Recession Could Thin Auto Dealer Ranks

A Bailout For Detroit

For Chevy dealer Barry Williams, deals can hang by a thread these days.

A couple of weeks ago, he stopped by the house of a longtime customer in Maryland to pick up a down payment on an Impala.

The customer, a retired minister, had just seen yet another bad economic report on TV. He paid Williams — reluctantly — but said he isn't sure he should have bought the car.

Then, Williams recalls, the customer asked: "Are you going to be there next year to service me?"

Williams reassured him he would, but it was a fair question. Williams has sold cars since the mid-1980s, but he says he's never faced such a terrible market. As the Detroit Three automakers present their business plans to Congress this week, they say they will make more trims to a dealership network that hasn't matched demand for years.

Williams' experience is typical of dealers across the country. He says the recession and credit crisis have knocked out 40 percent of his business.

"I've used the analogy of Katrina," says Williams, sitting in his near-empty showroom in Elkton, Md. "I'm in New Orleans right now, and the storm is coming and I didn't get out."

Williams is confident he will survive, but many dealers won't.

The National Auto Dealers Association expects about 900 car dealerships to close this year, and dealers themselves think the number could go much higher in 2009.

The dealer network dates back decades to when Detroit dominated the U.S. market. General Motors has cut its dealerships down to about 6,500 but says it still needs get rid of another 1,800 in the next several years.

One problem is that GM has far too many dealerships compared with foreign companies. Consider Frank Ursomarso, who sells GM vehicles and Hondas in Wilmington, Del.

"In this particular market, we sell eight Pontiacs a month," Ursomarso says. In contrast, he adds: "We sell 100 Hondas a month."

A big factor behind that huge gap is competition. There are twice as many Pontiac dealers in his area as Honda dealers. Ursomarso says that glut drives down prices and — ultimately — damages GM's image.

"The brand itself, instead of being something that's desired, becomes a commodity," Ursomarso says. "It just becomes a piece of iron to be sold at the least possible price."

Of course, lower prices mean lower profits and fewer dollars for dealers to reinvest. Corey Porter, who runs a Chevy dealership in Newark, Del., says the result can be shabby-looking facilities that further hurt the brand.

"I mean, who wants to go into an old, rundown showroom that looks like it's something out of 1960 to buy a car?" Porter says.

GM has reduced the number of dealers over the years, but it's tough and expensive. Many are protected by strong state franchise laws, and when GM got rid of Oldsmobile, it had to pay dealers more than $2 billion.

And dealers aren't volunteering to close. Many are family businesses that have employed generations and play important roles in communities, sponsoring little league teams and donating to charity.

Porter, whose family dealership dates to 1925, says the problem isn't just too many dealers, but too many different vehicles to sell. He says certain divisions just don't resonate with customers or make economic sense. Some, he says, should be shelved.

"I think GMC truck definitely needs to go away," Porter says. "I think Pontiac is another one that has ... an identity problem. They don't have any products that are exciting. I don't think Pontiac needs to be there."

GM says it is looking to either sell or cut divisions such as Saab and Saturn. But it plans to keep GMC and reduce Pontiac to a specialty brand.

Porter and other dealers say the solution to all of this may lie in the marketplace. If sales remain down, they expect that the recession will wipe out dealers in a way that the companies haven't been able to.

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