Auto dealers — a dying breed …

The largest Chevrolet dealer in the country filed for bankruptcy in September 2008.  So far in 2008, 590 auto dealers have closed their doors, compared with 1,200 between 2001 and 2008.   As described here, the auto manufacturers are quite pleased to see these dealers go.  Why?  The business model doesn’t work, especially in an economic downturn.

Some key points to note from this article about business models:

• The automakers have wanted to reduce the number of dealers for years.  State franchise laws have prevented them from doing so, and buyouts of dealers have been financially prohibitive for the automakers.   This status quo can only continue for so long before things break.
• An economic downturn tends to expose fundamental flaws in a business model.  Many dealers are barely profitable and cannot afford to maintain fancy showrooms.
• The core business model can often be explained in pretty simple terms, as AutoNation CEO Mike Jackson does in the article “A lot of individual dealers had a business model of big stores, huge inventories, big advertising budgets, and razor-thin margins.”
• When you think through the business model described above, your realize how it is totally dependent on high sales volumes.  When that slips, due to a combination of factors — $4 gas reducing demand for SUVs, the credit crunch impacting ability to finance vehicles, consumers holding back on spending due to lack of confidence, etc., it exposes the flaws in the model.
• What happens when you exit a failed business model too late?  Bankrupcty.  Dealers have resisted pressure to merge or close.  Now they are having trouble staying in business, period.