While the whole economy battles the recession, the auto industry seems to have been hit particularly hard. The biggest headlines have involved Detroit's Big Three, the bailout "bridge loans" that they managed to acquire, and plummeting sales. Indeed, sales are proving dismal for just about every major automaker worldwide.
While it's not often been above the fold, the truth is that every negative impact on one of the major automakers worldwide -- domestic or international -- has a major impact on the dealerships or franchises that sell the vehicles.
Case in point, domestic automakers have been trying to reduce their dealers networks, a cost-cutting move reflecting the glut of dealers in the market today.
The National Automobile Dealers Association has reported that 900 of the total 19,700 new car dealerships in the U.S. closed last year. A resulting, 50,000 jobs went with them.
Hispanic Business had an opportunity to talk to four Hispanic dealership owners to see how they are faring. Their examples illustrate many of the difficulties that dealerships nationwide are experiencing.
Luis Alaniz, Aztec Chevrolet, Buick and Pontiac, Beeville, Texas
Luis Alaniz opened Aztec in May 2007. He employs 38 people. He said that sales in 2007 and the first six months of 2008 were "good." Sales by month first averaged about 115 vehicles, then 105 and now it is down to 65 vehicles, about a 40 percent drop. He volunteered that although residual values of SUVs plummeted due to the rise of gasoline prices, he did not experience a drop in sales of SUVs or pickup trucks. He explained that is due to the area where he sells his vehicles, a region that includes a lot of farms and ranches and a little bit of oil business. People in these industries tend to buy trucks out of necessity.
Alaniz found that many of his customers were holding back from buying a car last December, when General Motors was claiming it may not make it through the rest of the year.
"I had a customer who was going to buy three Chevy Cobalts for his pharmacy business," said Alaniz. "But he held back in December because of all the talk of GM going bankrupt. When GM got its loan, he came back and bought the cars."
He uses GMAC as the primary lending source for his customers. Recently GMAC has demanded that lenders have a FICA credit score of 700 in order to be approved for a loan. As a result, Alaniz said that he has lost 80 percent of the customer base. Prior to the more restrictive loan practices of GMAC, Alaniz was also using local banks and credit unions to finance his customers. He is using them much more often now. But he is finding it difficult even dealing with the local banks.
"A lot of the local banks don't do car loans unless you are a real good customer," he said. He added that 10 percent to 15 percent of loans he gets for buyers are coming from credit unions.
There was a time when leasing cars was a positive way to get new customers to buy. That is no longer the case. However, Alaniz noted that leasing is not a good alternative for people who live in rural regions like the area in which he has his dealership.
Further complicating the course of businesses were the incentives offered by domestic automakers to combat dismal sales. Generally, GM would reimburse its dealers for the incentive about one week after a car was sold. But as things got tough in December, the automaker took as long as three weeks to pay. Alaniz complained that November and December were heavy months for incentives and, since GM paid late, he found himself falling behind. However, ever since GM got its loan money, Alaniz reports that the company has been good about reimbursements, which are again coming in weekly .
Another facet car dealerships contend with are the cost-cutting measures taken by automakers. One obvious example is the elimination of dealerships. Alaniz believes that GM's decision on whether to keep a dealership open or close it relies on customer service and customer sales satisfaction. He explained that every customer who buys a GM vehicle gets a satisfaction questionnaire from the company, as does every customer that comes in to use the service department for warranty work. GM uses these questionnaires to grade the dealership.
"I think it will be the satisfaction surveys that will hold the most weight when GM decides what dealerships to close," said Alaniz. "So I am telling my employees to focus on service and sales satisfaction."
The dealerships themselves are looking to cut costs. Alaniz has cut his advertising budget by one-third and has concentrated on targeting his ads on a particular demographic. As he's determined that his customer base is approximately 60 percent Hispanic, he's advertising on Spanish television. He is also targeting customers with higher credit scores.
Alaniz also offers some minor incentives to draw potential customers from outside his immediate area.
"We're located 50 miles from Corpus Cristi and 90 miles from San Antonio," said Alaniz. "Customers from there sometimes call to inquire about our vehicles and we invite them to come down and we give them a free dinner at Chili's."
He forecasts that the dust will clear during the first quarter of 2009.
Fernando Varela, All-Star Ford-Mercury, Palantine, Texas
Fernando Varela's All-Star Ford-Mercury opened in 1994. He has 40 employees. He said that he has not yet had to lay anyone off but he has been forced to re-adjust payment plans. He said that his best years were from 20'04 -20'07.
"2007 may have been one of my best years," he said. "We sold more than 1,000 units." More recently, he said that sales for November and December of 2008 were down about 10 percent to 15 percent. He blames the decline in sales on the weather and on the recent impact of the bad economy on his region of Texas. Varela indicated that he is experiencing a better January due to a strategy that focuses on used vehicles.
