BusinessReport.com

Sidney Woods has been selling cars for 15 years. He’s currently the general manager and financing manager at Saver City, an independent used car dealer in Albany in Livingston Parish. And like everyone else in the used car business in south Louisiana, he did very well in the year or so after Hurricane Katrina.

But when asked how sales are these days, his first response is “slim to none.”

“December wasn’t bad,” he says after a moment. “It wasn’t great, but it wasn’t bad. January was horrendous.”

Foot traffic is down, but even when people get in the door, it‘s tougher to get financing, even for people who would have had no problem a year ago.

“I think the lenders are scared,” Woods says. “I had a lender just turn a deal down; the husband applied for a loan, they turned it down because the wife didn’t drive.”

Woods says the lender claimed they couldn’t track down the wife’s information because she doesn’t have a valid license. The reason she doesn’t have a license, he says, is because she’s never driven. It’s almost like lenders are looking for excuses not to lend money. And for the first time in 15 years, Woods is starting to wonder how he’s going to pay his house note.

“I’m gonna pay it, but it’s going to be tough,” he says.

Auto industry analysts are predicting gloom and doom for 2008, following a 2007 during which new car sales around the country fell to 16.1 million, the worst since 1998, according to the Bloomberg financial news service. The oft-cited “credit crunch” might be the villain here, and while many consumers might put off buying that new car, others are turning to used cars as a more affordable option.

That sounds like good news for used car dealers. But the bad news for independent dealers like Saver City is the big franchise dealers are adjusting by placing more money and emphasis on the used car side of their business. The big guys have more resources, access to a better selection of used cars, and more clout with lenders.

“We hear of [independent] dealerships every week shutting their doors,” says Lee Domingue, president and CEO of AppOne, which provides financial technology services to independent auto dealers, banks and auto finance companies. He estimates that new car sales are down 15% to 20% for dealers in the Baton Rouge area, even 30% in some cases. And given the millions invested in the big franchises, “that’s a monster that needs to be fed.”

Used car sales are more profitable anyway. With new cars, there’s much more information out there. A savvy buyer will know how much the dealer paid for the car, so the buyer knows about how low the dealer can go on the price. But with used cars, every deal is different, and the dealer has a chance to work out a much better margin. Domingue says the profit on the average used car sale is about $2,500, while the margin on new cars can be as low as $200 or $300. Right now, especially, used cars are where the money is.

So it makes sense for a franchise dealer to emphasize the used car side. Those dealers have their trade-ins and they can get to the same auctions as the used car dealers, but Domingue says the big guys also have access to manufacturer-sponsored auctions that the independents can’t get into.

At the same time, the franchise dealers have access to multiple lending sources. They can afford to hang on to their inventory longer, rather than settling for a low price just to keep the money coming in. But with banks being more cautious these days, many smaller dealers can’t even qualify for business loans, which can make working capital scarce and make it harder still to pass financing along to their customers.

“Financing sells cars,” Domingue says. “If the lender goes away, cars won’t be sold.”

The independents in the best position to survive are the ones who have established strong relationships with vendors and with lenders who are going to stay with them through the tough times, he says. Part of that is just making sure the loans that are coming through are well-documented. If you do your paperwork right, you avoid creating unnecessary problems later on.

Domingue expects that over the next six to 12 months, many dealers who don’t have those relationships will close up shop. And the squeeze could continue as long as new car sales remain flat. He believes that recent rate cuts by the Federal Reserve might provide a spark that provokes manufacturers to have special initiatives, such as 0% financing. If not, new car sales could remain flat at best for the next two to three years, he says.