December 12, 2008 - Virginia Dealers, Hampton Roads VA

Local car dealers at risk of closing in crowded field

Hampton Roads, like many parts of the country, has too many automobile dealerships, and those familiar with the local market acknowledge that some will close as the U.S. car industry restructures.

"We will lose dealer head count," said Fred Miller, president and chief operating officer of Hall Automotive, the region's largest dealer group with 16 locations. "Maybe that's what needs to happen to right-size the industry."

Don Hall, president of the Virginia Automobile Dealers Association, agreed that Virginia is "overdealered" in some areas, particularly more populous metropolitan areas, such as Hampton Roads.

As auto sales plummet and U.S. car makers continue to lose sales to imported brands, industry leaders have recognized that they have more stores selling cars and trucks than they need. In Virginia, vehicle sales have dropped 20 percent for the year and 35 to 40 percent in the past two months, compared with 2007, Hall said.

"What we're going through right now is totally unprecedented," he said.

In plans submitted to Congress as part of their request for federal financial assistance, General Motors Corp. and Ford Motor Co. said they intend to shrink their dealership networks. GM projected it would reduce the number of its dealers by 27 percent, from 6,450 nationwide to 4,700 in 2012.

"At our current and expected future market share, we clearly have too many dealers and therefore have made it increasingly difficult to sustain a healthy and profitable dealer network," Ford wrote in its plan, submitted Dec. 2 to the House Financial Services Committee. "To address this overcapacity, we are partnering with our dealers and are downsizing and restructuring the Ford, Lincoln and Mercury network in our largest 130 metropolitan market areas."

At the end of 1997, the Big Three - GM, Ford and Chrysler LLC - had 71.5 percent of the car-buying market, said George Hoffer, an economics professor at Virginia Commonwealth University who specializes in the auto industry. In January 1998, domestic auto dealerships numbered 17,865, said Hoffer, citing an Automotive News market report.

A decade later, the U.S. manufacturers' market share has dropped to 50.6 percent and their dealership franchises to 14,294. They have lost about 30 percent of their market share but only 20 percent of their dealers, and most of those dealership cuts were part of the elimination of the Oldsmobile brand, Hoffer said.

"They are whistling in the dark unless something fundamentally changes," he said.

GM said it will focus on the four of its eight brands that account for 83 percent of its sales - Chevrolet, Cadillac, Buick and GMC. Pontiac would become a "specialty" brand, GM said. The company has suggested it might sell Hummer and Saab.

Saturn "has performed below expectations," GM wrote in its plan. It will "explore alternatives for the Saturn brand."

The owners of Cavalier Automotive Group, which operates the Saturn dealerships in Virginia Beach and Chesapeake, did not return phone calls this week.

Hall Automotive owns the sole Hummer dealership in the region, and Miller said he has confidence in its future.

"My presumption is I'm going to be selling Hummer," he said. "I just don't know who I'm going to be selling Hummer for."

The Ford dealerships in South Hampton Roads have performed well even as sales have fallen, said Robert Christian, sales manager for Kimnach Ford in Norfolk.

"We've been holding our market share," he said. "It's impossible for them to come in and shut us down."

By targeting the retailers, the industry has put national and state dealer associations - and their significant lobbying muscle - in a precarious position. Dealers want to support manufacturers to make sure they can keep supplying products to sell, but they don't want Congress to give the automakers the power to shut them down.

Today, most states have franchise laws that restrict the ability of the manufacturers to close individual dealerships. If an automaker does seek to shut down a dealer, the laws generally require that the dealer receive fair compensation for its new-car inventory, some of its equipment and sometimes even its real estate, Hall said.

In most cases, automakers make little investment in local car dealerships, Hall said. Dealers pay for their inventory - usually through a line of credit, often provided by the manufacturers - as soon as they order the vehicles, and they take all the financial risk of building, staffing and running the operation, Hall said.

So keeping dealerships open - even too many of them - doesn't cost manufacturers anything, Hall argued. "The size of the dealer network really isn't the problem."

Ford and GM want to downsize their dealer networks primarily to gain more oversight of the retailers that remain, Hall contended. "It allows them to shrink the body and exercise more control," he said.

Original Story - Virginian-Pilot