Auto Retail Industry Changing Faster Than Most Can Keep Up With

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Includes: AN, F, GM, LAD
by: Jerry Marks

This year we will get about a quarter of our sales volume (GM globally) out of 11 emerging markets. Something that even as recently as 5 years ago was pretty hard to imagine that we would reach that degree of growth in volume and revenue in those markets.

And what that has meant for us and what that means for the industry is that the composition of this industry of a decade ago that was very developed market oriented in terms of volume and revenue has been transformed in that decade, and going out in the next 5, 10, 15, years will probably be transformed at an even more brisk pace with regard to changing the sales composition.

Source: Paul Ballew, Executive Director, GM (NYSE:GM) Global Market and Industry Analysis, GM Securities Analyst Meeting, August 8, 2007

The point of rationalization?
You all know my thesis.

Jerry: “In the United States there are too many vehicles and too many dealers. So the dealer community will need to rationalize. And automakers should look abroad (outside the U.S). for growth.”

Dealer community: “We know Jerry. We all want to go to heaven, but no one wants to die first.”

Jerry: “At some point, economics will force said rationalization.”

As I have been saying, this summer could very well prove the turning point (where economics finally force dealer closure/consolidation). I still don’t know how to read the public dealer results (as they were very mixed).

But I will tell you in the 6+ years of formally covering the auto retailers, and nearly 10 years now covering automotive (and monitoring the public dealers), I have never seen the type of dealer closure headlines flow like I share with you today.

Keep in mind random headlines about a dealer closing here or there is purely anecdotal (undependable) to draw the conclusion that we are now entering a mass wave of rationalization.

But I think most people in the industry will agree that something just seems to be happening.

So I still wonder if the point of rationalization that I thought would likely arrive in 2009/2010 (after union negotiations allowed for plant closures) is happening sooner than anticipated (because of the employee buyouts lowering “manned capacity.”)

Check out the following headlines that have been published just this week. . .

Pacific Coast auto dealership to close after 32 years

The Pacific Coast Volvo Chrysler Jeep dealership will close "on or around" Labor Day weekend, ending a 32-year run in Santa Cruz.

Brian Meikle Jr., 28, general manager and son of the owner, said he plans to pursue graduate studies in business. He said his father is going on 65 and plans to retire.

Source: Jondi Gumz, Santa Cruz Sentinel, August 14, 2007

Calif. dealer gives up Ford (NYSE:F) franchise

San Diego dealer Bob Baker is surrendering the franchise of his Ford dealership as part of Ford Motor Co.'s program to shrink its retail network.

Baker has operated Bob Baker Ford in Mission Valley, Calif., for 28 years. The dealership sells 100 to 125 new vehicles at retail a month, about half what it sold five years ago.

Baker says that the San Diego market is crowded with Ford stores and that he believes he can make more profit selling the dealership's real estate to a developer.

Source: Donna Harris, Automotive News, August 13, 2007

Car Dealership Closes Suddenly

One day after learning they'd be out of a job next week, workers at the Central Ford Lincoln Mercury dealership get another shock. Instead of waiting a week, the South Beloit car dealer closed its doors the next day.

Source: Marissa Alter, WREX.com, Channel 13, Rockford, IL News, August 13, 2007

And if I Google search car dealer closures, I come up with a lot more over the last couple months. . .

Last auto dealership to close in Menlo Park

Menlo Park’s last auto dealership — Stanford Lincoln Mercury at 444 El Camino Real — will close on June 30, owner Robert Kopf has announced. It is the city’s fourth auto dealership to close in the last two-and-a-half years, leaving another potential eyesore along El Camino Real.

Other El Camino Real dealerships that have closed include University Ford, Cadillac Buick Pontiac GMC, and Anderson Chevrolet. Mr. Kopf, who has owned the dealership since it set up shop in 1976, said there has been a “gradual deterioration” of auto sales over the past several years, making it impossible to stay afloat.

Source: Rory Brown, The Almanac, June 27, 2007

Family-owned car dealership closes after 53 years

After 53 years in business, Allen Burks is closing down Martin Burks Chevrolet at 113 Forest Parkway, in Forest Park. The dealership was started by his father in August 1954. On Saturday, June 30, 2007, he will lock the doors.

The company is closing quietly. There was no going-out-of-business sale. No banners declaring, “Everything must go.” No hoopla. Burks didn’t have the heart for it.

Standing in the lot below the blue GM sign, with an airplane booming overhead, as it took off from the fifth runway at Hartsfield-Jackson Atlanta International Airport, he teared up as he talked about the end.

“I always wanted to work here,” Burks said. “Growing up, I was interested in cars.”

Source: Daniel Silman, Clayton News Daily, June 29, 2007

Innovation is moving faster than our culture can adapt
I recognize for some of the dealers on this distribution list today’s email may seem a little cold. Heck some of you probably know the very people (dealerships) I discussed in today’s piece

I realize it is all too easy to come across with a calculated mindset using fancy words like “rationalization” as real lives (and jobs) are being unearthed.

Sadly it has something to do with innovation today happening at a faster pace than our culture can adapt (and why we see structural shifts across various sectors of the economy moving with a vengeance).

But what I am simply trying to do, is point out to the investment community that there seems to be something far bigger at play here than just watching some bad earnings reports out of public car dealers (although like I have said before, besides Lithia (NYSE:LAD) and AutoNation (NYSE:AN), I was reasonably encouraged with the second quarter results).

As we continue to put the pieces together, I think we are seeing more and more signs that the industry is finally starting to rationalize (consolidate). And as far as I know, whenever retail sectors have consolidated (home improvement, consumer electronics, auto retail in the United Kingdom), efficient players (and investors in those efficient players) were handsomely rewarded.

The trick is becoming one of those efficient players (or finding the right one to invest in).

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