U.S. dealership closures to increase into '09: study

DETROIT (Reuters) - The number of U.S. car dealerships closing is expected to increase into 2009 with as many as 3,800 dealerships at risk of closure because of dwindling sales and tighter credit, according to a newly released study by Grant Thornton LLP on Wednesday.

With U.S. light vehicle sales predicted to drop to the 13.7-million-unit range in 2009, the study said that about 18 percent of the total number of U.S. car dealerships would need to close to maintain sales per dealer at last year's level of about 750 units.

"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.

"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.

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.

All three U.S. automakers are in the midst of shrinking their U.S. dealer network as they cut labor costs and slower-selling models in the face of slack sales and declining market share.

Analysts have said that U.S. carmakers need to cut U.S. dealerships -- particularly in crowded city markets -- in order to drive more sales through remaining stores and free up funds for advertising and new investment.

GM cut some 260 affiliated dealers last year, which took its U.S. dealer count to about 6,750 outlets at the start of 2008.

Unrealistically high price demands by sellers has slowed voluntary consolidation, however, according to Grant Thornton.

The deal-making environment is expected to improve in the early part of 2009, the study said

"Prices will come down as the weak market continues to erode franchise values, and as liquidity returns, we see more consolidation deals proceeding," Melville said.

He added that if franchise values were to fall 20 percent, it could stimulate mergers and acquisitions activity.