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Agony in the auto industry, too

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Dealers are facing tight consumer credit and floorplan troubles - sound familiar?


Like the marine industry, the automobile business is mired in its worst decline since the 1970s. U.S. auto sales were down roughly 34 percent through April 30 from a year ago. They declined another 34 percent in May alone, although that was slightly better than forecasts.

Not surprisingly, auto dealers are taking a huge hit. More than 900 shut down in 2008, according to the National Automobile Dealers Association. The organization in January projected another 1,200 would close in 2009.

However, that figure could surpass 2,000 as GM and Chrysler attempt to reorganize under Chapter 11 of the U.S. Bankruptcy Code.

Even independent dealers, who specialize in used cars and typically fare better in recessionary environments, have been hurt this time around, although to a much lesser degree than those selling new cars.

"Auto dealers are being driven out of business in droves," says George Magliano, director of automotive research of North America for New York-based IHS Global Insight. "At one time, the manufacturers were trying to weed out their dealerships in an effort to right-size in line with market share. Now this is being done through bankruptcy and attrition."

Both General Motors, which filed for Chapter 11 bankruptcy June 1, and Chrysler, which filed in April, plan to restructure with far fewer dealerships.

Issues the same

Why has the auto industry been hit so hard? Is there anything marine retailers can learn from the way auto dealers are adapting to the changing market?

In many ways, the problems plaguing the auto industry are similar to those pounding the boat business. On top of the generally sagging economy, many auto dealers blame tighter consumer car-loan standards, as well as a floorplan credit crisis similar to the one marine dealers face.

While the banking crisis has contributed to the problem, there were growing signs in June that banks are beginning to lend again to consumers with good credit scores. In fact, there are those who say the consumer credit crunch never was as bad as some have portrayed it.

A false hysteria?

Gary Reynolds, who owns Reynolds Garage & Marine, a new-car and marine dealership in Lyme, Conn., says the severity of the consumer credit crunch has been exaggerated by the media, scaring off some customers.

"The media have spent too much time telling people they don't have access to a credit facility," says Reynolds, who also is a NADA director. "Most dealers I know have struggled with that, but they've usually come up with some solution - be it a credit union or a bank - so they can get their customers financed."

But even when financing is available, lenders are capping the percentage of the overall purchase price they'll take on, forcing buyers to come up with larger down payments and pay cash for extras like extended warranties, service agreements or insurance.


"In the old days, when we sold a car, we'd get 110 percent of the book value, and we could [finance] an extended warranty," says Richard Llewellyn, president and chairman of the Florida Auto Dealers Association and partner and CEO of Palm Automotive Group, which operates 10 franchised car dealerships in Florida. "Now banks are saying they will loan 90 percent of book, including everything. So what happens is, if the customer wants that warranty, they almost always have to pay cash for it. That cuts a lot of [potential buyers] out."

Banks also are charging dealers acquisition fees for each loan they approve, which cuts into what typically has been a nice "back-end" profit center for car retailers. Marine dealers say the same thing is happening to them.

An even bigger headache for car dealers - and one marine dealers can well relate to - is the shortage of available floorplan credit. As in the marine business, floorplan lenders have tightened the screws on many car dealers whose balance sheets are in decline. Once again, GM and Chrysler dealers have suffered the most.

The floorplan crunch also has undercut new car dealers' ability to take trades, since they often finance those transactions through their inventory   financing.

"When we sell somebody a car, not only do we have to pay off the note on the car we're selling, but in many cases we also need credit facility enough to pay off the car they traded in," says Reynolds. "So we may need access to capital of $40,000 or $50,000 to do $30,000 worth of [new-car] business."

TALF pursuit

Like the marine industry, the auto business has asked the U.S. Treasury Department to add floorplan loans to the list of things covered by the Term Asset-Backed Securities Loan Facility, also known as TALF. How it would do this is complex, but basically industry experts say the program would provide additional security to buyers of floorplan loans packaged and sold on the open market as asset-backed securities. By essentially taking floorplan loans off lenders' books, it allows them to offer more inventory financing to qualified dealers.

Still, not everyone in the auto business sees the floorplan issue as a crisis, arguing that financially healthy dealers still have access to inventory financing.

"It's been my experience that stronger dealers who are fairly well capitalized, are not highly leveraged and not operating on thin margins are still able to get floorplan," says Llewellyn. "The ones the banks are not giving floorplan to ... are the ones who are marginally on the fence and probably won't make it through the downturn because of how their business is structured and how they operate."

Unlike the marine industry, where the pullout of several major floorplan lenders has compounded the problem, auto dealers still have plenty of sources for floorplan. More than a dozen floorplan lenders still service the auto industry. In addition, auto dealers are turning to local sources for floorplan and capital loans.


"We've had an arrangement with [a bank] out of New Hampshire for a number of years," says Reynolds. "So our floorplan hasn't been impacted yet."

Multiple lenders

One lesson marine dealers can learn from auto retailers: don't rely on one source for floorplan, commercial or retail financing. With the dearth of national sources for boat retailers, it's important to establish relationships with local lenders.

While few in the marine industry would argue with that logic, some counter that marine dealers have a more difficult time turning to local banks for financing - whether it be for inventory, general operating capital needs or providing retail credit to potential boat buyers - because many local lenders don't understand the boat business.

"It's an ongoing problem," says Larry Tague, owner of Lake Viking Marine in Gallatin, Mo., and a member of the board of the Marine Retailers Association of America, who long ago set up a working relationship with a local bank.

David Parker, owner of Parker Business Planning in Orlando, Fla., says it's easier for dealers to establish commercial and retail lines of credit than floorplan financing. "If you use the word floorplan with a lot of local bankers, they'll duck. They're just afraid of it," he says.

