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Aug. 10, 2009 – A recipe for a dealership profitability train wreck

August 10, 2009
Filed under Columns

With great regret I have to write on a subject that is infinitely depressing to consider but one I’m addressing simply because of its silver lining.
The end is near for a considerable number of dealerships.
In the weeks after this is published we’ll see a staggering amount of U.S. dealerships close their doors. It’s a movement that already has begun to start, but one that will accelerate in early fall.
That’s my belief.
Here’s my reasoning: First off, the exodus already has begun. Officials familiar with some of the industry’s largest corporations estimate 200 franchise dealerships have closed in the past three-four months. That number, probably conservative in nature, cannot be verified thanks to the vague bankruptcy reporting by the federal government and a reluctance by the industry as a whole to delve into that number, or at least in a public format. But even with those obstacles, the 200 number is valid given the credibility of the sources citing those dealer losses.
Secondly, let’s look at recent history. Last year, we asked more than 500 dealerships in a survey conducted for Powersports Business some key business questions. Namely, how many of them were profitable in 2007? Now remember, 2007 was a year in which the industry’s new unit retail sales number, as reported by the Motorcycle Industry Council (MIC), was off by only 10.5 percent. Even with that being the case, about 20 percent of the dealers reported losing money that year.
Twenty percent!
Fast forward 12 months and new unit sales in 2008, again only those reported by the MIC, were down even more, at nearly 16 percent. Worse, the fall and winter was a disaster for many stores. Same store sales information provided to us from ADP Lightspeed showed fall and winter sales — that’s parts, unit sales and service — decreased by more than 20 percent for much of the last quarter of 2008.
And this year, it’s only become worse.
The second-quarter slide of the on-highway motorcycle market, a segment that had shown considerable resiliency in 2008, figures to be the last straw for hundreds of dealers. The real question isn’t if, but when dealers will close. I’m betting the exodus will really start once we get past summer and into early fall, the last remnants of the prime-selling season.
In many ways, this industry is facing what the marine industry did, just a year later. It’s estimated by those in the marine industry that up to 25 percent of those dealers closed their doors in 2008. Similar to this industry, a dramatic falloff in new unit sales preceded that radical downsizing of the dealer pool.
Could the powersports version of the dealer loss be that dramatic? It certainly could be. Estimates from some OEMs that they have lost less than 5 percent of their dealer network in the recent past doesn’t seem like a viable percentage for the second half of 2009.
Is this line of thinking on expected dealer losses just a case of doom and gloom? Doubtful.
Consider two key statistics. First off, 64 percent. Of the total number of on-road motorcycles sold last year, 64 percent came in the first half. In other words, if the retail sales don’t come in the first half, they’re not likely to be made up in the second half. And that’s a huge problem when you consider that on-road bikes make up the industry’s largest segment, not to mention one of its most profitable ones.
Secondly, 11 percent. An ADP Lightspeed survey conducted for Powersports Business found gross profit margin for new units were under 11 percent for the bulk of the U.S. metric dealerships in their May sales. That percentage declined from a year ago.
Put the two key statistics together and you come up with a depressing conclusion: A decrease of first-half sales usually indicates uncomfortable inventory levels and hence a future further decline of gross profit margin as dealerships try to unload inventory and avoid increasing floor plan costs.
It’s a recipe for a profitability train wreck.
If 20 percent of the dealers lose money in a retail environment where new unit sales are off just 10 percent, what percentage will that be in a retail sales climate that is four times worse?
The silver lining of this probable dealer exodus is it could be the seeds of success for 2010 for those in the right position. For those that have the available cash flow, it’s extremely likely that this upcoming wave of closures could present some considerable values in terms of new unit inventory. After all, dealer doors may be closing but that showroom floor inventory won’t be going away.
But how do you get yourself in position to have sufficient cash flow? It’s a topic that we’ve asked every one of our speakers to address at the upcoming Powersports Business Conference & Expo, a dealership training event slated for Aug. 30-Sept. 1.
The event will, in many ways, be a finish line for the survivors of 2009. And sadly, that group of finishers will be noticeably smaller than in past years. psb
Neil Pascale is editor-in-chief of Powersports Business. He can be reached at npascale@affinitygroup.com. For complete information on Powersports Business Conference & Expo, go to www.powersportsbusiness.com/PSBCE/index.cfm or contact me.

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