The decline in the number of new car dealerships will accelerate this fall and into 2009 as weak sales, increased operational costs, and the credit crunch continue to take their toll, according to consultant Grant Thornton LLP.
"An increasing number of dealers are simply closing their doors because sales have plummeted, credit has dried up, the overall retail environment is increasingly challenging and potential investors are sitting on the sidelines," said Paul Melville, a Grant Thornton LLP partner.
"In addition, the domestic automakers who badly need retail consolidation are not spending much of their scarce capital on the problem because the economy is doing it for them."
Earlier this year, Grant Thornton said more than 2,700 dealerships would need to close in order to maintain sales per dealer at last year's level of about 750 units.
Now, with light vehicle sales on average predicted to drop to the 13.7-million unit range in 2009, the firm estimates that 3,800 dealerships will need to close.
"Significant consolidation is necessary, especially among Ford, General Motors and Chrysler retailers, because U.S. sales already have declined more than one million units this year," explained Melville. "The 'Detroit Three' account for more than 85 percent of the total decline, and their sales per dealer were already well below the industry average."
According to the trade journal Automotive News, the average U.S. new-vehicle franchise reported 322 new-vehicle registrations in 2007. Toyota Motor Sales accounted for 1,628 units per franchise.
Ford Motor Company's domestic brands reported 236 registrations, followed by GM's domestic brands at 202 and Chrysler at 169.
Not only are new car sales down, other sources of revenue for dealers, such as used car sales and financing profits, are also falling. For example, CarMax, Inc. reported that its average used vehicle-selling price declined six percent in the second quarter ended August 31, with double-digit declines in comparable store unit sales.
Property values also have taken a hit. According to the Moody's/REAL Commercial Property Price Index (CPPI), prices ended a four-month decline in July, but are down more than 11 percent from their October 2007 peak.
"We see more unprofitable dealers closing their stores outright, but if franchise values were to fall 20 percent, that could be enough to stimulate mergers and acquisitions activity," Melville said.
"Value investors are also looking for new opportunities, and they will find them in the real estate owned by dealerships."
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