New Car Dealers React to a Weak Economy

Credit markets for housing are loosening up a bit, but will automobile financing follow the trend? The decline in consumer spending power and the evaporation of credit has led to the worst few years for auto sales in a very long time.

As we have entered the worst new car market in 25 years, thanks to a credit crisis and a bursting of the Real Estate bubble, during a time when most car dealers are cutting back on costs, some new car dealers are changing their game plan. Some new car dealers are reacting to our current time of economic uncertainty by remodeling portions their dealership to convert parts of their business from new car sales to used car sales.

With major financial problems at Chrysler LLC and Ford Motor Co., and the near collapse of General Motors, many new car dealers are struggling to move inventory and are scrambling to diversify their risk by changing their business model. Other new car dealers have been and are still cutting costs and many have already closed up shop. Moreover, with the current major recalls and prospective electronic issues with many popular Toyota Motors vehicles, the future for new car dealers carrying Toyota models is also looking bleak.

The used car movement by some new car dealers is prompted partly by the rapid deterioration of the new car business this year. With sales of many new car dealerships now less than half what they were at their peak eight years ago, many new car dealers have found it unjustifiable to maintain large lots covered with inventory collecting dust.

There is not a dealership anywhere that has not been affected by the economic downturn. With little improvement foreseen in the job market and record unemployment the future looks bleak, yet some new car dealers expect the tide to change. While these new car dealers plan to become more competitive and convert portions of their new car site into a mixed operation that includes used cars. The intention of these dealers is to get in on the profits which are generally higher on used cars.

While other dealers applaud these bold plans in the face of a tough sales environment, most are busy pinching pennies and cutting costs in preparation for market that are likely to decline at least 10 percent further this year alone. Sales throughout the nation plunged nearly 32 percent last October and have fallen over 15 percent this year. Although the government cash for clunker program had a positive effect on new car sales, the end of the program has left a gap over the several months since the program ended.

It is amazing how swiftly this have gotten so ugly. Our economy is a consumer driven one, and unfortunately the consumer cannot afford to get out and shop. Moreover, consumers just don’t have the same access to credit they used to. Although many new car dealers in certain regional pockets have not yet been forced to file for bankruptcy, the National Automobile Dealers Association estimates that 750 of the nation's 22,000 new car dealerships will close this year, and another 900 to 1,000 next year.

This is about equal to the recession of the early 90’s, but not as bad as the market environment during the recession of the early 80’s. Even though, the financial pressure is strongly evident for new car dealers, and it's their plans for managing the situation that will determine their pain. New car dealers are buying fewer new vehicles from their factories and maintaining leaner inventories. Most are also slashing their advertising and postponing capital expenditures while leaving open staffing vacancies and laying employees off. Meanwhile, a large number of car dealers are relying more heavily on used car sales as the new car business withers.