America Car Center: The Start of the Car Dealership Collapse
Is the automobile industry an indicator of the economy? We have heard how bad things are although those who went car shopping would have a tough time seeing it. Reports are car prices were elevated throughout the post-lockdown period with many saying they paid well above MSRP.
The question is will the tied turn?
On YouTube, there are plenty to follow the car industry who claim it is. Some are supposedly in the business, telling us what is really happening. Of course, we have to be careful who we get information from. That said, there can be reputable people putting up content. Hence, we have to believe some has an idea of what is going on.
There is one who I follow who seems to be a straight shooter. For months he talked about the banks tightening lending, that dealerships were not willing to give up margins, and that things were going to bite them.
Are we starting to see this?
America Car Center
Have you heard of America Car Center?
Probably not. They are not a national chain but they did have some size.
According to the linked article, this was a dealership that employeed 288 people with dealership in 10 states. A bit of research revealed they had more than 40 locations in total.
Notice how it is past tense.
This is now gone. They closed up shop. The good times came to an end.
Here we have a chain that is not small. It is far from a mom and pop shop. These are doing tens of millions of dollars a year in business. They were doing well with their leasing and other aspects to the business. Yet, somehow, it all dried up.
Like any business, cash flow is crucial. Car dealership were at the point they did anything they could to hold margin, in spite of the declining value of the vehicle.
Also, as the franchises got more into the used car game during the post-pandemic era, they refused to unload the vehicles to other dealers. This is having a ripple effect.
Banking Crisis
The banking crisis is getting a lot of attention but there is a correlation. Many institutions that lend to car dealerships were extended too far. They went way over loan-to-value levels that are sensible, paving the way for a wave of repos.
As prices of the used cars drop, more people are finding themselves upside down on their loans. This is going to put a huge dent in sales the next few years as people simply cannot get out of the deals.
The cascading effect is that loan profolios needs to be cleaned up. Dealerships that are holding a lot of paper are likely in the same position as the banks. The increasing number of defaults is going to hit them directly.
YouTube is full of videos telling people to be patient. Dealerships are unwilling to cut prices but that is starting to crack. A few are moving in that direction.
As inventory sits, dealerships gets desperate. There are carrying costs that is incurred. We can find many instances where someone offered a price, had it rejected, only to get a call a few weeks later to see if they still wanted the car.
Business Cycle
This is a sign of the downslope of the business cycle. When things turn, a lot of bad stuff takes place. The economy is starting its contraction, at least in certain areas.
We see how the manufacturers are behaving. Tesla, along with a number of other companies, slashed the prices of their cars. This is going to hit all phases of the ecosystem. The legacy automakers saw an overall decline in new car sales in 2022. It does not look like 2023 will be much better.
This phases of the business cycle is extremely deflationary. That means the money supply will contract as loans go bad. Businesses will go under, making a lot of the paper they carry near worthless. Liquidation is going to be happening regulary.
All of this as a result of deflationary money. It talked about it for more than a year and now we are starting to see some of the effects.
Yet people still believe in the concept.
Just wait.
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