As a Ford dealer he uses Ford Credit to secure most -- about 65 percent -- of the loans he gets for his customers. He is also using a national bank -- Wells Fargo -- some local banks and credit unions. He noted that the credit unions have been very aggressive and is offering "cheap money" at 4 percent to 5 percent. "The more alternatives the better," he said.
Varela said that two dealerships about 30 miles east and west of him have gone out of business. But he is not too concerned that Ford will close him down.
"My dealership is one of the strongest in the area and I have been taking on the additional customer base that was served by those two dealerships."
He expects to see more dealerships merge this year if business does not pick up, but he also noted that dealership closures are happening mostly in the huge markets like Dallas, Houston, and Los Angeles. "There you will find a dealer every two miles. Here and in other rural areas the dealerships are more than 30 miles away from one another."
Ford has been offering incentives in the manner of cash back on some models.
"A customer could get $3,000 to $4,000 cash back according to what model truck and get an interest on the loan of 4 percent to 5 percent," said Varela. Unlike Alaniz's experience with GM, Ford reimburses Varela for the incentives quickly.
"I've talked to friends of mine who have GM dealerships and they've told me that GM is taking longer to reimburse them. That could really hurt a dealership substantially," he said.
Varela said that he is not leasing at all because Ford Credit doesn't offer it. But he finds that it doesn't matter much in his region.
Among the cuts Varela's made is his advertising budget, by about 40 percent.
"I've changed how I market," he said. "I cut back a lot on sponsorships and I am alternating my advertising in television and newspapers -- one week TV and one week newspapers. I've become more selective."
He's seen many minority-owned dealerships are closing, which he believes is because most are first generation dealers.
"I've been in the business for 15 years and I am still a first-generation dealer," he said. "Many main dealerships are second-, third- or even fourth-generation. The minority-owned dealerships that are closing have not been in business long enough to build any wealth. So when it comes to putting money into their business in order to survive they don't have it. And banks won't loan them money because they don't have assets."
Varela optimistically forecasts that the industry turn-around will occur in the beginning of the summer.
"In 2008 the first two quarters of the year were the best and the last two quarters were the worst. I expect that to flip flop in '09."
Daniel Ramirez, Ramirez Ford Sales and Ramirez Chrysler-Jeep-Dodge, Rio Grande City, Texas
Daniel Ramirez and his family own a number of dealerships --Ramirez Ford Sales and Ramirez Chrysler-Jeep-Dodge in Rio Grande City, Texas and Rio Grande Valley Motors in McCallum, Texas. Rio Grande Valley Motors sells Jaguars and Land Rovers. The Ford dealership opened in the 1940s. The Dodge store opened in 2003 and the Jaguar/Land Rover store went into business in 2005. The Jaguar/Land Rover store has 100 employees and the stores in Rio Grande City have 100. Ramirez said that he has not laid anyone off per se, but he is not filling any jobs when a person leaves or retires.
His best period was around the time of Sept. 11, 2001.
"About a year or two before and about a year after," said Ramirez. "It was about the time of 9/11 that there were zero percent loans and sales were phenomenal."
He depended on the domestic automakers' financial divisions to provide the loans his customers needed.
"On the Ford side, during the good years, 90 out of 100 cars sold were through Ford Credit," he said. "Now it's 10 percent." Accordingly, he is relying on local banks.
"Anything that's out there. It's a constant struggle to find banks that are willing to buy paper."
Ramirez has gone through the rare experience of changing manufacturers. This is something that is becoming more common as the domestic automakers sell brands to other automakers. Ramirez opened his Jaguar/Land Rover dealership while those two brands were still owned by Ford. Tata Motors of India bought Jaguar and Land Rover last year. His dealership was actually involved in the acquisition.
"After the acquisition was announced, Ford sent me a termination letter then I immediately got a re-instatement letter from Tata," he said. "Every single Jag and Land Rover dealer was terminated, then brought back in under the new company."
However, Ramirez pointed out that was how Ford and Tata worked out their deal. When a brand is purchased by another company there are no guarantees. That's why he is on "pins and needles" concerning Jeep for his Chrysler-Jeep-Dodge dealership. He has also found that having a foreign-branded dealership has opened up his ability to expand. He is adding Audi and Porsche to the property that hosts his Jaguar/Land Rover dealership.
Ramirez believes there is an advantage to have multi-dealerships.
"It's easier to stay in business," he said. "If one franchise slows down you have another one to pick up the slack and keep all afloat."
