Insights & Advice

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Dealer’s Demise Dents Investor Optimism

Chrysler’s announcement earlier in the week that it would be closing 789 of its dealerships, although expected, nevertheless darkened the mood on Wall Street. This was followed on Friday by General Motor’s bad news that 1,100 of their dealerships nationwide would also be discontinued by late next year. It was the excuse the markets needed for a pull back.

A few weeks back, when writing about the up-coming Chrysler bankruptcy, I worried about the impact of closing dealerships to the nation and in rural communities like the Berkshires. Auto dealers, I argued, provide employment, community support and taxes. Now that day has arrived and it won’t be pleasant. The majority of dealership cuts occurred east of the Rockies. Locally, Massachusetts lost 12 dealerships while New York was hit with 26.

“On average a new dealership employs 50 people,” said Robert O’Koniewski, Executive Vice President of the Massachusetts State Auto Dealers Association, “and 20% of a town’s retail activity flows through its dealerships.”

That means one out of every $5 in places like Adams, Cheshire or Sheffield is generated by their dealerships. Think about it: how many $500-$600 television sets would Best Buy need to sell to equal just one $30,000 automobile.

We have 13 auto dealerships in Berkshire County, three of them are General Motors franchises and one belongs to Chrysler, according to O’Koniewski. None of them need go out of business just because their GM or Chrysler franchise has been revoked. If they can find another franchise or failing that sell used cars, then they can survive. However, with the entire American auto industry pulling back obtaining another franchise could be difficult and just how many used car dealerships does one need in Berkshire County?

Once closed, O’Koniewski believes, it won’t be easy for Chrysler or General Motors to maintain market share despite the notorious brand loyalty of a Chevy or Mercury owner.

“In today’s world the consumer is not going to drive the extra 15 or 20 miles to get his vehicle serviced at a surviving dealership. Consumers want and need their dealerships close, by the train station or wherever in order to get them serviced. The more spread out your sales network is the less sense it makes to shrink your distribution,” O’Koniewski says.

Along with these negative developments, other macroeconomic news this week has been disappointing. Unemployment numbers were higher than expected as were the number of new homes going into foreclosure while retail sales came in lower than analysts thought. Given all of the above, plus a stock market that has been up for practically two months straight with only a minor correction here and there, we are experiencing a well-deserved pull back.

On my favorite index, the S& P 500, we came just 11 points shy of my target of 940 last week. I warned investors in “Go Slow, Bumps Ahead” that we might be entering a period of consolidation. That turned out to be an accurate call. So how low can the index go? I’m looking at 865-870 as a reasonable target but if the S&P fails to hold there, the 800 level is next. From there we could still resume our uptrend if good news on the economy continues to flow.

Posted in A Few Dollars More, At the Market