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Car dealers face troubled future, squeezed profit

As U.S. automakers struggle to compete on their home turf against imports, Jeff Berger is one of those fighting on the front lines.

Berger, 38, is general manager of Berger Family Dealerships in Hazleton, Pa., which sells cars and trucks by Cadillac, Buick, Pontiac, GMC, Chrysler, Dodge, Jeep and Mazda.

Factory incentives have helped drive more unit sales, but at the cost of squeezing his profits, Berger said. Meanwhile, the financial troubles of General Motors Corp. and Ford Motor Co. have rattled would-be customers, he said.

"It's been very difficult," he said Sunday during the National Automotive Dealers Association's annual convention in Orlando. "I think the negative impact of the press has just compounded things."

For the nation's car dealers, it has been the best of times and the worst of times.

First, the good news. U.S. sales of new cars and light trucks last year totaled 16.9-million units, the third-highest tally ever. In addition, the dealers association's chief economist, Paul Taylor, projects that sales will remain strong in 2006, albeit leveling off slightly to 16.8-million.

But it's also a time of traumatic transition for GM and Ford, the top two American automakers. Both are burdened by high health care and pension costs and have seen their share of the U.S. car market continue to slide under competitive pressure from foreign automakers, particularly the Japanese.

GM posted a breathtaking net loss of $8.6-billion in 2005, while Ford recorded a net profit of $2-billion, but lost $1.6-billion in its North American automotive operations. In hopes for a recovery, the companies have announced painful restructuring plans that include shuttering plants and cutting tens of thousands of jobs.

Not surprisingly, GM and Ford's troubles cast a long shadow over the dealers association's convention at the Orange County Convention Center. The confab began Saturday and concludes today.

During a preconvention conference Friday, J.D. Power and Associates president and chief executive Steve Goodall observed that while there has been significant discussion about the impact that GM and Ford's travails will have on their employees and suppliers, there has been relatively little talk of the inevitable fallout for their dealerships.

While Goodall said he thinks high-volume dealers and small, rural dealers will survive, he warned that lower-volume dealers in competitive suburban markets are vulnerable. To stay above water, such dealerships should make sure they have strong used-car sales, a thriving repair business and a diversified portfolio of nameplates, he said.

"Let's face it, if GM, Ford - and I will add in Chrysler as well - were to start things all over again today, none of them would have the same number of (dealerships) that are currently in place," Goodall said.

Lee Beckman, vice president of administration for Martin Automotive Group in Bowling Green, Ky., said he thinks top-level executives at Ford are leading the company in the right direction. "I think they're finally getting it," he said.

But he added that the company's mid-level bureaucracy can sometimes slow the ability of dealerships to order cars and apply for marketing funds.

"It's a really cumbersome company to work with," Beckman said.

Of course, the biggest concern of dealers is their ability to make money, something that they say has been complicated in recent years by the flurry of consumer-incentive programs offered by domestic automakers.

Employee pricing was particularly unpopular with dealerships because it sharply cut into their already thin profit margins, which, on average, add up to just a few hundred dollars per new car sale.

GM's "value pricing" strategy of lowering the sticker prices on its vehicles hasn't been accompanied by a cut in invoice prices, leaving less wiggle room for dealers to offer attractive trade-in deals.

Brent Smith, president of Ray Smith Chevrolet Buick Pontiac in Camden, Tenn., expressed frustration with what he views as the interference of automakers in the sales process.

"Build us quality products at an affordable price and we'll take care of the rest," he said.

Rising interest rates are another major concern, especially at a time when manufacturers are pushing their dealers to carry more inventory. Some dealers attending the convention said they were carrying inventory for 120 days or more, far longer than the preferred 45 to 60 days.

Ken Phillips, owner of Car Pros Automotive Group of Tacoma, Wash., said sales have been "pretty good" but noted that his inventory costs have tripled during the past three years. Car Pros sells Chrysler, Jeep, Hyundai and Kia vehicles.

Not all dealers face this problem, least of all those selling popular Japanese nameplates. When asked if he was concerned about inventory costs, Bud Biggin, co-owner of Lipton Toyota in Fort Lauderdale, just laughed. Sales have been so brisk that his dealership's biggest headache has been getting enough product onto lots, he said.

Despite the many challenges facing car dealers, most remain hopeful about the future, according to James Ziegler, president of Ziegler SuperSystems, a Duluth, Ga., consulting firm.

"Dealers are generally a pretty optimistic bunch," he said. "They're entrepreneurs, they're usually family-owned businesses, sometimes for generations. . . . The (manufacturers) keep making fatal mistakes and the dealers keep bringing them back."

Berger of Berger Family Dealerships has his share of gripes. He said that employee pricing was "a disaster from day one" because "it set up a fire sale mentality among the customers and destroyed our margins."

Still, he's excited about some of the new models that GM has launched recently, including the Pontiac Soltice convertible and the Buick Lucerne luxury sedan.

"I think this is going to be a banner year," he said.

Louis Hau can be reached at hau@sppimes.com or (813) 226-3404.

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