Dealers Crash as Economy Slows

Few people are going to shed tears for down-on-their-luck automobile dealers. Don’t expect Congress to appropriate billions of dollars to bail out faltering dealerships and help them merge their way back into solvency. After all, car dealers are among the most vilified professionals in the country, ranking right down there with personal injury lawyers and politicians on the loathsome scale. But there is little doubt that car dealers are hurting. In fact, it would not be surprising if more than 1,000 of them go out of business this year. After a decade and a half of salad years, 2008 has marked an incredibly rapid and painful turnaround.

What has caused so many dealers to call it quits this year? It is a combination of negative factors that one might describe as a perfect storm of bad news piled on top of bad news. This year started with predictions that auto sales would not be as good as they were in 2007, which was widely regarded in the industry as a so-so year, but through the first few months of the year, the industry largely held its own. Then came the oil price bubble, and with it, the incredibly quick run-up in fuel prices. That caused consumers to rethink their vehicle preferences totally, leaving dealers with too many SUVs, pickup trucks and luxury sedans and too few small cars. It also caused many consumers to decide to forget about buying a new car at all until gas prices eased.

Just as that started to happen, though, the housing crisis, which had been bubbling along beneath the surface, eroding individuals’ sense of well-being, prompted the failure of several large financial institutions, putting the credit markets in a tizzy. The politicians waded in trying to help the situation, but their dire pronouncements about the economy also scared many consumers out of the new-car market altogether. To add to the calamity, the failure of banks created chaos in the credit market, making it much more difficult for consumers to get car loans or leases. Then the general media dove in, trumpeting the erroneous message that if you wanted to get a car loan, you couldn’t get one.

Car sales reeled in August and plummeted in September as the result of this. The grim auto sales prompted talk of a deep recession or even a return of the Great Depression, sending stock prices on a steep and rapid slide. This, in turn, further frightened potential car buyers. Throw in the rumors that General Motors Corp. was on the verge of declaring bankruptcy, and you have something that might be termed worse than anybody’s worst-case scenario.

Many dealers, who depend on credit and consumer confidence to make their livings, were trapped in the collapse of both and buried so deep in the rubble that they realized they couldn’t climb their way out. Annette Sykora, head of the National Automobile Dealers Association, predicted that 700 dealers would close this year, and that might turn out to be very optimistic. Since large multilocation dealerships are the norm these days, if they get sick and die, they can take out scores of dealerships in a heartbeat. This is why estimates that 1,000 dealerships might close their doors this year and another 1,000 might do the same in 2009 are not exaggerations.

So what does this mean to the consumer? In the long run it means less choice and less competition, which could well translate into higher costs. For the short term, though, this is a buyers’ market as car dealers and the car manufacturers themselves struggle to keep from dipping below the waves for the last time by offering incredible deals. For those who can stomach the wild ride, this is actually a great time to buy a new car.