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Dealerships drive toward recovery

Posted: December 11, 2010 10:41 p.m.
Updated: December 12, 2010 4:30 a.m.

A pre-owned 2009 Acrua RDX is among the cars lined up at Valencia Acura on Creekside Road in Valencia on Dec. 2.

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The recession rolled into California, building like angry Santa Ana winds, creating havoc and taking a heck of a long time to blow out of town.

Many cities suffered devastating revenue losses from declining sales taxes and unstable state coffers due to the faltering economy.

Cities were left to grapple with dwindling resources to support their local infrastructure and provide ongoing services to local residents.

Santa Clarita dodged many of the bullets that have taken down other cities. Part of that is the leanly managed city government. Another big contributor is automotive sales in Santa Clarita.

“Santa Clarita’s auto dealers generate millions of dollars in sales tax revenue that stays right here in our city,” said Ken Striplin, assistant city manager.

Without that revenue stream, the city might join others on life support.

The National Automotive Dealers Association estimates that new-car sales in California represent 20 percent of all retail sales-tax collected annually.

With more than 200,000 cars sold in Los Angeles County and an average sales tax of 10 percent, estimates put the sales tax generated for the first three quarters of 2010 at $601 million, assuming the average price of a car was $30,000.

The National Automotive Dealers Association, dubbed “NADA,” reported that California auto dealerships represented 13.9 percent of the total private-sector payroll in the state in 2007, the last year such numbers are available for.

In other words, it is important to have a healthy automotive market. According to NADA, auto manufacturing and retail sales remain two of the most robust parts of the economy.

SCV sales
In 2010, local auto dealerships generated approximately $650 million in sales through November, according to the Santa Clarita Valley Auto Dealers Association.

That figure represents new and used vehicle sales, as well as parts and service, according to Don Fleming, president of the association and general manager and co-owner of Valencia Acura, along with his wife, Cheri.

The recession pushed sales numbers down from two years ago, when the local dealers generated closer to $1 billion in sales.

The local auto industry, and industry as a whole, are showing signs of a mild resurgence.

Daniel Sterkel, general manager of the Nissan dealership, said people feel more stable in their jobs now and have the money to spend, and those factors are translating to increased local sales.

Sales at the Nissan dealership this past month were up nearly 41 percent from a year ago, he said.

On the whole, Santa Clarita dealerships sold almost 12,000 vehicles in 2010 through November, averaging nearly 1,100 vehicles sold per month.

The local dealers generated nearly $63.4 million in total tax revenue for the state, county and city through November.

Of that sales-tax amount, Santa Clarita receives 1 percent to feed the general fund.

Striplin said the local auto dealers contribute 24 percent, or $6.5 million, annually to the general fund and employ around 1,000 people in the city.

He also confirms that local auto sales are showing signs of growth.

“Sales tax is one of our most important revenue streams,” Striplin said. “Our local auto industry is a major tax-revenue generator and has a significant impact on our city.”

Weathering challenges
Around the nation, East Coast and Midwest dealers are reporting stronger sales; most California dealers are experiencing a slower recovery.

The cause: a poor state economy coupled with local municipal fiscal challenges.

The last couple of years saw unemployment numbers hit historic highs, and remain stubbornly high, in both California and Los Angeles County. The numbers in Santa Clarita were much better, but still unemployment was up.

In addition, the economy caused home values to fall, reducing owners’ equity and access to cash, and hampering their ability to secure home equity loans.

This scenario influenced car sales, as buyers no longer walked into dealerships flush with cash.

Sterkel, G.M. of the Nissan dealership, estimated 10 to 15 percent of sales were based on home-equity values in 2005.

Today, he says, these sales probably represent less than 1 percent of an auto dealer’s sales.

“People used their homes as piggy banks,” said Lenny Sage, vice president of the Santa Clarita Valley Auto Dealers Association and owner of the Mercedes-Benz of Valencia dealership.

Acura’s Fleming agreed, saying cars were selling like hotcakes, and buyers were paying with cash.

Sage said people felt a lot more comfortable and more liquid until home equity values starting declining.

