Daniel Duggan  |  Crain's Detroit Business  |  August 22, 2010

Dan Frost's business represents, in many ways, the ups and downs of the local car dealership community. In the past 18 months, he and his business partners lost two Hummer dealerships, opened a new Cadillac dealership and watched competing Chrysler LLC dealers near his three Chrysler dealerships get closed down.

Now he's faced with the escalating costs of improving his remaining Chrysler dealerships to new standards — nearly $1 million at each — and the startup costs of the new Cadillac franchise. “It's just what you deal with,” he said. “But we were lucky, things worked out for us.”

With the bankruptcies and arbitration hearings of the past 18 months behind them, the network of metro Detroit car dealers is stabilizing, settling in to a new landscape of franchises and owners. Overall, 29 dealerships have closed since the beginning of 2009 in the Detroit statistical area, according to data from Detroit-based consulting firm Urban Science.

In addition to the reshuffling of franchises from closed dealers to open dealers, two new franchises have been created. Eight local dealers have been shut down — and then reopened. Locally and nationally, the dealer network for the domestic original-equipment manufacturers has been cut to where it can be profitable, said Randy Berlin, global practice director with Urban Science.

If dealers can be profitable now, when annual automobile sales are estimated at 11.4 million units, they will be even more profitable when sales increase to former peak levels near 17 million units. “The contention, at the beginning, was that cutting the dealers was a cost issue,” Berlin said. “But it was really about streamlining the product offerings, and they've done that. The bottom line is that the production capacity and the dealer network (of the domestic OEMs) are aligned to compete, and compete profitably.”

Profits shift to overdrive

National car dealership networks have impressed analysts with profit levels. Bloomfield Hills-based Penske Automotive Group (NYSE: PAG), the second-largest dealer group in the U.S., posted net income of $29.2 million, or 32 cents a share, in the second quarter — a 47 percent increase, year over year — on $2.7 billion in revenue. The results topped analyst expectations of 29 cents on $2.6 billion revenue. Fort Lauderdale-based AutoNation Inc. (NYSE: AN) posted a 36 percent increase in net income in the second quarter compared to 2009, with $50 million in income on $3.1 billion revenue.

Nationally, the average net income for a car dealership, before taxes, was $279,000 for the first five months of 2010, nearly double the profit during the same period in 2009, according to a report issued by the National Automobile Dealers Association. The average profit margin is 2.3 percent compared to 1.3 percent in 2009, according to the report.

Locally, profits are returning to dealers, especially among the Detroit 3 OEMs, said Daniell Patterson, a principal specializing in car dealership consulting in the Southfield office of UHY Advisors Inc. “Everyone is getting used to the market of 11 million (units) or so in annual sales,” he said.

“The dealers have reacted, and they have their staff under control, expense structure in line with revenue, and they're seeing a return to profitability.”

The loss of competitors also helps surviving dealers, he said, especially in the Detroit market where a large number of people have employee discounts and want to shop from one GM dealer to another.

Buick franchises rub elbows

If you want to buy a Buick in Troy, there are two options within a half-mile of each other.

On Maple Road, just outside of the Troy Motor Mall, sits Somerset Buick GMC. On Maplelawn Drive in the complex to the south sits Suburban Cadillac Buick.

Despite the effort to prevent dealerships for the same OEM from competing, the situation was created when the Suburban dealer was to be shut down and Somerset Pontiac was given the Buick franchise, say dealers familiar with the situation. General Motors Co. then reconsidered the decision to close Suburban and gave the Buick franchise back, but only after Somerset had started selling Buicks.

In an e-mailed statement, Tom Wilkinson, director of corporate news relations for GM, gave only a broad overview.

“This is a unique situation brought about by the bankruptcy,” he wrote. “We were winding down one of the franchises and another dealer picked it up, and then through our reinstatement process the original dealer got his Buick franchise back.”

Representatives from both dealerships would not comment.

