Car dealerships seeing less traffic, lower profit on what they do sell

Some nights last fall, business got so slow at Dan Nigri Lincoln-Mercury, the cashier would be sent home. Through layoffs and resignations, the staff shrunk from 21 employees to 14.

Then, after 23 years as an auto dealer, owner Dan Nigri realized it was time to hang up his car keys.

Facing the worst auto market he's ever seen, Nigri sold his St. Charles dealership in November to nearby Zimmerman Ford.

"There are too many dealers," Nigri said. "We were getting a smaller piece of the pie. It doesn't make a good business plan if you can't sell enough cars."

Nigri's plight is hardly unique in the auto industry these days.

In October, Lattof Chevrolet in Arlington Heights shut down after more than 70 years in business. Extreme Ford in Crystal Lake and Champion Dodge Chrysler Jeep in Barrington both closed in November, and Wickstrom Ford Lincoln-Mercury in Barrington took over the Champion franchise.

Those closings may be only the beginning. U.S. auto sales fell 18 percent in 2008, and 36 percent in December - capping the worst three-month period since 1981.

Some industry analysts predict 2009 will be even worse.

Auto dealers are struggling to survive. In some cases, their own manufacturers are looking to put them out of business.

As part of their recovery strategies, General Motors plans to close 1,750 dealerships, and Chrysler plans to shut down 3,300 in the next few years, through buyouts or consolidations. Domestic manufacturers hope to change state laws that limit changes in franchise contracts. The goal is to increase sales per dealer to the levels of foreign automakers.

Winter is always the toughest time for auto dealers. But this season is even more challenging. A recession, compounded by a credit crunch, rising unemployment and consumer uncertainty have brought the auto market "to its knees," in the words of trade publication Chicago Auto Outlook.

Not only are dealers selling fewer cars, but they're making less money on each sale: Edmunds.com reports the average discount is 15 percent off the manufacturer's suggested retail price, compared to 10 percent a year ago. That leaves an average $1,204 profit over the dealer's cost, a 29 percent drop from a year ago, and a net reported loss after operating costs are figured in.

"'Profit' has become a dirty word," Nigri's Sales Manager Steve VerVynck said. "Customers are much more educated now. They can tell you pretty much what you own that car for."

In response to low demand, manufacturers offered a record level of incentives in December, worth more than $2,000 per vehicle. Zero percent financing, up to $6,000 in cash back and employee discounts have been common.

Hyundai also is offering to let buyers return their vehicles for free within one year if they can't make payments because of unforeseen circumstances like a job loss.

On the financing side of the equation, the recent federal bailout has helped free up loans.

After last fall's credit crisis, banks and loan companies had tightened the minimum required credit score for car loans to 700 in many cases, which reportedly excluded 42 percent of consumers.

But after getting a $6 billion federal loan, General Motors' primary financier, GMAC, which got caught in the mortgage lending fiasco, is again offering credit to buyers with scores as low as 621. Ford Motor Credit maintained it wasn't hurt by the financial crisis because it never got into the mortgage business.

In the Chicago area, dealers complain that widespread media reports about lack of credit have created a false impression that buyers can't get loans. In response, the Chicago Automobile Trade Association, which represents local dealers, recently launched a radio ad campaign to convince people that financing is readily available for qualified buyers.

With new car sales down, dealers are relying more on used car sales, parts and service to pay the bills.

Several years ago, Saul Rosen, owner of dealerships in Gurnee, Algonquin and Lake Villa, among other locations, saw the market moving from domestic to foreign makes and sold his Lincoln-Mercury dealership in favor of Asian automakers. His sales have also recently declined, but not as much.

"It's going to be a difficult 18 months for car dealers," he predicted. "It'll be 2010 before the market starts improving."

Anticipating an eventual rebound, some dealers are choosing now to invest millions of dollars into their businesses. Chicago-area auto icon Bob Rohrman opened a new Saturn dealership in Arlington Heights this fall, and moved his Arlington Nissan dealership to make it the largest Nissan dealership by area in the Midwest.

While lower gas prices and easier credit help, Edmunds.com auto industry analyst Jessica Caldwell said what the market really needs is a return of consumer confidence.

She expects a rough beginning of 2009, but looks for some sales increase by the end of the year.

"It's going to be tough for a lot of dealers, especially when people aren't even interested in going to the showroom," she said. "The ones that will make it are the larger ones that have savings to get them through this tough time."

For now, many dealers just hope to stop the bleeding and last until the market improves.

"2008 was a struggle for everybody," Napleton Schaumburg Pontiac General Sales Manager Ken Taheny said. "We're looking at 2009 where hopefully we could stabilize, so we can try to grow in the future."