Ford's woes worry dealers

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February 28, 2007|By The Dallas Morning News

DALLAS -- Saturdays used to rock at Ford dealerships in the Dallas area.

Salespeople would run to their managers' offices, paperwork in hand, trying to close as many deals as they could on hot-selling Explorers, Expeditions and F-150 pickups.

Now, with Ford awash in red ink and sales down 40 percent to 50 percent since 2000, dealerships are scrambling in different ways: ratcheting down sales operations, hustling service work, and worrying about losing incentives and other financial support from the struggling automaker.

Sam Pack, who owns three Ford dealerships in Texas, said dealers had plenty of support programs in 2006.

"As we look to 2007, the $64,000 question is, will we have that kind of support this year? We don't know, but I think the dealer body will have a more difficult year in '07 than we had in '06."

Ford Motor Co. lost $12.7 billion last year, the largest annual deficit in the company's 103-year history. The company has closed two plants and will shutter two more this year.

More than 50,000 jobs have been eliminated.

Ford says it does not expect to be profitable again until 2009.

Dealers operate as independent franchise businesses but feel Ford's pain. All say they believe the automaker will survive, and most are generally satisfied with its products. But they are worried.

As franchisees of Ford, many have spent millions to build or buy their dealerships. They assume huge loans monthly to buy inventory from the automaker and depend on Ford for a steady supply of new cars and trucks.

The Southwest was Ford's healthiest region last year, officials say. But dealers say a few large stores generated a majority of the profit, and all relied heavily on Ford's support programs for their earnings.

"This region outperformed the nation last year because we had stair-step programs that were not available to dealerships in the nation as a whole," said Pack, the area's largest and most profitable Ford dealer.

Ford's stair-step incentives reward dealers for high sales, paying them an incentive when they are near their goal, another when they reach it and a bigger one if they exceed it. The automaker sometimes helps with dealers' monthly interest payments on inventory loans, an expense that can easily exceed $50,000 a month.

Pack, who estimates that sales at his dealerships have dropped about 20 percent since 2000, says he's also concerned about falling margins on new vehicles, which average 8 percent or less.

Dealers buy vehicles at wholesale prices from the factory and try to sell them for the window-sticker price set by the automakers. The new Ford Edge crossover vehicle, for example, has a sticker price of $26,450 with a few options.

The vehicle has a 4 percent profit margin, plus a 3 percent "holdback" that the automaker keeps until a vehicle sells. If dealers are able to get the full window-sticker price - and that's rare these days - they will earn a gross profit of about $1,780, from which they must pay a portion of their rent, utilities, interest on loans, advertising expenses and the sales commission.

"Manufacturers are reducing margins to hold down costs," Pack said. "When you get into a challenging market, the dealer body has to be profitable to be a good partner. Neither of us can survive in the long term if we're both losing money."

Sticker prices have been cut to better reflect true transaction prices because many consumers shop cars on the Internet and Ford wants a more competitive first-glance price, said Dave Mondragon, general manager of Ford's Southwest region, which consists of Texas and Oklahoma.

"We don't want these grossly inflated prices that have big margins but also include big rebates," Mondragon said. "Lots of consumers - especially those who do their initial comparisons on Web sites - don't drill down far enough to find the incentives."

Still, Ford realizes how tough the retail business is. At least a dozen deals are pending in the Southwest region to allow Lincoln Mercury dealerships to merge with Ford stores, Mondragon said. "The bottom line going forward is the financial proposition for small stand-alone dealers is very difficult," Mondragon said. "Dualing [consolidating Ford and Lincoln Mercury dealerships] is an option that can benefit dealers and consumers."

It could even include odd pairings, dealers say, such as Ford and Hyundai or Ford and Suzuki.

Florida-based AutoNation Inc., the largest single owner of Ford dealerships, is talking with Ford officials about consolidating some of its dealerships - though AutoNation did not say which it is considering. "We want to look at consolidation when that is an opportunity," said Mike Maroone, AutoNation's president and chief operating officer.

Ford has not said that it intends to reduce the stair-step program or any other dealer support program. But, like Pack and others, Maroone presumes that is a possibility. "The things that give me the most heartburn are the oversupply of vehicles - too much inventory - the loss of Blue Oval payments [for having superior facilities and customer service] and fewer stair-steps," Maroone said. "In our stores, it was not unusual to be chasing a six-figure pot of gold from the stair-steps."

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