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GM, Chrysler Closing Dealerships at Record Pace

Benjamin Hunting
by Benjamin Hunting
April 22, 2009

Americans are finding themselves with fewer options when it comes to searching out a thanks to war of financial attrition that is cutting a significant number of dealers out of the picture. Beginning in 2008 and accelerating through the first quarter of 2009, automobile dealerships marketing a wide range of different brands of vehicles have been closing left, right and center, as a combination of factors have made it increasingly difficult to stay in business selling cars. More than 881 were closed in 2008, setting a record that will most likely be eclipsed by the end of the current year.

Hit hardest in terms of closings are dealerships linked to and . Of course, one of the biggest reasons why these businesses are having difficulty keeping their doors open has to do with the much smaller number of buyers looking to purchase a new vehicle. Sales in 2008 shrank by 18%, and the numbers for 2009 have not improved. A lack of cash flow has caused many dealerships which ordered large numbers of cars this year based on discount incentives from GM and Chrysler to regret their decisions as inventory now sits languishing on lots and in warehouses.

This supply pile-up has also introduced a new worry for beleaguered dealerships. The specter of bankruptcy which haunts the two troubled automotive giants could have serious repercussions for dealerships who are left waiting for payments due to them by their parent companies. Medium to large-sized dealerships typically take in around $500,000 per month in incentive payments from GM, along with quarterly vehicle holdback amounts totaling half that amount. The reimbursement of warranty costs adds a further $100,000 to this outstanding amount. Should the General file for Chapter 11, then the fate of those payments - and the solvency of most dealerships - would be thrown into question.

Further compounding the outstanding incentives payments issue is the fact that the current credit crisis has left many dealerships scrambling to find loans to help them with real estate costs and capital improvements. They are also finding it difficult to qualify for retail and wholesale loans. When taken all together, some business owners have had to get very creative when it comes to juggling their financial situation. This can include convincing customers to wait for until they actually arrive from GM or Chrysler, as opposed to having the amount immediately knocked off the price of the vehicle being purchased.

There are still just over 6,000 GM dealerships currently fighting for survival. So far, 165 GM dealerships have closed their doors in 2009. The typical loss rate tops out at 200 closings for an entire calendar year, indicating that serious blood will be spilled over the next 8 months. Chrysler's dealership closing rate has accelerated by 35% since the end of November, with 15 more dealerships closed this past March than were eliminated in the same month the year before.

Each of the Detroit automakers have been attempting to reduce their total number of dealers in the United States for quite some time, but only has been able to gain a measure of control with regards to their scale-down, cutting 269 lots out of the picture in 2008 on their way to a total of 3,787.


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