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The closure of dealerships will be bad for the economy, but not nearly as bad as some fearmongers are making it out to be

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April 30, 2009 – Comments (20) | RELATED TICKERS: GM

I recently read an estimate from a fearmonger who believes that 250,000 people will lose their jobs as a result of General Motors and Chrysler dealership closures.  Here's how they arrived at that estimate:

In the next 12 months...America is likely going to shutter 5000 car dealerships.  If each dealership averages 50 employees accross [sic] sales, service, management and finance.....we are looking at 250 thousand employees just from closing those businesses. 

These closures will be very painful and bad for the economy, probably much more so more than many people currently realize, but the above "estimate" is waaaayyy off.  I estimate that it overstates the impact of dealership closures by at least 300%.

Here's how I arrived at this conclusion:

First of all, I suspect that the estimate of 5,000 dealership closures is high...but for the sake of simplicity we'll go with it for now.

As of last year, the average new vehicle dealer in the United States had 53 employees. 

The majority of the stores that are going to be closed by General Motors and Chrysler are smaller, underperforming locations not the big mega stores that have better economies of scale.  So for the sake of this analysis one could probably safely assume that the average number of layoffs per dealership will likely be in the mid 20s.

Add to this that a number of the people at these dealers, such as the good service techs, will be picked up by larger dealers who will need more employees as their volume increases and we're likely talking about a net impact of the dealership closings of somewhere in the teens of jobs per point.

Let's say there's a net loss of 15 jobs per store closure

15 net job losses x 5,000 stores =  75,000 total jobs lost

That's bad, but not nearly as bad as a quarter of a million jobs lost.  Also, it's going to take a lot more than twelve months to close all of these stores, more like two years at a minimum. 

So instead of 250,000 jobs lost over the next 12 months, or an average of around 20,800 per month we're actually looking at around 75,000 jobs lost over 24 months, an average of 3,125/month.

That's the real, objective truth from someone who works in the industry.

Deej

20 Comments – Post Your Own

#1) On April 30, 2009 at 1:15 PM, lemoneater (79.26) wrote:

Recently it seems like the media overall has fallen in love with big numbers whether or not the numbers are accurate. Thank you for taking the time to give a careful analysis of the actual effect the closing of dealerships will have on the economy. I'm wondering if any of these employees will be absorbed by Carmax or any of the other discount car dealerships?

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#2) On April 30, 2009 at 1:35 PM, Wharrgarbl (52.32) wrote:

Your analysis assumes roughly 60-70% of laid off workers will be reabsorbed into the dealerships that make it.  That's the only item in your analysis that seems unrealistic.

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#3) On April 30, 2009 at 1:41 PM, catoismymotor (46.33) wrote:

What becomes of the acreage these dealerships currently occupy? I imagine that with approximately 10,000 acres of unoccupied retail space left sitting in the sun will add to the pain felt by banks and individual sellers of commercial real estate.

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#4) On April 30, 2009 at 1:46 PM, catoismymotor (46.33) wrote:

The sales staff can move on to find other things to sell. Mangement will "manage" and move on to something else. The mechanics and body people hopefully will find openings at the large retail garages and shops, along with mom and pop shops. With people keeping their cars longer the need for mechanics and body people should not taper off.

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#5) On April 30, 2009 at 1:57 PM, JoeandChuckP (75.94) wrote:

But you don't recognize concentration of dealerships.  Chrysler has it's largest concentration in the metro Detroit, and Michigan has the largest # of chrysler dealerships.  Again, michigan will be disproportionately affected by the closures.

But you also gloss over the effect of reduced spending in all the communites that will have closures.  Even if mega dealers absorb volume, and some of the personnel, the net effect will be sharpley lower spending in communities, which will exacerbate the recession. 

I think the net effect will be more pronounced in some areas the you suspect, and negligible in others.  Normalizing the losses on a US scale really doesn't make sense. 

And I also work in the industry.

