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Car Dealerships or Lemon Aide Stands

By Kathryn Reynolds     Jul 20, 2008 in Business
Around 1995 some of America’s biggest car dealer chains, Asbury Automotive, Auto Nation and Lithia Motors, went public with big payoffs to investors, having doubled their value since 2003.
When car sales began to slump in 2006, the chains sold investors on the notion that they could, not only survive, but thrive during the slow period by setting high end, luxury used cars and raking in millions by servicing vehicles people were keeping. It hasn’t turned out that way. Most of the dealer’s profits are sliding downhill with a twenty-four percent drop in stock in the past twelve months. “This is the first major plunge since they’ve gone public,” says Standard and Poor’s Equity Analyst Efraim Levy. “Let’s see them perform in a turn down and we’ll believe their sales pitch.”
The big money pinch and sky-rocketing gas prices have turned yesterday’s pink clouds into a dark horizon. As a whole, we are buying fewer vehicles and choosing smaller ones, which generates less profit.
The American consumers are trading in gas-guzzling white elephants also known as SUVs’ that are harder to sell than ice to Alaska. Car lots are over-flowing with these hard to unload, motorized, lemons. Earl Hesterberg, CEO of Group 1 Automotive Chain, says his dealerships voluntarily cut one-third of their profit on used trucks. Although the vehicles are slowly moving back onto the roadways, many remain like stones in a graveyard.
Overall profits from used car sales fell by six percent in the first quarter. American Credit has recently reduced auto lending by sixty percent. Others are following their lead. Even when a buyer wants to purchase a used vehicle, the dealer may not be able to find them a loan, and that means no sell. Gone are the days when lenders were willing and eager to handout those loans. The argument that dealers could make big money on repairing older cars that people are hanging on to is revealed in, the portion of their business that has grown. But it is not enough to close the bap between slipping revenues elsewhere.
On the other hand, with new cars being made to last longer, and some manufacturers offering extended warranties, dealers are making less money or repair work. In addition, the car makers encouraged many dealers to give “face lifts” to their show room, spending millions of dollars.
With auto sales at an all-time low and interest rates shrinking the profits, the cutbacks have begun. At Lithia, Chairman Sid DeBoer says he has saved 500,000 dollars a month by cutting staff.
Analysts say profits should improve as the chains cut costs. With credit tight and sometimes not available, many industry watchers are advising “to buckle up, it’s going to be a long ride,” Business Week June 30, 08.
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