The recession hit Ontario's automotive sector hard. Faced with consolidation and closures, the future of Canada's new car dealerships may be at risk.
North Americans are not spending. Car sales are tanking. Production lines stand still. A growing stock of new vehicles now jams ports and storage lots around the world. General Motors (GM) and Chrysler’s impending doom seems inevitable. Already operating in a saturated market, the future of the Big Three’s (Ford, GM and Chrysler) dealership network is in question.
As car sales plunge in North America, the auto industry is facing its worst downturn since World War II. According to Scotia Capital senior economist Carlos Gomes, global purchases, “slumped nearly 30 per cent year over year in January.” U.S. car sales alone dropped 40 per cent in January reaching the lowest level since mid-1982. Vehicle sales have averaged 16 million units per year for the past decade, a number Gomes says is “abnormal.” He blames low-interest financing for excessively stimulating the North American auto market. While a stable U.S. vehicle sales market would steady around 14 million units per year, sales for 2009 are predicted to crash below 10 million. As a result, the automakers stalled production plants during the month of January in both the U.S. and Canada.
Excess Inventory
The overabundance of new inventory is evident by the endless rows of cars lined up on the dealership’s lot. City Buick Pontiac Cadillac Ltd. sits on more than 6,000 square metres of an urban area built for 50 per cent market share. However, as general manager Michael Carmichael admits, “we’ve got 10 [per cent market share].”
It would be naive to pretend that the business hasn’t changed. “Everybody is downsizing right now,” says Carmichael. Gomes sees this as a restructuring period whereby the Big Three companies will be negotiating with area dealerships. According to the Toronto Star, there are presently 700 GM dealers across the country, employing 33, 000 workers. By 2014, GM estimates that they will have slashed around 35 per cent of their total retailers.
“These are very different dynamics,” says Carmichael. “The viability of our manufacturer was never an issue in previous tough times.”
While the risk of dealerships closing is very real, given the horrendous vehicle sales during the first few months of 2009, Carmichael sees the prospect of consolidation in the dealer network as a great opportunity.
“I’m confident that [closures] will be done in a way that best serves the customer and the dealer and the surrounding community,” says Carmichael.
Carmichael is optimistic that City Buick Pontiac Cadillac Ltd. will survive the recession and GM’s internal cutbacks because of his dealership's location and community legacy. However, he still wonders, “What does the new world look like?”
In comparing his own “outdated and antiquated” GM dealership, built in 1967, to the new $25 million facilities that house Honda and Toyota cars, Carmichael hopes the consolidations will drive profitability numbers up and create success factors that “will make the opportunity to build new facilities [and] develop... far more viable.”
The Logistics
“This hit so fast and that’s a challenge,” said Carmichael in reaction to the current downturn. GM dealerships were told in August that leasing was no longer an option. Designed to deal with capacity, leasing “was a very convenient way to buy a vehicle,” adds Carmichael. But with 60 per cent of his sales, leading up to this year, from leased vehicles, Carmichael and others like him, were blindsided by the decision.
“Ninety per cent of our Cadillac business was leased. I was sitting with eight Escalades in stock. It was very difficult to finance an Escalade.”
Going in through 2009, Carmichael’s goal was to go with a 60 day supply of
vehicles, 100 cars on the ground and 50 coming at him on order. But,
the slowdown brought business to a halt and City Buick Pontiac Cadillac Ltd. sold only 35 cars in January and 16 in February. “I’m sitting right now with 245 cars on ground. The goal is to get to 100 maximum on ground.”
Despite the severity of the current North American auto industry overhaul, Carmichael is keeping everything in perspective. “You’ve got to hope that the other side is brighter than what we are going through right now, and that there is another side to it,” he said.
When Carmichael was growing up around the dealership, the head count was 220 people. Five years ago when he became general manager, the dealership employed 165 people. At the end of February, City Buick Pontiac Cadillac Ltd. was down to 92 employees.
“It will fundamentally change how everything looks and feels,” says Carmichael.
According to Gomes, dealerships across the country employ 60 people on average. Ford, GM and Chrysler make up 45 to 50 per cent of the dealerships in Canada. As a result, they are experiencing the brunt of the job losses. In the midst of an economic downturn, the new vehicle market will be impacted the most, while used car sales generally stay the course.
Used Cars
The dynamics of the automotive industry are definitely changing. “For the first time I’ve ever seen, or in our company’s history, we sold more used cars last month than we did new. And we sold almost one for one the month before,” said Carmichael.
John Wallischek, sales manager of Auto Showplace, a used car dealership located in North York, couldn’t agree more. Having worked in the business through the 1990s, Wallischek has seen this before: when new car sales slowdown, used car sales pick up.
Sales between September 2008 and March 2009 at Auto Showplace are up $22, 000 compared to the same period last year. Moreover, with people hanging on to their older cars for longer, the body shop at Auto Showplace has been extremely busy for the last four or five months.
“People are repairing their cars more often... They’re not spending the same sort of money on a new vehicle, they figure they will either fix their old car up or buy what will get them by in the next little bit,” says Wallischek. And even though the demand for used cars is on the rise and the price is quickly following, Wallischek still figures people can buy a used car for less than half the price of a new car.
Looking ahead
People will still need to buy new cars in the future. According to Gomes, close to 40 per cent of all vehicles on the road are more than nine years old. Until then, the risk remains for Ontario's new car dealerships.
Email with comments: michellechristina.de@ryerson.ca
