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Auto shakedown; Arkansas car dealers feel the squeeze to expand as manufacturers siphon cash.

Auto Shakedown Arkansas Car Dealers Feel The Squeeze To Expand As Manufacturers Siphon Cash

In 1979-89, the number of auto dealerships in Arkansas shrunk by about 16 percent - down from 400 to 335 according to the Arkansas Automobile Dealers Association. During the first four months of 1990 alone, there have been nine ownership changes among dealers and seven closings or bankruptcies.

The herd has been thinned to be sure, but auto dealers aren't likely to become an endangered species anytime soon. The severity of the shakeout is relative although the total number of dealership sales and closings in recent weeks can create a misleading impression of doom and gloom.

Noah Bates, president and owner of his namesake Chrysler-Plymouth-Peugeot-Daihatsu dealerships, doesn't consider the current attrition rate to be out of the ordinary.

"Dealers have come and gone ever since I've been in the business," observes the 29-year veteran of car wars. "The reason more dealers may seem to be going out is that there were more of them out there. I don't think the percent [of attrition] has changed any more than in years past."

Automobile manufacturers have been tallying record profits while dealers have watched theirs drop 200 percent in the last two years. A profit margin of 2-3 percent has been the rule for dealers during most of the 1980s, but that has been squeezed down to 0.6-0.7 percent in many cases. Those thin margins can be pumped up by increasing the sales volume of existing product lines or broadening the sales base through the addition of new dealerships.

Dealers will face more choices in allying themselves with automakers, and further fractionalization of the car market is all but a foregone conclusion. Where there were 39 automakers in 1979, 58 companies will be in production by year-end.

Franchise Shopping

"You're always looking for the good one, and if you don't take a new franchise, someone's going to take it," Bates says.

There are some economies of scale that promote diversification. That and expanding a dealer's potential marketshare are the major movers for taking on a new franchise. Those two considerations prompted Little Rock Dodge to begin handling the Mitsubishi line three years ago.

"You're going to see more and more dealers carry multiple lines because the costs of operating are so much greater today," predicts Butch Martindale, GM of Little Rock Dodge-Mitsubishi.

Expansion is not without its downside potential. Some foreign automobile manufacturers have required a stand-alone facility to qualify for a dealership. The capital investment is substantial, and the risk is considerable.

Perhaps no one can appreciate that more than the crew at the One Moore family of automobile dealerships in Sherwood, which encompasses Ford, Hyundai, Suzuki and Daihatsu.

Economic realities have forced automakers to liberalize their standards for maintaining a franchise because their past demands have put dealerships like Moore in a financial bind.

"I think they're not having any choice on that," remarks Terry Mercing, CFO at One Moore Management Group. "A great number of manufacturers are backing off on their requirements."

Case In Point

In an effort to maintain its diversified product line, Moore took on some serious debt in 1988 to acquire land and build a new sales and service facility for the Hyundai dealership. The Korean automaker prodded Moore into developing the free-standing operation or risk losing the franchise.

The specifications of the facility set up by Hyundai were based on projected sales and left little room for flexibility where cost was concerned. Unfortunately, those envisioned sales didn't materialize as the once hot product lost some of its steam. With strikes on the assembly line and other problems, the car renowned for its low sticker price lost some of its sex appeal.

But it was Moore who was stuck with paying for the overhead that could not be supported by its own revenue stream, even when the Suzuki operation was brought over to bolster the cash flow.

Twin City Bank in North Little Rock provided the construction loan with the permanent financing channeled through Ford Motor Credit Corp. in Dearborn, Mich., in the form of a $1.85 million deed of trust dated Jan. 31, 1989.

The strain of supporting this additional debt began to show up within weeks. Moore obtained an additional $525,000 in April 1989 through Ford Motor Credit Corp. This promissory note, which comes due in 1992, is attached to an existing $3.9 million note tied to the One Moore Ford operation.

Six months later, another $525,000 draw was made. This time the borrower was One Moore Hyundai Inc. The loan, made through Twin City Bank in November, was used to cover the negative cash flow caused by the high-priced digs of the Hyndai facility. The guarantors of the loan include Mike and Roberta Moore, One Moore Ford, One Moore Suzuki, One Moore Investment Group and One Moore Management Group.

A paragraph in the mortgage, loan and security agreement explains that: "[The] borrower, due to its inadvertent accounting error, has overdrafted its demand deposit (checking) account with lender resulting in an approximate overdraft as of the date of this instrument of $525,000."

Nobody said it was cheap to do business in the big city, but this situation was getting out of hand. To cut costs, Moore has moved the Hyundai and Suzuki operations back into less expensive quarters and is trying to sell the facility.

"We do have multiple negotiations going on," reveals Terry Mercing. A deal should be inked before year's end.

Cost Containment

While rural dealers don't enjoy the sales volume of metro dealers, they usually have less overhead and require fewer dollars to support the business.

"If he stays on top of things, he can come down easier with the times than a metro dealer," Noah Bates says.

It would be an ideal situation for a dealership to be in a position to break even without selling a car. However, it's all but impossible for the back shop (parts, repair service, etc.) to cover all the operating expenses. Sales must typically account for 30 percent or better of all income.

The biggest single expense for a dealer is the cost of carrying his inventory from month to month. That interest charge is typically 1 percent of a car's invoice cost. In other words, it costs $10,000 per month to carry $1 million worth of inventory.

Manufacturer requirements often dictate how much inventory is carried, and dealers also have to contribute to advertising associations. The cost, mandated by the individual automakers, can add up to 1 percent of a dealer's invoice price per car.

"I'm not sure it's good or if it's going to last, but it's a cost we have to deal with to do business," states Butch Martindale of Little Rock Dodge-Mitsubishi. "A lot of dealers are real militant about it. As long as everyone else has to go along with it, I'll do my share."

If the current projections for declining sales pan out, dealers may be getting additional relief from the manufacturers. Cost containment can only go so far.

PHOTO : BEFORE: Hyundai leaned on Mike Moore to come up with a snazzy and expensive facility to house its dealership or the Korean automaker would pull the franchise from him.

PHOTO : AFTER: The strain of supporting a new $1.85 million facility, which is now for sale, forced automakers affiliated with Moore's dealerships to allow a cost-cutting consolidation move.
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Article Details
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Author:Waldon, George
Publication:Arkansas Business
Date:May 7, 1990
Words:1241
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