Car sales this month are forecast to fall more than 50%. The largest car companies have been staggered by poor earnings and the elimination of dividends. What is often left out of this mix are the dealership networks that are critical to the industry. Most are not funded to handle months of a downturn in sales. Some will disappear, which will leave manufacturers without a core component to the relationship between car companies and consumers.
Cox Automotive forecasts that U.S. car sales will drop by 53% this month compared to April of 2019. The number of cars sold in all of last year was about 17 million. No one expected the falloff of more than half to last the entire year. However, the industry will take a beating worse than the one during the Great Recession. Ford has announced that it expects to lose $5 billion this quarter, which will drain its cash balance.
There are over about 16,700 car dealers in the United States. Most make money through sales and service. Sales have been cut as people have sheltered because of COVID-19. Dealers have offered ways to buy cars online. The Cox data points to the fact that this has not worked well. People also have delayed trips to the service department.
Dealers have had to decide whether to remain open. Many are small businesses without the ability to remain shuttered for months. Hundreds of dealerships will disappear. The car companies will have no dealers at all in some cities.
One example of this problem is Infiniti, the Nissan luxury car brand, and its lack of a dealership in Manhattan. It serves its New York City customers from dealerships in Brooklyn and Manhasset. Financial trouble at either location could leave New York City, the country’s largest by population, with just one dealership, or none. How will Infiniti sell cars in the city? Where will people go to service them?
The problem is less acute for the largest car brands. Companies like Ford, GM and Toyota generally have several dealerships in and around most cities. However, the distances customers have to go for sales and service may rise if some of the dealerships of these big manufacturers close down.
Even in the best times, profit margins at dealers run between 5% and 10%. Only those that are cash-rich can ride out months of downturn. Where will car companies ship their cars to be sold? In some areas, the answer will be nowhere.
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