As you may know, and as you may have seen me write, dealers generally make the most money when they are coming off of tough times. The reason for that is pretty simple. When times are tight dealers tighten their belts, get back to basics, and grind it out. As business starts to get better they make a lot of money because they have put their ship in order. The better times get the looser dealers get, by adding people, increasing advertising and buying this and that. We’re all guilty.
My opinion of the world and the car business changes based on those I’m around and the influence they have on my thinking. I’m influenced by people like Dale Pollak and other leaders I meet both inside and outside of the automobile industry, which includes many of you. Often times it’s in those conversations I have outside of a formal meeting environment that I learn the most.
I don’t consider myself to be a positive or negative person. I believe I’m a realist. For the most part I try to see things as they are. I’m not an expert on the economy and the true impact of the national debt, but my common sense view would be that if you’re spending more money than you’re taking in that reckoning day will eventually come. I suspect that’s what’s going on in Wisconsin and some other states.
With the world so unsettled, gas prices going up and up, I believe that inflation will soon raise its ugly head and that when it does, car dealers, who are historically heavy borrowers, will really feel the pinch. Whether it is from Capital Loans or floor plan expense, it’s going to hit some dealers very hard. Many of us remember the early 80s under the Carter Administration with interest rates in the 20s.
Such forces will make it very difficult for some dealerships to survive, especially if they have taken on much debt. For the most part most dealerships will be ok so long as they reduce their debt and expenses and hoard lots of cash.
I believe now is the time to tighten your belt, become as conservative as you can, pay off all you can and get ready for a bumpy ride. Heavily leveraged construction cost, acquisitions, and increased expenses could be the kiss of death.
We all know the factory has once again become a bit cocky and will start to demand more and more of dealers when it comes to facilities. I would urge you to resist as best you can. (Putting your energy, resources and effort into used cars is a good way to hedge your bet.)
Most dealers are very optimistic right now and are starting to loosen the purse strings by hiring more people, increasing advertising and inventories. Dealers who don’t focus on turning their new and used inventories are flirting with some serious trouble as interest rates start to move up. (Pay attention to last week’s Zinger on "Life Cycle" management.)
I’m a believer that you can’t expense your way to a profit, but that you have to sell your way to a profit. These are unique times and the trick is to sell your way to a profit without taking on expenses that have the potential to bury you. Now is the time to squeeze every cent of profit possible just in case I’m right.
I have an old friend by the name of Mike Riddle. I had a conversation years ago with Mike about God. Mike said "Well let’s suppose there is a God and you’re a believer. You believe, you die, you go to heaven, you win." Obviously if you’re a non-believer you end up in hell and lose. Then he said "Suppose there is not a God. You were a believer, you die, you turn to dust, but because you were a believer you lived a much better life by believing."
That’s where I think we are today. Be a believer. Keep your operations tight, and if I’m wrong you end up making that much more money and lived a better life. That’s all I’m gonna say. Tommy