 

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#6) On April 30, 2009 at 1:57 PM, JoeandChuckP (75.94) wrote:

But you don't recognize concentration of dealerships.  Chrysler has it's largest concentration in the metro Detroit, and Michigan has the largest # of chrysler dealerships.  Again, michigan will be disproportionately affected by the closures.

But you also gloss over the effect of reduced spending in all the communites that will have closures.  Even if mega dealers absorb volume, and some of the personnel, the net effect will be sharpley lower spending in communities, which will exacerbate the recession. 

I think the net effect will be more pronounced in some areas the you suspect, and negligible in others.  Normalizing the losses on a US scale really doesn't make sense. 

And I also work in the industry.

 

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#7) On April 30, 2009 at 1:58 PM, alstry (35.02) wrote:

Actually,

Many of the many of the dealers that will be closing are the "mega" dealers...

The largest chevy dealer in America just shut down.  Denny Hecker is on life support.  And I am aware of a number of others hanging on by a string.

You truly don't have a clue what you are talking about...but that is OK...you are great for comedy and leading fellow Fools down a path of failure.

The sales run in America of new cars is half of what it was just a couple years ago....it is likely we won't return to old levels of leveraged volumes any time soon.....

if you are actually in the business....I have little doubt you are just an employee and not an owner.

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#8) On April 30, 2009 at 2:20 PM, TMFDeej (99.43) wrote:

Comedy huh?  Let's see what's funnier...someone who knows how the industry works and has actual statistics and anecdotes to back his comments up, or someone who makes huge, exaggerated generalizations about what they believe will happen like you, Alsty.  Oh that's right, you seem to imply in your recent comments that you own or have owned some sort of auto business, right?  I'd love to hear all about it. 

Does anyone else see the pattern of extreme exaggeration this guy's your posts?  I certainly do.  What are we up to now, 70% to 90% of all businesses going bankrupt, or is that everyone including regular citizens?

For every mega dealer that you come up with that has closed its doors, I can come up with a list of 20 Mom and Pop GM and Chrysler dealerships with only a handful of employees that will be shut down.

I have been as bearish on the auto industry as anyone for years now.  Please feel free to scroll back through my posts if you don't believe me.  The truth is right there at the click of your mouse. 

Having said that, once again you are exaggerating.  In your previous comment you said:

The sales run in America of new cars is half of what it was just a couple years ago

Light vehicle sales will probably be somewhere in the area of 10 million units in 2009.  That's down from an average of 16.something million units for six consecutive years and 13.something million units in 2008.  We're talking about a drop of 38%...not 50%.  It's bad out there and there is a lot of excess capacity on a number of levels, but once again your pattern of exaggerating to make things look worse than they actually are persists.

Things are bad and I for the life of me I can't figure out why the market has rallied like it has lately, but your doom and gloom predictions won't even come close to coming true.

Deej

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#9) On April 30, 2009 at 2:30 PM, dividendhound (< 20) wrote:

It sucks, but the nation actually needed a bit of a shake.  A lot of these unemployed people will find new, productive ways to contribute to society.  Some of them will come up with the next big business ideas.  A surprising number of people were zombies even before zombie banks existed, due to golden handcuffs to meaningless jobs, many of which only existed because of the bubble.  I don't expect unemployment to be solved any time soon, but there are a lot of people I know who are stumbling out into the light for the first time, and actually kind of excited to start something new, albeit at a low salary, rather than continue in unfulfilling careers.  It isn't easy, but the glass can be seen as half full.

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#10) On April 30, 2009 at 2:35 PM, alstry (35.02) wrote:

Actually, GM and Chrysler's numbers are down half and more.....why are you bringing Toyota and Honda and other relatively more successful foreign brands into the equation?

You are seemingly a very smart person....you just don't know how to distinguish material data from collateral data.

Many of the smaller new car dealers are foreign dealers like Hyundi and Suzuki and so forth...many of the larger dealers are bloated American dealers which are now suffering as we all know....

