Tight Credit Puts Squeeze On Big Three Auto Dealers

From the August 28, 2008 edition, Wall Street Journal, Page B1

By John D. Stoll

The credit crunch squeezing Detroit's Big Three auto makers is now spreading to some of their dealers, adding financial pressure to a group already strained by this year's big drop in auto sales.

The latest and most prominent example is Bill Heard Enterprises Inc., one of the largest Chevrolet dealers in the country, with 2007 sales of $2.1 billion. Earlier this month GMAC LLC, the financing company partly owned by General Motors Corp., stopped doing business with Bill Heard over concerns about financial losses related to the privately owned chain of 14 stores, Bill Heard confirmed through a spokesman.

The weakening credit profiles of GM, Ford Motor Co. and Chrysler LLC and their finance arms are adding a new challenge for dealers. In the past, GMAC, Chrysler Financial and Ford Motor Credit were key elements in how Detroit pumped up vehicle sales. They typically offered dealers easy credit to help them sell as many cars and trucks as possible, even if they gave away some of their margin to do so.

But now that the car makers and their once-lucrative financing units are racking up losses and struggling to raise funds themselves, they are getting tougher on dealers with weak finances. And since GMAC and Chrysler Financial are both controlled by private-equity group Cerberus Capital Management LP, each is now being run to maximize profits, not auto sales.

Tighter credit is "starting to hurt," said Mark Williams who sold a dealership near Cincinnati to Ford earlier this year but still owns two others. "You have less [financing] sources, and the sources you do have today are willing to advance less money," Mr. Williams said.

Other domestic-brand auto dealers around the country are also feeling the pinch. In Sacramento, Calif., Winter Volvo Lincoln Mercury is preparing to close its doors on Sept. 2, after 60 years in business. Also in the Sacramento area, Elk Grove Ford closed at the end of June and Great Valley Chrysler Jeep went out of business in May. After suffering a big sales drop in the first few months of 2008, Longhorn Dodge, in Fort Worth, Texas, shut down in May.

"GMAC has changed due to the economic environment, and it has put more strain on the individual dealership," said Duane Paddock, owner of a Chevy dealership near Buffalo, N.Y., and head of the GM dealer council.

GMAC typically provides dealers with subsidized financing for customers as well as low-interest-rate loans to buy the vehicles they hold in inventory on their lots. The loss of financing from GMAC is likely to make it even harder for Bill Heard and other dealers to improve their financial situation. The Chevy dealer has told GM it is now considering selling at least two or three of its stores.

Neither Chief Executive Bill Heard Jr. nor other executives were available to comment. In a statement, a company spokesman said it "is taking actions" to address GMAC's decision. It plans to "increase [its] efficiency and productivity, tap the emerging fuel-conscious market with an appropriate product mix, reduce our already competitive cost structure and restructure our business."

GMAC declined to comment on Bill Heard. But a spokeswoman acknowledged that "clearly this is a challenging market environment," adding that its actions "are not different than that of other financial-service companies."

In the long run, a dealer shakeout could help the Big Three by reducing competition and improving profits of the dealers who survive. But turmoil in their retail networks could hurt Detroit's sales in the short term. The tightening of "floor plan" credit will encourage dealers to inventory fewer vehicles. In the past, the Big Three boosted sales by pushing dealers to order more vehicles than they could sell.

Bill Heard normally could help GM prop up its own declining sales. Started in 1919 from a lone Chevy dealer in Columbus, Ga., the company operates huge Chevy stores in Houston; Memphis, Tenn.; Tampa, Fla.; Scottsdale, Ariz.; and elsewhere. But it has had to borrow large sums to keep its megastores filled with inventory and is heavily dependent on GM's Chevy brand, whose sales have plunged this year as consumers have turned away from pickups and sport-utility vehicles.

-- Kate Linebaugh and Neal E. Boudette contributed to this article.

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