Here in Ohio, the latest unemployment figures were just released. Not since 1993 have so many people been unemployed. More than 7 percent of the workforce is not working. As you look around the country, especially in the Rust Belt states, you see that is the prevailing trend. And, if people are working, they're more worried now than any time in the recent past about joining those on the unemployment rolls.
In light of this news, it's no surprise that the new car business is hurting. This year we may see new car sales under 14 million, down from a high of 16 million just a couple of years ago. The latest available figures from the National Automobile Dealers Association (NADA)show that the number of dealerships shrank from 21,200 in 2006 to 20,770 in 2007, a 2 percent drop. You can expect that this year's drop will be even worse, because the weaker dealerships either will drive themselves out of business with desperate business practices or the OEMs will deem them underperformers and strip them of their franchises.
To illustrate just how bad things are, the NADA reports that the average dealer is losing money in the new-vehicle department, which includes financing and insurance products. Where they make money is in their used car business, which is why the smart dealers always try to steer customers to the used-car lot first, even when customers say they are looking for a new car. Selling a used car is profitable enough by itself to a dealer, but they want to see that car again in their repair bays after the warranty has worn out.
Even those who can afford to buy a new car are thinking twice when they look at the current finance rates. You can thank the liars, cheaters and thieves behind the subprime mortgage loan debacle for that. The risk-taking days for banks are over, which means credit is tight and what credit is available comes at a premium price. In order to "afford" a new car, many people are buying new cars over 72 months or even 84 months. Clearly, buying on time is like doing time.
Let's get back to the basic issue. If you don't have a job or are faced with losing it, a new car is the last thing on your mind. Common folks are concerned about keeping the household running and keeping food on the table, not having the wind blow through their hair in a new convertible.
Ironically, there's an upside to the bad economy. It shakes out a lot of things from bad business practices to bad businesses themselves. No doubt that independent repair shops should benefit from dealership closures and the lack of new car buying. If there was ever a time to build your business on the misfortune of others, this is it. In essence, it's an unfortunate fortune for you.
But before you go off skipping down the Yellow Brick Road, keep in mind that those dealerships that are left standing are the strong ones, run by the smart guys who have made it through tough times before and plan to make it through these tough times as well. My sense is that they will be more competitive than ever. If I were them, I would build my used car business with an aggressive extended warranty campaign. If I were you, I would prepare for that or something worse.
