Nearly 1 in 5 car dealerships could fail

DETROIT Wed Oct 1, 2008 12:18pm EDT

SUVs are seen at a dealership in Silver Spring, Maryland, July 1, 2008. REUTERS/Yuri Gripas

SUVs are seen at a dealership in Silver Spring, Maryland, July 1, 2008.

Credit: Reuters/Yuri Gripas

DETROIT (Reuters) - As many as 3,800 U.S. car dealerships could fail this fall and into 2009 -- nearly one in five -- because of weak sales, increased operational costs and the credit crunch, according to a forecast released on Wednesday.

"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 partner with Grant Thornton LLP, which issued the forecast.

"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," he said.

Bill Heard Enterprises Inc, one of the biggest General Motors Corp Chevrolet dealerships, filed for bankruptcy on Sunday, citing operating losses, decreased demand for vehicles and lack of credit.

At its peak, Alabama-based Heard's revenue was about $2.5 billion per year, according to the bankruptcy filing.

With U.S. light vehicle sales predicted to drop to the 13.7-million-unit range in 2009, the study said that about 3,800 dealerships, about 18 percent of the total number of U.S. car dealerships at the end of 2007, will need to close.

U.S. vehicle sales are expected to be flat next year with any recovery in demand expected only in 2010, as consumers struggle with tight credit, high gasoline prices and a housing market slump.

The drop in demand has been particularly hard for Detroit-based automakers GM, Ford Motor Co and Chrysler LLC. GM's sales were down 18.5 percent in the first eight months of 2008 while Ford's sales declined 16 percent and sales at Chrysler, controlled by Cerberus Capital Management, dropped 24 percent.

Thornton said apart from new car sales, other sources of revenue for dealers, such as used car sales and financing profits, are also falling.

(Reporting by Poornima Gupta; Editing by Brian Moss)

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