Downturn is hurting cities' car dealerships: Auto revenue sputtering

Oct 12, 2008 (Ventura County Star - McClatchy-Tribune Information Services via COMTEX) -- GM | Quote | Chart | News | PowerRating -- Ventura County auto dealerships are reeling from the spillover of a nationwide economic collapse that is forcing them to consolidate or close.

Business has fallen off so severely that cities -- the ones that rely heavily on sales taxes generated by new- and used-vehicle purchases -- are bracing for reduced revenue.

A grim picture emerged last week from the auto dealerships in Thousand Oaks, said Gary Wartik, the city's economic development manager.

"I had a conversation with some of the major dealers in the auto mall, and sales were down to levels not seen in at least a dozen years," he said.

Thousand Oaks revised its sales tax projection in July, slashing it by $2.4 million, and is adjusting expenditures accordingly.

"We're hoping to be OK," said Thousand Oaks Deputy Finance Director John Adams. "We have a minimum of 25 percent in reserves, and that certainly would be enough to get us through a significant period of time with any significant downturn."

For Camarillo, Fillmore, Moorpark, Ojai and Santa Paula, there are few, if any, dealerships pumping money into their budgets, so they won't feel the wallop of the auto industry downturn. But it will hit home in Ventura, Oxnard, Simi Valley and Thousand Oaks.

Oxnard and Ventura appear to be on budget because they both forecast for the drop-off.

Since January, at least five dealerships have closed countywide: Ventura Volvo; Ford of Santa Paula; Crown Kia; Bunnin of Ventura; and Schaiers Chrysler Jeep Dodge of Fillmore.

GM provided more gloom last week when its share price lost nearly half its value, plunging to the lowest level in more than 58 years. And there are reports that General Motors Corp. has held preliminary talks about a merger or an acquisition of Chrysler by GM.

Loan approvals are down

Leo Bunnin, owner of Bunnin Automotive Group and one of the county's leading auto dealers, said local dealership consolidation began during the last year.

Some dealers are closing because they just can't make it financially at a time when lease constrictions are in place and lending is tight, he said.

For the year through Sept. 20, about 52 percent of auto loan applications were approved in California, down from 89 percent for the same period last year, according to CNW Marketing Research Inc., a research firm based in Bandon, Ore.

Approvals of subprime auto loan applications in California fell dramatically during the same period, to 20 percent from more than 71 percent a year ago.

Rumors that Courtesy Chevrolet in Thousand Oaks might be closing were flatly denied by owner John McClure. At the same time, he indicated the outlook is grim.

"Everybody's struggling," he said. "Everybody's down. And we're cutting every expense we can. In the last two years we have gone from 104 employees down to 66, basically almost half."

When gas prices shot up to more than $4 this summer, McClure's dealership went into a tailspin because it was selling gas-guzzling trucks.

"The value of the SUVs and pickup trucks is absolutely terrible," McClure said.

He is working to shift his inventory from trucks to more fuel-efficient cars, even as gas mileage is now taking a back seat to more pressing challenges.

"People are losing their jobs," he said. "They're getting cuts in pay. It's more expensive to live now, and if your car is not broke, you're not going to get rid of it."

Bunnin suggested some dealers might close because the land they sit on is of such great value.

"Even with the drop in real estate prices, they still have fabulous equity and they can sell the property," he said. "And they don't have to deal with the day-to-day business problems." But the biggest reason for the closures, he believes, is that areas have been "over-dealershipped."

He said auto manufacturers pushed for more and more representation, and eager entrepreneurs were taking them up on it.

"The manufacturer felt the more representation, the more cars that would be sold," Bunnin said. "And indeed, you had aggressive car dealers that agreed. But as time went on, there were not enough customers to be able to have multiple locations flourish."

Still, Bunnin's outlook is optimistic because of the government's $700 billion bailout plan.

"I'd say in the 21- to 45-day range you'll start seeing some traction," he said.

Bunnin believes banks have put the brakes on extending credit, but they will ease up once they take inventory and evaluate their finances.

"The auto industry generates too much wonderful revenue for the banks," he said. "They need to be in the automotive game."

Spending less than projected

In Ventura, the city took proactive steps in preparing its 2008-09 budget and is doing fine, with spending slightly less than projected, Senior Financial Analyst Everette Garmon said.

"You can better gauge what's going on and meet adjustments before the ship falls off the edge of the earth," he said.

Ventura provided a snapshot of the decline in auto sales taxes with its first two quarterly reports this year -- the city has collected $1.4 million, down 26 percent from $1.9 million for the same period in 2007. A similar pattern has emerged in Thousand Oaks, which took in 15 percent less in the first two quarters of 2008.

Thousand Oaks depends on the auto dealerships for more than $6 million in sales taxes, or about 30 percent to 33 percent of its annual revenue. That's about three times more than the sales taxes generated by The Oaks mall.

"It's no doubt going to take a bit of time for auto sales to recover," Wartik said. "We have a general feeling that it won't be perhaps until the end of 2009, and part of that, too, is not only just the vehicles themselves, but the issue of credit availability and increases in job layoffs."

Events called 'perfect storm'

John Masterson, a former car dealer and editor of the Western Automotive Consultants Report in Ventura, described what's happening as the "perfect storm."

Masterson said available wholesale credit is lacking, financing is strained by additional requirements, vehicle leasing programs are being canceled, and business costs are rising.

If industry analysts are correct and things don't improve until 2010, he said, "there will be a dramatic reshuffling of how cars and trucks are retailed to the public."

U.S. auto sales are down 13 percent through September compared with the same period of 2007, and J.D. Power and Associates, a market research company in Westlake Village, this week reduced its sales projections. It now expects U.S. new-vehicle sales to total 13.6 million this year and 13.2 million in 2009, down from 16.1 million units in 2007.

While National Automobile Dealers Association chief economist Paul Taylor is projecting "a little more strength in the second half of the year," NADA Chairwoman Annette Sykora is projecting a loss of up to 700 dealerships nationwide this year.

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