You remind me of one of my students...intelligent and eager to learn....but sometimes having difficulty grasping the IMPORTANT facts.

Deej,

As far as doom and gloom....America is losing over 600K jobs per week, sales at some of our most important companies are down 30, 40, 50% and more.....I don't have to project negative figures.....the negative numbers are here right now.....open your eyes.

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#11) On April 30, 2009 at 3:49 PM, TMFDeej (99.43) wrote:

Hi Alsty.  I believe that this is a more appropriate to discuss the auto industry than my other non-related posts.  Please try to limit your messages on this subject to this area rather than spamming them all over the place.  Thanks. 

In terns of what type of dealers will be closed here's a quote from an article in today's Automotive News (I'd provide you with a link, but it's subscriber only and I doubt that you have a subscription).

Chrysler LLC will reduce its dealership roster as it operates in U.S. Bankruptcy Court, White House officials said this morning.

Chrysler has not resolved what criteria will be used. The company already has been consolidating dealers in a program called Project Genesis. Under that program, Chrysler consolidates standalone or dual brand stores to put Chrysler, Dodge and Jeep under one roof.

Chrysler launched Project Genesis in February 2008. As of March 31, the company had 3,215 dealers. Sixty-two percent, or 1,993, of its dealerships carry all three brands, said Chrysler spokeswoman Kathy Graham.

There is no doubt that some mega dealers will go bankrupt on their own, but that's not what we're talking about here.  You specifically mentioned the 5,000 dealers that GM and Chrysler are intentionally trying to shut down on a corporate level.

As you can see from the quote above, Chrysler is trying to close smaller Chrysler, Dodge, and Jeep points that do not have all three franchises and keep the larger stores that already sell the troika of brands.

Generally speaking, large dealerships that significant number of vehicles have the best economies of scale and are the most efficient.  It is in the best interest of manufacturers to force close smaller, less efficient stores to close...not mega dealers.

Here's an Automotive News description of the General Motors dealerships that will be closed:

GM says that in 2010, it will not renew the franchise agreements of dealers at up to 1,200 dealerships with low scores on various performance measurements. Many of the dealerships are in metro markets with too many stores.

The 1,200 terminations are part of a GM plan to reduce its dealership count to 3,605 by the end of 2010.

As of Jan. 1, 2009, GM had 6,273 U.S. dealerships, excluding Saab, according to the Automotive News annual census.

Starting in May, GM will meet with or send a letter to about 1,000 to 1,200 GM dealerships informing them that "they will not be part of a reinvented GM going forward, and we'll work on a transition with them," LaNeve told Automotive News on Monday.

LaNeve characterized the group of dealerships as "very poor performing and not adhering to the sales and service agreement obligations." For example, the dealership might be dualed with a non-GM brand or have poor customer service ratings, inadequate facilities, poor new-car sales or inadequate working capital.

GM expects to lose an additional 500 dealerships that now handle Hummer, Saab and Saturn vehicles.

Many of the stores that are scheduled to close are small, stand alone brands that do not need a large staff to support the limited number of vehicles that they currently sell.

In fact, if a store is "dualed" it means that the dealer also sells another brand of vehicles in the same showroom that it sells General Motors products in. 

If GM pulls its franchise agreement at one of these stores it counts as a closed dealer when in fact the store itself can still continue to do business and sell whatever remaining brand vehicles it has.

The company is trying to sell all three brands. GM is phasing out Pontiac by the end of 2010 and will lose 35 stand-alone dealerships at that time, LaNeve said.

How many people could possibly work at a stand-alone Pontiac dealership?  10?

GM will seek to close another 500 or so dealerships, mostly in overcrowded metro markets. LaNeve declined to say whether GM would provide extra cash to do those deals.

Some of the employees, particularly service techs who still will be needed regardless of now many new vehicles are sold, will simply begin to work at the other dealers in town.  Regardless of how many new vehicles are sold, people still need to maintain their existing ones.  One could argue that mechanics will actually be in greater demand now that people are keeping their existing vehicles longer instead of buying new ones.

