Feature: June 2009

Upticks in the Economy

There may just be hope for improvement.

By Joan Mooney and Mary Anne Shreve

Used-car prices are beginning to edge up again, according to NADA’s latest data.

The worst has come for many dealers, who are still reeling after getting pink slips from Chrysler and GM last month and are trying to sort out their options. But the auto industry’s story is still unfolding, and there are stirrings of a recovery in the economy, reasons to believe the turnaround may have begun. These developments should ultimately mean good news for dealerships.

• May’s vehicle sales SAAR—9.9 million—was the highest this year, as the year-to-date level hit 9.6 million. All six major automakers reported improvements from April.

• What’s good for the Dow is good for the dealer. The recent stock market rally is a good omen not only for the economy, but also for vehicle sales. NADA chief economist Paul Taylor finds a “broad correlation between the broad market indexes and car sales. A rising Dow and/or Nasdaq is good news for luxury car sales.” He says new-car sales should exceed 10 million this year, with the 31 states that have emerged from the housing bust seeing the most improvement.

• Consumers are feeling more confident. In May the Conference Board’s index of consumer attitudes jumped to its highest level in eight months—and showed the biggest one-month gain since April 2003.

• Fewer jobs are disappearing. May’s figure of 345,000 jobs lost was better than most economists expected. In fact, it was the smallest figure since last September. “It seems as though the bleeding has started to stop,” says independent auto analyst Erich Merkle. Most anticipate that unemployment will peak at 10 percent later this year or early next year.

• Contracts for home sales are rising. The index for pending home sales (based on signed contracts) rose for the third straight month in April, thanks to record-low mortgage rates and the first-time home buyer tax credit, says the National Association of Realtors. Detroit, Miami, and Las Vegas—some of the hardest-hit markets—are starting to stabilize, says CSM Worldwide economist Charles Chesbrough. The next place to look for an upswing, he adds, is housing starts, which historically have had a strong correlation to vehicle sales. As with auto sales, there’s pent-up demand for new housing.

• The hardest-hit markets will be the first to rebound. California, Florida, and other hurting regions have “good fundamentals,” says Jesse Toprak, executive director of industry analysis, Edmunds.com. “There’s a lot of population growth in those areas, and when the economy recovers, they will recover fastest.”

• Pent-up demand for cars will eventually burst the dam. There’s four to five million units’ worth of pent-up demand, say analysts. “A huge part of the population could be ready to go shopping fairly quickly” once they feel a little more confident, says David Cole, chairman of the Center for Automotive Research, Ann Arbor, Mich. According to an R.L. Polk study, 55 percent of respondents said they plan to buy a vehicle in the next 24 months, and a quarter of them plan to buy within the year.

• Chrysler’s bankruptcy didn’t scare off buyers. True, terminated dealers were selling at fire-sale prices, but consumers didn’t seem concerned about warranties or the company’s viability. And despite all the people who said it couldn’t be done quickly, Chrysler’s bankruptcy sped right along.

• Ford doesn’t plan any drastic dealer cuts. Ford has dropped 670 dealers—16 percent—gradually over the past three years. It plans further consolidations in metro areas, but calls them small compared with GM’s and Chrysler’s cuts. Ford execs say they expect a modest vehicle sales rebound to begin later this year.

• A “Cash for Clunkers” program could spur a million new-car sales. “It’s important to get people back into the shopping mode,” says Toprak. “If you see that your neighbor bought a car, then your friend buys a car, then a relative buys a car, you’re now thinking about buying a new car.” Auto industry forecaster CSM Worldwide says a million sales would generate more than $25 billion in revenue and more than $1.4 billion in state sales taxes.

• A new floor-planning source is springing up. Community and regional banks are pooling resources to offer financing for dealers: Dealership Company Capital Group in Connecticut hopes to have 10 banks in its network this summer, and a dozen more next year, and to provide $500 million to $1 billion in lending capital.

• The love affair with crossovers continues. Sure, crossovers may not bring in SUV-size margins, but neither are they unprofitable econoboxes. These popular vehicles, whose sales had been growing steadily for years before the recession, are still gaining market share, says NADA’s Taylor. They made up 21.4 percent of the market this year through April, a 2.8 point rise from a year ago.

• Say good-bye to unsustainable incentives. When the dust settles, automaker capacity will be more in sync with demand, eliminating the need to offer ever-greater discounts. “Giving $8,000 off a car is ridiculous—it devalues your product and says, ‘We got the price wrong,’ ” says Toprak.

• Vehicle production is down, but so are dealer inventory levels. Gone are the days when 100-plus days’ supplies were common, says Cole. “Dealers are making progress.”

• Dealers have the resiliency gene. Bill Forbes, a 30-year auto-retail vet, lost his floor-planning when his bank left the business last spring. The New Martinsville, W.Va., GM dealer couldn’t find another financing source after the banking crisis hit last fall and lost his franchise. Now he’s working with a consultant to turn his service department and body shop into an independent business. He’s also looking to floor-plan a used lot, and won’t rule out getting another franchise. “Maybe some day, because I don’t like to say never.”

• Dozens of grassroots efforts are helping dealers. Allbritton Communications offered its staff cash incentives to buy vehicles from local dealerships—$2,000 for new cars, $1,000 for used. More than 85 employees participated, generating more than $2 million in revenue for local dealers. And the city of Tracy, Calif., is spending $600,000 to give out $500 gift cards to consumers who buy a new vehicle from any of the town’s dealerships (which contribute 20 percent of the town’s budget in sales taxes).

• There really is a pot of gold at the end of the rainbow. For surviving domestic dealers, “things are really going to look up,” says Toprak. “The remaining dealers will be more profitable; they won’t be competing with other same-make dealers in their areas. And GM will have a better lineup of products—the Volt will be out there, and it could be a potential game changer.”

Joan Mooney and Mary Anne Shreve are senior editors of AutoExec.

Note:To read an expanded version of this story, visit autoexecmag.com and click on the June issue icon