In the past couple of years, buyers have been reticent about making big purchases, and many decided to keep their current vehicles for a year or two longer.

Car buyers became price-conscious and no longer bought accessories or technological innovations that they once added to their vehicles.

Retail credit nearly frozen

Ed Tonkin, NADA chairman, said as a result of the economic meltdown on Wall Street, auto dealers, like most businesses, had difficulty securing wholesale credit and faced an almost complete freeze on retail credit.

By the end of summer 2009, the problems being faced by some of the car manufacturers resulted in a lack of product and selection.

Local dealerships suffered due to the limited vehicle selection and inventory they could offer buyers.

When the U.S. government authorized the $2 billion Cash for Clunkers program, Tonkin said, dealers sold out of most of their new-vehicle inventory.

In the course of eight weeks, dealers sold almost 800,000 vehicles nationwide. That left them with fewer used cars to sell because the “clunkers” had to be retired under the program.

On average, U.S. dealers generate 40 percent of their operating revenue from their used vehicle departments.

California auto dealers also have had to cope with rising license and tax fees. Fleming noted these costs are added to the total cost of a vehicle, and that becomes an issue for price-conscious consumers.

Southern California is a huge market with attractive demographics, including a large number of high-net-worth people and
disposable incomes well above the national average.

Consequently, dealers in this state likely face more competition than dealers in other states.

Sales deals
Perhaps the biggest challenge facing our local dealers is the perception by some Santa Clarita Valley buyers that they can find a better deal and a lower price on a vehicle from dealerships outside of the SCV.

The local dealers disagreed with this notion, saying they all pay the same price as every other dealer to buy a car.

The only difference in the purchase price is the amount of dealer profit. Like any other business, profits also cover all the expenses the dealership incurs, from employee wages and benefits (including the almost 1,000 jobs local dealers provide), to parts, supplies and even the electric bill to keep the lights on.

Buying a vehicle and spending money with an auto dealer outside the SCV market provides no local economic benefit, does not support any local jobs and results in no return or benefit to the community.

Dennis Hawking, general manager of Power Ford, noted that SCV dealers can offer the same deal, and in some cases beat the outside price, because SCV auto dealers have lower overhead costs than many of the dealerships located outside the SCV market.

Land fees were less expensive locally when the auto dealers established themselves, and they still remain favorable compared to most desirable areas in the L.A. County market.

In addition, the city of Santa Clarita has earned a reputation as business friendly, and it is one of the few municipalities in L.A. County that does not impose a business-license fee.

This all adds up to SCV auto dealerships being able to operate at a lower cost structure than their counterparts throughout the Southern California region.

“Vehicle sales and service are part of the equation of quality of life here,” Hawking said. “When a vehicle is purchased outside of the city, it hurts all of us,” he said.

It’s estimated that up to 30 percent of local residents buy their cars outside Santa Clarita, even though the Valencia Auto Center is one of the largest Southern California auto malls, with 13 dealerships offering 23 different brands and a local myriad options.

Sage said there’s a predisposition for people to want to shop around. The SCV dealers just ask one thing: Give them a chance to earn your business.

“Do your shopping online and then bring it in to your local dealer so the money can stay here in Santa Clarita,” Sage said.

Sage echoed Hawking’s statement by saying that SCV dealers can match most prices or do better, and that keeping the sale in Santa Clarita benefits all residents by reducing any cash-flow leakage from the city.

Striplin said sales-tax revenue generated from local vehicle sales go into the city’s general fund, which positively affects the quality of life in Santa Clarita.

An adequate city general fund supports local services such as the Sheriff’s Department, parks, recreational fields and programs, paseos and open spaces, the new Central Park cross country track, and even the Sports Complex and Aquatics Center.

“When you buy ‘local,’ good things happen,” Fleming said.

Independent businesses
The majority of auto dealerships are independent businesses and are not owned by the manufacturers. Dealerships pay interest fees for every day a vehicle sits unsold on their lots.