Competitors gone

The closings have eliminated situations where dealers were competing with other dealers from the same OEM. In Dearborn, Les Stanford Chevrolet has historically competed with Wink Chevrolet Co., just five miles away.

At the end of June, Wink closed after losing an arbitration appeal. Stanford saw an immediate jump, said President Paul Stanford. “Right away, we started getting more service customers and increased sales,” he said. Stanford bought a billboard near the closed Wink dealership advertising his dealership and hired the service manager and a sales person to use their relationships. And the real benefit will come when GM sends a letter to Wink customers informing them that Stanford is the closest dealer. “People are going to gravitate to the closest dealer,” Stanford said.

In one rare case, the closings created an even worse competitive landscape. In Troy, two Buick dealerships are within a half-mile of each other.

But overall, the OEMs were able to eliminate many situations where dealers of the same manufacturer were competing, said Urban Science's Berlin. “The key is that these dealers can get back to dealing with their real competition, that being other OEMs,” he said.

Some dealers still winding down

While six General Motors Co. dealers — in addition to six Saturn dealers — have been closed since the filing of the OEM's bankruptcy, several more closings are on the way.

Dealers placed on the so-called “wind-down” list are allowed to continue operating until October. While most Saturn dealerships, for example, have closed, several have continued operation. Saturn of Warren plans to continue selling cars until the very end, said General Manager Kevin Bilski.

“There are about 60 cars left in the country,” he said. “We've got about half of them.” GM dealers are allowed to buy cars from other GM dealers to keep on their lots until October.

John Rogin Buick in Livonia, Dick Morris Chevrolet in Walled Lake and Cauley Chevrolet in West Bloomfield are operating but will be closing soon, according to dealers familiar with the situation and a list of dealers being closed on Edmonds.com.

The three dealers have inventories of mostly used cars and a few new cars. Calls placed by Crain's to all three dealers over the past three months have not been returned.

Also in the wind-down process are Saturn of Clarkston and Saturn of Lakeside.

Finding new uses for land

Vacant dealerships are also part of the local real estate landscape, with few reuses, though several dealerships have found new life. In Detroit, the former Dalgleish Cadillac was purchased by TechTown as an incubator for technology companies. In Farmington Hills, the former Holiday Chevrolet was purchased for $1 million by the Steppingstone Center for Gifted Education to be used as a charter school. The old showroom will become a classroom. The old service garage will be a gymnasium.In some cases, dealerships that closed are being used by existing dealerships.

Serra Buick has purchased the site where Joe Panian Chevrolet was once located. Sources familiar with the deal say the land was sold for $6.2 million.

In Brighton, Brighton Mazda has taken the building that was used by Superior Cadillac before it closed. Frost said he is considering a Fiat franchise from Chrysler for his closed Hummer location in Southfield. While the sale of car dealership land has been slow locally, sales are picking up nationally said John Latessa, managing director of the Southfield office of commercial real estate firm CB Richard Ellis.

Latessa is also practice leader of the firm's national Automotive Dealership Services group, which consults dealers on how to reposition their property. “Right now, 70 to 80 percent of the reuses are auto-related,” he said. “New cars, used cars and auto-related retailers are using the sites.”

Latessa said new uses of dealerships vary from one local area to another, with no clear trend, though some churches have been using the land in many rural areas. “One thing we are finding is that municipalities are being very flexible and supportive of the use for these sites, whatever it is,” he said.

Major changes for owners

For the dealers, the changes have meant a major lifestyle change. Asher Panian said he has started a new business to help people find cars rather than going through a dealership. Panian was able to get an Internet URL for City of Cars, the name of his father's, Joe, first dealership.

“There are people out there who'd rather deal with us than deal with a dealership,” Panian said.

Frank Audette Jr., who has spent his entire life working for the Audette Cadillac dealership his father started, said it's an adjustment to find something else as a career.

“Not to mention, I have to find myself a car,” he said. “I've been driving demos around, and now I have to buy one.”