Moving iron

New Mexico Business Journal, Dec, 1995 by Rebecca Murphy

Smaller profit margins, imperious manufacturers and more demanding customers are obliging dealers to work harder and smarter.

Drive by any new car dealership in Albuquerque on a busy Saturday afternoon. See the lot filled with brand new cars, all the colorful balloons, the customers milling around. You think these dealerships must have it made. Just sell those cars. Rake in the cash. Go to the bank.

Well, not exactly. Think of it more as 504 car payments (all due Monday) sitting in your mailbox. And 55 cars in the garage all making funny noises and you have to figure out why - by tonight. Not to mention problems with hostile customers, government regulations and new employees.

The New Mexico automobile industry is, of course, like any other business, but with its own unique set of concerns. It's a vital industry for the state. Cars, like houses, (forgive the pun) drive the economy. And everyone, it seems, has an opinion about cars. Who can miss the television ads, the billboards, the newspaper supplements?

The Big Three domestic manufacturers in 1994 had their top earning year of all time. A rebounding economy and internal cost-cutting measures have contributed to the recovery. New Mexico dealers also have recovered from the lean times of the early '90s. But, while the industry is definitely on the upswing, most dealers agree it isn't as easy as it was ten years ago to make a buck.

Make no mistake. New Mexico auto dealers aren't crying in their beer. Nearly 25 percent of the New Mexico Private 100 - a list of companies posting revenues between $10 million and $150 million - are dealerships. "The car business is going very well in New Mexico," says Ray Berube, President of the New Mexico Automotive Dealers Association. "Dealers are setting all-time records."

But dealers, like everyone else, have their problems. Take a New Mexico dealer to lunch and you'll probably hear about climbing interest rates, narrowing margins and problems with allocations.

"It's very difficult for a New Mexico dealer to make a profit," says Casey Luna, owner of Casey Luna Ford Mercury in Belen and former lieutenant governor of the state. "Because of downsizing the manufacturers are making huge amounts of money. But the dealer isn't."

Lee Galles, owner of four Albuquerque dealerships, notes, "We're watching the margins get tighter."

In the auto industry, the margin is the difference between what the dealer pays for the car and the final price they get for that vehicle. (And dealers purchase those cars in full, usually within 10 to 20 days - thus the origin of the frantic salesman on TV who hollers "We've got eight days to move 'em off the lot!" Dealers can finance the car through the manufacturer, but they usually obtain loans locally at commercial rates.)

Profits Are Slimmer

That sedan the dealer bought for $11,000 might have a sticker price of $13,500-$14,000. But competition from the dealer down the street, or from across the state, can drive the price down considerably. With cars costing more from the factory and savvy buyers paying less, a dealer might walk away with just a $400 profit on a $14,000 vehicle. Some of that commission goes to the salesperson, plenty goes to overhead, and a little is left over for the dealer. "That's half what we used to make five years ago," says Galles.

"The cost we pay for an Explorer has gone up 15 percent in 1995," says Luna. "The manufacturer says the cost is up because they've put on more standard equipment. My assumption is that it's because it's more popular."

"There's been a real squeeze by the manufacturer," agrees Berube. As a result, the relationship between manufacturer and dealer is, he adds "frankly, at times, adversarial."

It's a contractual relationship as well, based on a franchise arrangement. The manufacturers grant the franchise to the dealer to sell new cars. The dealer agrees to operate his dealership within a set of guidelines written by the manufacturer. "The dealer takes it or leaves it," says Berube.

"We're concerned with the erosion of the franchise system," says Berube, who lobbied during the session in Santa Fe for several bills supported by the NMADA. "Everyone's chipping away at it. The factories with their margin squeeze, megadealers taking over little dealers, and brokers and wholesalers and discount places that want to sell cars but don't want to play by the rules."

The problems are no different in Hobbs. Charley Smith, chairman of Watson Truck and Supply, which plans to sell 500 new cars and pickups this year, as well as 100-125 medium and heavy trucks, agrees that the margins are getting slimmer. "I've heard it said that without F&I (finance and insurance costs added onto buyer financing obtained through the dealer), the vast number of dealerships would be unprofitable."

Allocations are another concern for many New Mexico dealers. "We have an allocation from the manufacturer every month, based on sales," says Luna. "If the factory has an overabundance of cars, they may give us extra." But more new cars on the lots across the state can drive sales down. "We're the ones who suffer from oversupply," he adds.