Alsty, it's OK to be wrong.  Mistakes are easy to make, but difficult to admit.

Deej

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#12) On April 30, 2009 at 4:23 PM, alstry (35.02) wrote:

Deej,

If you are reflective of the the analyical skills at Motley Fool, or you somehow fancy yourself as a competent analyst.....I would not whisper it to your wife as she might be embarrassed to state it publicly and stand next to you at parties.

There were approximately 23,000 dealers toward the peak of sales a few years ago.  As you yourself admit, sales are down about 40% and margins even worse.

If we simply cull dealers proportionately to the decline in sales....we would lose about 10,000 dealers and not the conservative 5,000 in my analysis limited to GM and Chrysler.

Now do the math and I think you will find my 250,000 number conservative.....no need to appologize, my guess is you are farily young and pretty inexperienced.

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#13) On April 30, 2009 at 5:00 PM, TMFDeej (99.43) wrote:

Alsty, it's funny that you seem to be so obsessed with me when we both are bearish.  You're just more bearish than I am.  One would think that someone who is more optimistic about the economy and the markets would be your target.  Whatever. 

I believe that it will be very clear to anyone who reads our discussion that you once again are exaggerating the extent of the damage that is happening.  The economy is bad and it will not improve for a while and the major indices have all gotten ahead of themselves as far as I'm concerned, but the things that you say are comical.  If I felt like wading through your posts, I'd pull out the "70% to 90% of everything is going to go bankrupt" post that you made the other day.

In your latest comment, you apply the 36% that U.S. sales are down year-over-year YTD (not surprisingly you rounded up) to and apply it to the number of dealers that existed several years ago even though a number of them have already closed.

The last time that there was actually 23,000 new vehicle dealers in the United States was 1992.  As of 2008, there were 20,700 dealers in the U.S. and I'm sure that there are a lot fewer than that now.

Margins on new vehicle sales can't get much worse than they already are and have been for a number of years.  While new vehicle sales represent more than 50% of the revenue at dealers, they account for a much lower percentage of their profits. 

The gross margins on the sale of new vehicles has been falling steadily since 2005.  Most recently, new vehicle profit margins declined 3% in 2007 and again in 2008.  It's to the point that new vehicle sales are almost loss leaders for dealers.

Here's the real facts.  As of 2007, and this trend has been accelerating over the past year and a half, service and parts accounted for 81% of dealership profits and used vehicles accounted for 27%.  See table below.

Used vehicles and service that keeps the doors of most dealerships, particularly domestic stores, open.  Declining new vehicle sales are bad for dealers, just not as bad as you make them out to be.

Rather than using real facts, you take incorrect ones and then twist them to suit your needs while at the same time tossing in insults like "Oh well, you must be so young," "You're inexperienced," "You've never owned an auto business like I have," blah, blah, blah to try to discredit me and distract the reader from the fact that your assumptions are flawed.

I can't believe that I've wasted this much time debating this nonsense.  I'm clearly right and I'm not going to spend any more time on this.

Deej

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#14) On April 30, 2009 at 5:12 PM, alstry (35.02) wrote:

If you are not selling new cars, eventually, there will be few used cars and not many cars coming in for repairs.

Take a trip to Cuba for a good extreme perspective.

Your problem is you write too much and see too little.  Often a sign of inexperience or not understanding his subject clearly.

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#15) On April 30, 2009 at 5:16 PM, TMFDeej (99.43) wrote:

Well stated rebuttal.  Both deep and factual.  Notice the slight dig at me towards the end to distract readers from the fact that it contained no real new information or facts, just some bizarre reference to Cuba.

Deej

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#16) On April 30, 2009 at 5:19 PM, TMFDeej (99.43) wrote:

Speaking of writing too much, you've posted 960 blogs here on CAPS, many of which say the exact same thing over, and over, and over.  I have written only 490 blogs, around half as many. 