According to the Casesa Shapiro Group, independently owned dealerships represent the largest retail business in the U.S., with approximately $693 billion in revenues in 2007.

Franchised dealerships employ more than 1.1 million people, comprise nearly 20 percent of all retail sales in the U.S., and, in total, pay billions annually in state and local taxes.

The nation’s 20,700 independent, franchised new-car dealerships comprise an industry sector where 92 percent are
privately owned.

The Shapiro Group further provided that franchised dealers have $233.5 billion invested in their dealerships, or an average of $11.3 million per dealership. The average dealership displays approximately $4.9 million in new car inventory.

Signs to come
According to the National Automotive Dealers Association, the peak year for the industry was 2000, when 17.4 million vehicles were sold.

The nation’s franchised new-car dealers sold 10.4 million new light vehicles in 2009, a decrease of 2.8 million from the 13.2 million units sold in 2008.

But the news is mostly good in 2010; a spike in vehicle sales helped raise retail sales in October by the largest margin in seven months. November was another good month with auto dealerships making the final sales drives of the year.

“New-vehicle sales, which are a key indicator of economic growth, were strong in November,” said Taylor, NADA’s
economist. “They’ll continue to show signs of strength over the next couple of months.”

Taylor projects a sales improvement of at least 15 percent for 2011.

Locally, Fleming said Valencia Acura is up 24 percent from last year. And he said the number of customers walking onto the auto lots is up as well.

“We’re very pleased with what we’re seeing,” Fleming said.

Pent-up demand is a possible factor driving auto sales. Sage said pent-up demand has caused the floodgates to creak open.

“Consumer confidence seems to be returning,” he said. “People don’t believe in the boogey man as much as they used to, or they feel at least the storm didn’t wipe them out.”

Year-to-date, new-car sales at the Mercedes-Benz dealership were up 39 percent, according to Sage. Used-car sales were up 10 percent he said.

Acura recently sold a car to a woman who visited six months earlier but was reluctant to buy a vehicle because she was too afraid that she’d lose her job, Fleming said.

“She was back today,” Fleming said. “She was still afraid that she’ll lose her job but said she’s tired of being afraid and decided to buy a new car.”

While the dealerships are below the peak demand of a couple years ago, Sage said, he expects to see 15- to 20-percent growth in vehicle sales.

According to the “Southland Auto Outlook,” released by the Southland Motor Car Dealers Association in October, Toyota/Scion sits at the top of the market with a 26.9-percent share of the L.A. County market.

Honda holds 16 percent, Nissan 7.9 percent, Ford has 7 percent and Chevrolet holds 4.8 percent. Ford was the only brand in the top-selling group that showed a gain over 2009, at 0.5 percent.

“Ford has a very bright future,” Hawking said. “The research and development that is going on is going to sustain new growth, and I believe 2011 sales will continue to increase.”

Higher-end vehicles, or “near luxury” brands, showed significant gains in year-to-date sales over 2009.

In the central/north L.A. Country area of the regional market, Lexus gained a 10.9 percent increase. Infiniti gained a 23.9
percent increase, even though the brand represents only 1.4 percent of the total market.

Gains in year-to-date sales over 2009 were made by many of the brands represented by the local dealerships, such as Acura with a 23.5-percent gain, Mercedes-Benz with 17.3-percent, Ford with 25.9 percent and Nissan with a 6.5-percent gain.

Volkswagen and GMC recorded sales gains of 29.8 percent and 28.9 percent, respectively.
Community partners
The SCV dealerships have been very involved in the local community, donating to local nonprofits, sponsoring local events and even serving Thanksgiving dinners at the SCV Boys & Girls Club.

“Santa Clarita’s auto dealers regularly contribute tens of thousands of dollars to local nonprofit agencies, schools, events, sports groups and programs that enrich the lives of our residents,” Striplin said.

Striplin said there are not too many nonprofits that the local dealers haven’t helped in some way.

“I’m not sure that auto dealers in other cities have the kind of relationship with their local community that the Santa Clarita dealers do,” he said.

More information about the Valencia Auto Center can be found at: www.valenciaautocenter.com.

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