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An Estimated 2,500 Dealerships to Close, Says CNW Research

October 21, 2008

Based on internal data from automakers, franchised dealer groups and financial sources, CNW Research estimates between 1,000 and 2,500 franchised dealerships are on the brink of closing. The situation is no better for independents as well.

"The wide variance is traceable directly to the insurance and capital markets. If the bailout funds are put back into the market quickly rather than being hoarded by banks, fewer dealerships will close," wrote CNW Research in its October newsletter.

In the meantime, franchised and independent dealerships continue to struggle with tighter floorplan funding, fewer vehicles sales and less warranty repair orders. The F&I department, which is a critical source of profits, is under pressure from tighter consumer budgets and higher product quality, which means fewer extended warranty contracts.

"The automakers, especially Detroit, have long bemoaned the inability to shed dealerships under franchise laws. But those same laws don't require dealerships that close of their own volition to be replaced," CNW said. "However, the benefit for the Detroit Three is the opportunity to watch their dealer body shrink, and leave behind the strong dealerships that will easily fill any sales gaps left by closed points."

The market research firm also said a staggering 970 independent dealerships shut down in September or shrunk in volume to a point where they were all but closed. "The credit crunch, destructively low consumer confidence and shrinking home-equity lines of credit can all take blame for the blood bath," CNW said.

California was the hardest hit with more than 250 independents closed. Florida, Michigan and New York State each saw more than 75 used-auto business shut down.

September's loss brings the number of independent that have closed in the first nine months of 2008 to 2,065 independents. Last year the industry lost 1,530 independents. In 2006, 381 dealerships closed their doors.

Typically, less than three quarters of one percent of independent dealerships close shop each month. September's rate represented 2.27 percent of all operating independent dealerships that were open that month. The worst previous month was May of this year when 441 dealerships closed.

The double whammy of low volume and slumping retail prices contributed to the independent closures. In September, independents sold nearly 190,000 units less than September 2007. Year to date, through its October estimate, independents are off by nearly a million units — 10.1 million in 2008 vs. 11.1 million in 2007.

The first half of October was already showing a near 14 percent slide in independent sales.

"While franchised dealerships' used-car operations are likely to be down nearly as much, they are somewhat better prepared for such slow downs and continue to have financial institutions willing to carry used-auto paper, something independents have been struggling with for most of 2008," wrote CNW.

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