How does that phrase go about the pot calling the kettle black?

Deej

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#17) On April 30, 2009 at 5:21 PM, alstry (35.02) wrote:

Notice how you fail to repond substantively to the well stated deep and factual rebuttal......

a clear sign of a person who has just failed defending a position who just stated he was right.......

annoying or airheaded arroagance.....you pick;)

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#18) On April 30, 2009 at 6:49 PM, AnomaLee (28.52) wrote:

... getting back to reality

Deej, are you seeing any 'green shoots' in maintenance and repairs?

I just took my car in for repairs and I spoke with the mechanic. He said that business has actually been holding up very well since people don't have the will or ability to buy new cars.

His part of our conversation went something like this:

"I see people getting their car repaired. Before they'd get a quote that said $600 to $1000 and they figured they'd just buy another car. I've even told some people that it wasn't worth paying the money to get the car fixed, but they went ahead anyway because they didn't want another car note."

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#19) On April 30, 2009 at 8:32 PM, TMFDeej (99.43) wrote:

Hey Anoma.  I'm seeing brown shoots than green ones in most things lately ;).

For a while I kept thinking that the cheap parts / repair angle would be good if we experienced a major downturn in new vehicle sales like I expected.  I wrote the following post on the subject a little over a year ago, but I never really put 2 and 2 together and got around to giving companies like Autozone the green thumb and now it's too late because everyone's all over the trade.  Oh well.

Crash your car? Turn that frown upside down, I’ve got an investment opportunity for you

Recs 11 

April 15, 2008 – Comments (5) | RELATED TICKERS: LKQX

Lame title, I know, but I do have an interesting idea to write about so deal with it ;).  It’s funny how being OCD about investing changes your perspective on things.  I see the conversations that I have with people in a different light now than I used to, in a Peter Lynch sort of way.  Here’s a great example.  As some of you who have read my blog before know, during the day I work in a field that is related to the auto industry.  Yesterday I was speaking with the manager of a large dealership about how business is.  Not surprisingly, it’s pretty bad.  That’s not the interesting part of the conversation though.  What I found especially intriguing was when he told me that he has seen a significant up tick in auto parts sales to independent repair shops.  If this is a wide-spread phenomenon, it means that in tough economic times, like what we are currently experiencing, consumers are choosing to repair their vehicles to keep them on the road longer instead of buying something new.  Not only are they choosing to repair them, but they are doing so as cheaply as possible by going to independent repair shops rather than the more expensive dealership service departments. 

This story immediately made me think of a company that I read a short blurb about in Smart Money magazine the other day, LKQ Corp. (LKQX).  Its shares of have been under pressure over the past couple of weeks because California is considering passing a law banning the use of recycled auto parts in insurance repairs.  Goldman published a note yesterday stating that their channel checks lead them to the conclusion that this law will not pass.  Furthermore, Goldman stated that colder winter temperatures this year probably led to an increased number of traffic accidents, which would be bullish for LKQX because its parts would be used in the repairs. 

These developments, along with an increase in consumers trying to save money by having their cars and trucks fixed as cheaply as possible would be great for a company like LKQ.  The problem is its price.  Even after its recent slide, LKQX currently has a P/E of just under 35, which is a little rich for me…especially in the current market environment.  The company has been knocking the cover off the ball with earnings quarter after quarter though, so while I will not purchase shares of this company in real life if I can find a way to fit it in my overcrowded CAPS portfolio I probably will.

Deej

No position in LKQX

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#20) On April 30, 2009 at 8:35 PM, TMFDeej (99.43) wrote:

Alsty?  Are you still here.  Do you realize what you're even saying?  What on Earth are you talking about? I post a million real facts and statistics that you completely ignore and you want me to respond to your statement that there will be absolutely no used vehicles to sell or vehicles to repair on the roads in the United States?  Are you serious?  What a waste of time this debate has become.  I thought that you were better than that.

Deej

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