U.S. Automobile Manufacturers and Dealers: Decline Precedes Revitalization
By Burton Marcus, PhD, ASA, Partner – Advisory Services(13)
Automobile manufacturers sold 10.4 million new automobiles and light trucks, such as sport utility vehicles and passenger and cargo vans in 2009. This represents a decline of 21.2% from the 13.2 million units sold in 2008 and was the fourth year in a row that unit sales declined. In fact, new vehicle sales in the U.S. in 2009 represented more than a 25-year low in unit sales — the steepest decline in U.S. auto sales since World War II after adjusting for population.(8) In contrast, China sold 12.9 million vehicles in 2009 to become the world’s largest and fastest growing automobile market.(12)
This article briefly summarizes facts relating to the current U.S. automobile manufacturer and dealer markets, and discusses the trends facing these organizations.
A Shrinking Domestic Market Share for U. S. Manufacturers
The sales decline through 2009 weighed more heavily on US manufacturers than foreign companies, as the US firms have collectively lost almost 10% of US market share to non-domestic automakers since 2006. According to Standard & Poor’s (S&P), this loss reflects the financial difficulties of US companies, well-received new products from foreign rivals, and the growing attraction to Asian and European nameplates in the U. S. Consequently, every major non-US company (i.e., Toyota, Honda, Nissan, Hyundai, Kia Motors, Volkswagen, Daimler, BMW, Subaru and Mazda) gained U.S. market share in recent years.
The extent of the drop of the Big-3 U. S. manufacturers’ domestic market share is illustrated by examining domestic and foreign auto sales between 1965 and 2009. As can be seen in the following table, the market share of GM, Ford and Chrysler declined from 90.6% in 1965 to 43.7% in 2009—an incredible drop of just over half these manufacturers’ original market share for the period addressed. However, industry experts believe 2009 will have established the bottom of the current downward sales trend.(9)
On the brighter side, early sales statistics through July 2010 indicate total light vehicle sales were improving. Hence, industry experts are raising sales estimates, with S&P predicting sales of total light vehicles to increase to 11.71 million units in 2010, and to 13.48 million in 2011.(9) This is believed to reflect a small but steady strengthening of the U. S. economy, continued aging of the U.S. auto fleet, smaller inventories of late model used vehicles, higher priced used cars, and wider availability of consumer credit to stimulate recovery of new vehicle sales of all brands.(5)
In general, a turnaround for U. S. manufacturers is expected in the coming years. Ford Motor Company’s sales statistics are already demonstrating this, with the Company actually gaining market share since 2008 and with such models as the Fusion, Focus, Edge, Escape and F-Series truck among the top-selling vehicles in 2010. General Motors is very slowly following – even prior to the introduction of its new all electric Volt which it is hoped will make a major difference for the company. On the other hand, the success of Fiat-Chrysler remains to be determined.
A Competitively Changing Auto Dealerships Environment(6)
There are approximately 45,000 new and used vehicle dealers in the U. S. Their combined annual sales are $600 billion. The larger dealers in the industry include AutoNation, Penske Automotive Group, Sonic Automotive, and CarMax. But as large as they are, the top 50 companies (which in turn own many individual dealerships of the same and different brands) still only account for less than 15 percent of vehicle sales. The rest of the sales are from smaller, privately held dealerships operating one or at most several dealerships of similar or multiple brands. Although much smaller than the very much larger regional or national dealerships, they are still larger than the former years’ traditional small dealerships, and some even offer several different brands of automobiles under one or multiple roofs.
In 2009, total sales of the estimated 18,458 new-vehicle dealerships in the US amounted to $486.9 billion, which represented 13.2% of all retail sales in the US.(4) Average sales per dealership were $26.4 million. New-vehicle dealerships employed a total of 912,000 persons, and averaged 49 employees per dealership. However, while new cars comprised 52.3% of total dealership sales, they contributed only marginally, if at all, to profitability. In contrast, used vehicles comprised 32% of total sales, but provided significantly more to dealership profitability. Parts and service represented the remaining 15.7%, and also provided well to dealership profitability. Because of the decline in total vehicle sales, in today’s dealer environment, service, parts and financing account for the majority of dealership operating profit.
The major factor impacting dealer sales and profitability include changing economic conditions, competitive product offerings, consumer confidence, interest rates, inflation, and fuel prices. In addition, sales for particular brands of automobiles are particularly influenced by evolving consumer preferences and manufacturer ability to appropriately respond to consumer trends and market conditions. Although dealerships typically report gross margins of about 15% of sales, during economic downturns, dealer margins shrink and the dealerships often barely break even, if they do not lose money, on new vehicle sales.
Although the industry was hit hard by the current economic recession, the auto dealerships are currently making significant progress towards cost reduction and improved profitability.
Trends Impacting Auto Manufacturers
Key trends impacting the auto industry include pricing challenges, declining customer brand loyalty, volatile gas prices, hybrid and alternative-fuel vehicles, and increasing safety standards.
Declining customer brand loyalty:(6)
Volatile gas prices:(6)
Hybrid and alternative-fuel vehicles:(9)
Increasing safety standards:(9)
Trends Affecting Automobile Dealerships
Key trends impacting automotive dealerships include continued industry consolidation, increasing consumer frugality, increasing used auto prices, and reduced vehicle inventories.
Continued Industry Consolidation:
In the period between 2005 and 2007 there were approximately 225 closings a year, but in 2008 there were more than 1,000 dealerships closings. This rapid consolidation continued in 2009, due to the increasingly competitive and challenging environment, the reduced availability of credit for dealers and customers, and forced dealership closings by Chrysler and GM.(9)
As a result, the total number of small dealers in the US declined by more than 20 percent between 1998 and 2008. On the other hand, the number of large dealers increased by 4%. Additionally, with some domestic car manufacturers decreasing the variety of models offered, many single franchise dealerships were forced to merge with other dealerships.(6) According to NADA Data 2010, the net closure rates of dealerships was 1,550 during 2009, but were expected to decrease to approximately 500 net closures in 2010.(10)
Increasing Consumer Frugality:
Increasing Used Auto Prices:
Reduced Vehicle Inventories:
One recognized industry source predicts that the total value of the market in 2010 will be $169.5 billion, which although 5.5% higher than in 2009 is still significantly below 2008.(1) Although the automotive market is showing signs of recovery, the outlook is for a gradual and modest recovery, with pre-recession sales levels to be unlikely until at least 2013.(2)
However, although the industry continues to face significant challenges during the current difficult economic conditions, the overall outlook for the automotive industry for both manufacturers and dealers is one of cautious optimism.