Study: economy, competition and auto dealerANN ARBOR—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 University of Michigan 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. The report offers analysis and insight on how U.S. auto retailers might weather the next major economic recession by being in the right place, at the right time with the right product. ]

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 between 1978 and 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 overall new vehicle sales volume over the 21-year period ending in 1998 and provides models that “reasonably predicts 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 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 sport utility vehicles, 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.

The study also notes a fundamental shift by consumers from the traditional passenger car to the light truck, now viewed as a viable, workhorse alternative to the passenger car. After experiencing a sales downturn during the 1981-82 recession, light truck sales have grown steadily, while non-luxury passenger car sales continue to fall.

Despite pressure from imports, the study indicates that Big Three U.S. carmakers are still dominant in the light truck market, yet that dominance could be “as precarious as their hold on luxury vehicles has turned out to be.”

Another area of concern for dealers is a move by automakers to sell directly to consumers and direct sales via the Internet. Both developments, the authors predict, are just a matter of time.

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 about 300 dealerships a year. Yet, even with this decline, those dealers surveyed still believe that the market is still overdealered by as much as 10 percent to 15 percent.

The automotive market has proved to be subject to a variety of shifting economic influences, the report says, making it hard to offer hard and fast predictors. It does, however, highlight major events that have influenced total vehicle sales and segment sales of various models over the 21-year period. From 1978 to 1988, the market experienced a rise in oil prices, introduction of the mini-van, a couple of recessions and two record sales years. From 1988 to 1998 the industry saw record economic expansion, one recession and the stellar rise of SUV sales.

The study notes a fundamental change in the relationship between the industry and the performance of the economy over the past 21 years. As consumers consider buying cars over the Internet and the Big Three car companies begin a shift toward direct sales, the study predicts the emergence of a new, diverse business model for the industry as it moves into the new economy.

“Market conditions, technical developments and customer demand are prompting sweeping changes throughout retailing, and it is now clear that many if not all of these forces will affect the retailing of automobiles.”

The study was conducted by Michael S. Flynn, Kim Hill, Kara F. Alkire, Bruce M. Belzowski, and Gina Kang, all of OSAT, and Richard Senter, professor of sociology at Central Michigan University.

Transportation Research InstituteOffice for the Study of Automotive TransportationMichael S. FlynnStandard & PoorKara F. Alkire