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Car dealers scaling back to survive downturn

NEW ORLEANS (Reuters) - A prolonged slump in U.S. auto sales has left many of the country’s 20,000 new car and truck dealers hanging on by their fingertips.

Car salesman Ray Schaffer (L) shows a customer a 2009 Chevrolet Impala sedan at a dealership in Dearborn, Michigan December 29, 2008. REUTERS/Rebecca Cook

And the government bailout of General Motors Corp and Cerberus Capital Management LP’s Chrysler LLC in December doesn’t mean the end to the plight of dealers -- whose revenue collectively represents 20 percent of U.S. retail sales.

With the world’s single largest car market expected to shrink further in 2009 amid fragile consumer confidence and tight credit, more than 10 percent of dealerships are likely to shut their doors this year, analysts said.

Survival, not profitability, topped the agenda as thousands of dealers across the country gathered for the annual National Automobile Dealers Association convention in New Orleans.

“People really came here for serious business reasons,” said Richard Llewellyn, a Chrysler dealer in Punta Gorda, Florida. “It’s about how to survive a different market. We are reducing salaries, getting inventories down and becoming creative on where to cut costs,” Llewellyn said.

Analysts and automakers have forecast that U.S. sales of cars and trucks could fall near 10 million units this year, from 13.2 million units in 2008. That would mark the lowest level in 27 years. Sales were 16.2 million units in 2007.

“A 10 million unit industry is an automotive hurricane,” Ford Motor Co marketing and sales chief Jim Farley said on the sidelines of the convention being held in a city that still bears the scars from Hurricane Katrina in 2005.

Last year’s slump forced about 900 dealerships out of the market. In 2009, an additional 2,500 dealerships are expected to go out of business, according to industry restructuring adviser Grand Thornton.

A slowing economy, plunging housing values and credit market strains have all contributed to a deep slump in consumer demand, but dealers cite credit as their biggest concern.

The financial market turmoil has made it extremely hard for consumers to get loans to buy cars and for dealers to finance the glut of unsold cars and trucks on their lots.

“Lack of credit is killing our industry,” said Mike Jackson, chief executive of AutoNation Inc, the largest U.S. public dealership group.

“If we can get some sort of normal credit, we can forget the rest,” Jackson said.

Car loan approval rates have barely improved even after auto finance companies GMAC and Chrysler Financial received government loans of $6 billion and $1.5 billion, respectively, over the past month, he said.

“There’s a little disconnect there,” Jackson said.

CUTS, AND MORE CUTS

Fritz Hitchcock, who owns three Toyota Motor Corp and two BMW AG dealerships in Los Angeles, laid off 230 people last year to cope with declining sales and plans to cut 50 more jobs. He now has 530 employees.

“I’m just going home and will continue to cut,” Hitchcock said.

Nevertheless, he is in a better position than dealers for Detroit automakers, he said. Toyota dealerships sell 1,400 cars per year on average, while dealers for GM’s Chevrolet sell 800.

“Do the math; Jesus. How do you do that? It’s sad,” Hitchcock added.

Joseph Vital, a principal at Deloitte, said GM, Chrysler and Ford Motor Co have 30 percent to 40 percent more dealers than they need, but automakers cannot afford to buy out dealers while they are burning cash at an accelerated pace.

All three U.S.-based automakers have outlined plans to shrink their vast retail networks as part of restructuring plans submitted to Congress in December.

Consolidation has been triggered by financial strains, rather than automaker buyouts. Among 287 U.S. Chrysler dealers to go out of business in 2008, 195 left for economic reasons.

“It costs money to consolidate,” GM’s U.S. sales chief Mark LaNeve said. “And we’ve slowed down the activity while we figure out our brand and nameplate situation.”

GM met with its dealers on Sunday, but stopped short of providing updates on its Saab and Hummer brands, which are up for sale, or Saturn, which is under strategic review. In the meantime, dealers complain they are sitting on unsold Saab and Saturn cars with the future of the brands up in the air.

“I have a huge Saab inventory,” said Raymond Ciccolo, who owns GM dealerships including Saab and Hummer in Boston. “I told my guys to lose money and get rid of these things. It’s bad, but how much do I lose by keeping them? I’ve got to just get rid of these things.”

Editing by Gerald E. McCormick

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