The University Record, September 4, 2001

Auto dealers navigate the economy

By John Woods
News and Information Services

Faced with decreasing market share, the onset of e-commerce and a global economy, American auto dealerships are looking for new strategies and innovative ideas to survive in an ever-changing economy.

A U-M Transportation Research Institute (UMTRI) study provides a variety of predictors and models for how economic developments will shape the level and types of new vehicle sales. It also examines the ways that dealerships have changed and may change further to compete more successfully.

Prepared by UMTRI's Office for the Study of Automotive Transportation, the report, "The Economy, Competition and the Retail Automotive Dealer," examines economic influences on the rise and fall of vehicle sales, 1978–1998.

“Dealers will have to confront serious issues and challenges to survive the next recession,” according to OSAT Director Michael S. Flynn, one of the authors of the report.

The study examined new vehicle sales in a 21-year period ending in 1998 and provides models that “reasonably predict sales levels.” However, the models differ, depending on whether the vehicles are passenger cars or light trucks, and whether the time period is earlier or later.

The report focuses considerable attention on how the long-term viability of dealerships is linked to consumer buying trends of certain vehicle models and how those trends, in turn, are affected by shifts in the economy. “A rising economic tide does not lift all types of vehicle sales equally,” the report says. The study reveals a complex relationship between economic factors and vehicle sales, such as consumer confidence, inflation rates, housing starts, and personal consumption expenditures.

Unemployment rates tend to affect small car sales, while the stock market drives luxury sport utility vehicle (SUV) sales. “The prominent predictors for luxury passenger cars and SUVs are disposable income and the Standard & Poor’s 500. For example, a rise in the Consumer Price Index tends to drive up light truck sales, while increases in gas prices and interest rates tend to be associated with weaker sales.” The report indicates that basic passenger car sales are much less tied to changes in the economy.

Based on data provided by dealerships, researchers found that sales of SUVs, sports cars and light trucks will likely fall during periods of economic recession, while sales of luxury cars and full-sized pickup trucks are likely to resist a sales drop.

Another area of concern for dealers is a move by automakers to sell directly to consumers and to use direct sales via the Internet.

The study offers a wealth of data to dealers hoping for long-term survival. There is little question that in today’s automotive market, more brands, more franchises and more locations mean lower dealer risk. The report advises dealers to look at their outlets as portfolio investments and spread their risks.

The number of U.S. dealerships declined from about 46,000 in 1948 to some 22,000 in 1998. A 23-percent drop in new car dealerships was noted between 1978 and 1998, averaging 300 dealerships a year. Yet, even with this decline, dealers surveyed believe that the market is overdealered by as much as 10 to 15 percent.