in 2008. The decline was due primarily to a 14 percent year-on-year decline in same-store sales. While the company posted a net income of US$127 million in 2007, it reported a net loss of US$411.9 million in 2008. Diluted earnings per share were US$1.35 in 2007 and a loss of US$4.45 in 2008. In June 2009, Penske Automotive agreed to take over the Saturn brand from the struggling General Motors.

Sonic Automotive Inc.
One of the fastest growing dealership groups at the beginning of the twenty-first century, Sonic Automotive was founded by O. Bruton Smith in 1997 with five dealerships. By 2009, the company operated 135 new and used car dealerships and 33 collision repair centers in 15 states, posted revenues of approximately US$6 billion, and had 10,400 employees. Sonic sells more than 35 brands of cars and light trucks and offers vehicle-financing plans. Strategic plans called for continued focus on growth in metropolitan markets. Sonic owns Don Massey Cadillac, the largest Cadillac dealer in the United States. At the end of 2008, Sonic found itself with a debt of US$1.9 billion and on shaky ground with its creditors. The company warned in its 2008 Annual Report, "If we do not restructure or obtain additional financing to satisfy our substantial debt obligations . . .we may be unable to avoid filing for bankruptcy protection." Net income in 2007 was US$95 million; in 2008 the company reported a net loss of US$868 million.

CarMax Inc.
A publicly traded spin-off of the United States's Circuit City Stores Inc., CarMax was credited with introducing the no-haggling, wide-selection, customer-friendly superstore concept to the auto retail industry. By 2004, it was the United States's largest dealer of used cars. Founded in 1993, the used car chain grew much more slowly and attracted less media attention than groups such as AutoNation, but during the 1990s it forged a solid position in a number of U.S. regional markets, primarily in the Southeast. Among the amenities it offered were fixed pricing, somewhat akin to grocery stores' so-called everyday low pricing, snacks, and recreation areas for children. The group doubled its outlets from 20 to more than 40 between 1998 and 2001, with the number growing to about 100 by 2009. CarMax specialized in used cars that were less than six years old with fewer than 60,000 miles. It also sold older cars with more miles under its ValuMax program. For fiscal year 2008 (ending February 2009), CarMax posted US$7 billion in revenues. The company maintained a payroll of 13,000 workers. Also impacted by the auto industry's weakened state in the late years of the first decade of the 2000s, CarMax's net income fell from $182 million in 2007 to $59.2 million in 2008. Its new car sales declined in 2008 by nearly 29 percent; used car sales fell by 8 percent.

Group 1 Automotive Group.
Group 1 continues to move ahead as the second-largest Ford Motor Company dealership group in the United States. It owns and operates more than 140 franchises at 105 dealerships. In addition, it is responsible for approximately 30 collision service centers in more than 12 states. These dealerships offer new and used cars along with light trucks through about 30 different brands. Group 1 also offers financing plans, maintenance and repair services, and sells replacement parts. Since acquiring about 12 dealerships in 2006, the company continued to focus on growth strategies.

America and the World

The United States has traditionally been the world's largest retail auto market. However, China, which had already surpassed Japan to become the world's second largest market, was outpacing the United States in monthly sales for the first time in 2009. Some analysts predicted that 2009 would be the first year that China would overtake the United States, with China's expected volume to reach approximately 10.7 million units whereas 2009 estimates for U.S. consumption of new vehicles ranged from 9.6 to 10 million. In the wake of an economic stimulus package by the Chinese government, auto sales, which had slowed somewhat after extremely rapid growth, once again surged in China in mid-2009. Consumers were faced with up to a three-month wait to drive home a new car as suppliers worked overtime to meet demand.

One of the United Kingdom's largest dealer groups, European Motor Holdings operated 50 franchises throughout the United Kingdom in 2009, all of European-make cars. The company was founded in 1991 when a group of nine motor retail businesses joined forces. The following year, the group purchased Casemount Holdings Ltd., which evolved into its motor services arm. Eight more dealerships were added that year as well. Normand Motor Group Ltd., which included 16 dealer franchises throughout southeastern and northwestern England, was acquired in 1994. Two years later, European Motor bought Telford Motor Auctions. In 2007 the company was purchased by Inchcape plc, a $12 billion organization in the U.K. auto industry, which also operated the online auto retailer Autobytel UK.

European Motor Holdings' key franchises included Volkswagen, Rover, Volvo, Mercedes-Benz, and BMW. Just over half of European Motor Holdings' unit sales came from used cars It served as the sole distributor for Perodua economy cars, a compact vehicle manufactured in Malaysia. The company also operated motor auctions and international automotive imports, a vehicle washing equipment unit, an electrical parts reconditioning unit, and a timber/plywood packing business.