Parker advises referring to floorplan more generically as inventory financing when approaching local lenders. He also suggests marine dealers put together a professional loan application that includes a cover letter explaining the basics of the business and complete financial statements reflecting the dealership's historical and anticipated sales and earnings.

Used-car market stronger

Much of the carnage in the auto industry has hit franchise dealers selling new units. Used-car dealers are faring better, says Michael Linn, CEO of the National Independent Automobile Dealers Association in Arlington, Texas. With more than 28,000 members, NIADA represents mostly independent used-car retailers who sell at least 100 vehicles a year. Only about   3 percent of the organization's members are franchised dealers, Linn says, although he expects that percentage to increase as more and more new-car dealers switch to used cars or open separate used-car outlets.

Linn says used-car dealers are faring better because they have lower overhead than new-car dealers and are more adept at working through down cycles.

"Many of these used car-guys have been around a long time and have learned to maneuver during downturns," he says. "The franchise dealer is pretty much handcuffed. He has such a high overhead ... it takes him a long time to downsize, where the used-car guy can make adjustments on a weekly basis."

Overall, car dealers - be they independent or franchised - say used-car sales are stronger than new right now. "I have several members who say last year was the best year they've ever had," says Linn.

What's driving the used-car business?

Llewellyn says many people who had been holding on to their current cars with plans to eventually buy new are playing it more conservatively now and instead are buying used. Not only is there a good selection of used cars right now, but they're cheaper than new cars. Dealers also are doing more service and repair work, since people are holding on to their cars longer, he and other dealers claim.

Find used boats

Once again, marine dealers can take a lesson from used-car dealers. As with autos, the used market for boats is far larger, and it's where consumers, especially in these difficult times, are increasingly looking to buy a boat.

"There is no question that the market is pretty good for used boats and that dealers should be paying attention to that like never before," says MRAA chairman Ed Lofgren, president of 3A Marine Service in Hingham, Mass. Lofgren says used and brokerage boat sales account for close to 20 percent of his total sales.

While the marine industry lacks the sophisticated secondary market for used units found in the auto industry, Lofgren and others say there are plenty of sources for dealers looking for used inventory.

"There are plenty of used boats out there, but you need to have someone dedicated to that side of the business," Parker says. "With new boats, you call up a manufacturer, and they deliver them on a truck, so the supply is almost endless."

Dealers typically find used boats one at a time - either by taking trades or buying them from other sources. So Parker urges dealers to advertise that they buy used boats.

One obstacle again is finding the cash to buy them. Used-boat floorplan is available, but, again, those sources are limited.

Focus on service

If there's one area of their business where auto dealers historically have done a far better job it's in the service department. Years ago, auto dealers figured out that a good service department isn't only essential to driving sales, but it can be a profit center on its own. In fact, during weak sales periods, a thriving service department is vital to a dealership's survival, many auto experts say.

To their credit, more and more marine dealers are catching on to this fact.

"Most successful [marine] dealerships have based their operations on successful customer service and servicing of boats and motors," says Lofgren. "It's as simple as that."

Parker agrees, adding that while few marine dealers can live on service alone, it can be a great source of profits, especially at a time when boaters are holding on to boats longer and, therefore, need more service work.

He offers a few suggestions to help dealers get the most out of their service departments.

First, bill at flat rates and make sure your service technicians work efficiently enough to beat that rate. "You also need to have a really strong scheduling system so you know how much work you have and when it's been promised [to the customer]," he says.

He also says marine dealers often don't charge enough for service work. "A good rule of thumb is to take the average hourly rate of your income producers in the shop [technicians and riggers] and multiply that times six," he says. "That's pretty close to what the retail labor rate needs to be."

An ad gap

If there's a fundamental difference between how the auto and marine industries are reacting to the downturn, it's in marketing and advertising. Auto dealers long ago learned the importance of ongoing advertising and promotions to build brand awareness and drive sales, while the average marine dealer, who admittedly operates on a tighter budget, will cut those expenses to the bone during rough times.

Still, auto dealers are being more cautious with their marketing budgets and taking a much more targeted approach. Given the consumer credit squeeze, auto dealers are designing promotions that pull in people who are more likely to qualify for financing.

"In the old days, we'd cast a big net and try to get anybody we could into our showrooms, hoping they would like our products," Llewellyn says. "If they did, there was a good chance we could get them financed."

Now, dealers are going after what he calls "enthusiasts." Ironically, that's just the kind of marketing strategy marine dealers and their manufacturers have long employed.

"We look for people who are consistent attendees at [auto] shows," Llewellyn says. "They typically subscribe to magazines that talk about the products we sell."

Vehicle attrition

Llewellyn also believes the new-car business will rebound in a few years, since, at present sales levels, more cars are being taken off the market than added.

"From the new-car side, the annual selling pace is about 9.5 million vehicles, which is very low," he says. Meanwhile, some 12.2 million cars are being scrapped annually. "So we're creating a vacuum in the market where we're taking more cars off the road than are going on."

With so few new boats being built today, and the used-boat fleet growing older, could a similar phenomenon rev up demand for new boats in a few years?

Another important piece of advice for the marine industry comes from Magliano, the director of automotive research at IHS Global. He warns manufacturers not to forsake their dealers in these troubled times.

"You business is your dealer," he says. "We talk about cost-cutting and problems with credit, but in the end the dealer is the one who sells the boat or the car. So there is an important outlet here, and if [manufacturers] work it, there is an important opportunity as well."

This article originally appeared in the July 2009 issue.



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