Another concern of his is the future of Chrysler. He did not like it when there was talk that Chrysler and GM might be merging, specifically due to his Chrysler-Jeep-Dodge store. He fears that if there were a merger of the two, his Chrysler dealership would be more likely to close than nearby GM dealerships. If Chrysler is, in fact, sold, he's hoping GM won't be the buyer.
Ramirez concluded that dealerships that started most recently will be the first ones to die.
"It all comes down to having experience with the banks," he said. "I can expand because the banks know me, and that's because we have had the Ford dealership since the 1940s. We have a reputation."
"And your staff has to be good," continued Ramirez. "Your finance manager and your sales manager need to be experienced enough to know what's going on. They need to understand the various loan programs. Two or three years ago you could get away with having an inadequate staff. You can't do that now."
Ramirez forecasts a turn around in about six months. "Probably around the summertime we'll see a change," he said. "But the fuel situation will continue to be a problem. Things could turn around and then the fuel prices could spike and become outrageous and no one will buy a car and then we are back to where we are now."
To combat this possibility Ramirez is looking into opening import dealerships so that he can sell more fuel-efficient cars.
David Ferraez, Green Brook Pontiac, Buick, GMC and Hummer, Greenbrook, New Jersey
Green Brook Pontiac, Buick, GMC, Hummer, Green Brook, New Jersey opened its doors in May 1999. It has 78 employees. According to David Ferraez, 35 had to be laid off in the past three months.
The best sales years for Green Brook were 2002 through 2005. Average sales during this period were 250 to 300 cars a month, according to David Ferraez. Now it is about 150 to 160 a month, he added. "We are off by about 25 percent for 2008 when compared to those years," said David Ferraez.
Leasing is an important part of business for Greenbrook Pontiac, Buck, GMC, Hummer, said Ferraez. In fact, it accounts for about 60 percent of its sales. GMAC, the financial division of GM, stopped its leasing program and that has had a major impact on the dealership.
"That's why volume is off as much as it is," said Ferraez. "We had more than 2,000 customers in our lease portfolio. They are now coming off their leases at a rate of close to 100 a month. We can't offer them another lease, so 90 percent of those customers are leaving and going to other franchises."
Ferraez said that he has tried to hold that customer base with incentives and GM is helping out. According to Ferraez, GM is willing to give up about $1,000 to $2,000 on a deal that would get a leasee to buy or lease from a third party. But Ferraez complained that there is only one third-party company in the country willing to lease -- U.S. Bank. "GMAC and GM are putting in incentives to try and help us save this base, but it is not working," said Ferraez.
Ferraez added that he is only using banks for loans since GMAC has stopped buying paper about four months ago.
"The only thing we could do is use alternative banks, prime and subprime banks. We are using all the major players -- Chase, U.S. Bank, etc. Unfortunately for GMAC they didn't have money to lend. And now that they've gotten a loan from the Federal Reserve, they now have money to lend but they aren't as competitive as some of the banks are."
The dealership is located in a major urban area in Northern New Jersey and the market is saturated with dealerships.
"For every one dealer they need, there are probably three of us here they don't need. North New Jersey could be the most over-dealered part of the country. The truth is the domestic automakers do need to thin out their dealer networks by two-thirds."
In order to protect himself, Ferraez has added a foreign car manufacturer, Suzuki, and plans to expand with other automakers in the future.
"But we need to do it in a way that makes sense," he said. "We need to expand on property we already have because they already have all the elements of a dealership -- sales, service, body shop, parts and accounting."
And as a General Motors dealer, Ferraez is concerned about the automaker selling some of its brands. Recognizing that GM will probably dump Hummer, Ferraez has already made a buyout deal with GM concerning Hummer. "I made my settlement with GM. I will be a Hummer dealer for two more years," he said.
Other GM brands that could be sold or killed include Saturn, Saab, and Pontiac. Ferraez said that as a GM dealer he has to deal with it when it happens. As far as Pontiac is concerned, Ferraez has heard that General Motors will make it a small part of the Buick-GMC franchise. "It could be Buick-GMC with a couple of Pontiacs in the mix. But that's GM's decision. This is only what I've been hearing," he said.
The current crisis has caused him to spend less on marketing. "We are constantly advertising, but we are also prospecting for referrals and repeat business," he said. He has also targeted his advertising with direct mail by zip code and with Internet marketing. He also pays extra to search engines so that when someone is on the Internet looking for a GM dealer, it is his dealership that is listed first or close to first. This has proved relatively successful because a lot of people are interested in the Buick LaCrosse.
He has upgraded his Web site with the help of a company called Cobalt Group, which also works with GM. "They do a very good job helping us with the Web site and marketing on the Internet," he said.
Ferraez forecasts that the market "bottomed out" in October 2008. "January is tracking better than December and December tracked better than November," he concluded.
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