In January, the Wall Street Journal ran a page one story about the troubles facing two dealerships in southeastern Kentucky. One of them, Johnny Watkins, had filed for bankruptcy.
At the time, we predicted that there would be a lot more dealership closures in 2009, especially in smaller towns.
- There really isn't enough critical mass of car sales to support a dealership in a small town. So dealers have to draw customers from nearby cities, usually with discounts that squeeze their profitability.
- The most profitable part of the dealerships come from service to vehicles after the sale. When out-of-town customers purchase from a small-town dealer, they tend to have their cars serviced somewhere else, as the dealer is too inconvenient for frequent maintenance. So small-town dealers lack the service customers that larger dealers have.
- The heavy reliance on car sales (and the lack of substantial service sales) means that small-town dealers are much more sensitive to economic downturns. As car sales plummet, the service business is what has sustained many big-city dealers. The smaller dealers just don't have that cushion.
The economic realities of being a dealer in a small town mean that a lot of them won't survive over the next couple of years.