Lots of Woe: Car Dealers in Crisis

WAL-Mart might not have difficulty selling Hot Wheels this year, but auto dealers are struggling to move the real thing. Just ask Gary Bell Sr., whose family has been selling cars for 85 years. That is, until December, when the Leonardtown, Md., business will end for the Bells, thanks to the slumping economy and credit crunch. With sales less than half what they were at the beginning of the decade, Bell could no longer make a go of the General Motors dealership his grandfather cofounded. "It's very emotional," says Bell, 42. "My father put his heart and soul in this business. You feel like you're letting him down."

These are days of despair for car dealers. First they were hit by rising gas prices. Then the crisis on Wall Street froze credit, making it difficult for dealers to finance their inventories and harder yet for buyers to get car loans—the few buyers brave enough to venture into showrooms, which have the feel of mausoleums these days. Car sales collapsed in September, falling 23 percent, and they continued their slide in October. The pain has spread beyond distressed Detroit automakers to healthy carmakers like Toyota, which suffered a 29 percent decline in September. "Dealers who have been in this business for decades say they've never seen anything like this," Annette Sykora, head of the National Automobile Dealers Association, said in Detroit in October as she predicted 700 dealers would close this year.

That might turn out to be optimistic. By the end of September, 590 dealers had already closed. Mike Jackson, CEO of AutoNation, America's largest car seller, says it will be more like 1,000 going out of business and another 1,000 next year. And not just the mom-and-pop stores. The nation's largest Chevy dealer, Bill Heard of Columbus, Ga., went bankrupt in September, padlocking 13 stores. Typically, about 200 of America's 21,461 dealers close every year. "In February, I couldn't give away a Prius; by May, I was taking in Escalades in trade for Priuses," says Jackson, who has closed three dealerships but remains profitable.

Making matters worse, GMAC, the nation's second largest auto lender, just said it would no longer issue loans to buyers with credit scores below 700. The move could cut off nearly half the car buyers in America, since about 42 percent of consumers have credit scores below 700. "You fall below 700 if your wife forgets to pay the Saks bill," Jackson says. "That could be easily 60 percent of our traffic."

Analysts have predicted a reckoning for car dealers for years. The Detroit Big Three have kept many afloat by using their own financing operations both to subsidize loans that dealers use to put new models on the showroom floor and to close sales with buyers. That's left GM, Ford and Chrysler with 14,294 dealers, enough to cover 70 percent of the U.S. car market, but Detroit's combined market share has fallen to 48 percent. Now that America's automakers are running out of cash and time to fix themselves, they're shutting off easy money for dealers.

For anyone who's ever had his arm twisted by a dealer, there might be some satisfaction in this turn of events. But car dealerships account for one fifth of all U.S. retail sales and are often the biggest local business, employing hundreds and underwriting the Little League. Those big stores, with rows of gleaming metal and flags flapping, once made dealers among the richest folks in town. Not anymore. A recent study by Edmunds.com said that dealer profits on new cars are off 25 percent this year. "Our pot of gold is not as big as people would think," says Bell, who's searching for an accounting job. "I have a mortgage and bills to pay. There's a sense of not knowing what is going to happen." Maybe he should look into selling toy cars.

With Hilary Shenfeld

© 2008