The COVID-19 pandemic and its resulting impact on the economy are going to leave a number of dealers in crisis. The most stable of dealerships may be left vulnerable and — absent a definitive plan to create, protect and preserve liquidity — the dealer pool may be considerably culled.
Unlike other industries, the auto industry wasn’t demonstrating robust growth prior to this unprecedented crisis. Dealerships have been increasing leverage while managing declining margins.
Throughout 2019, in good overall economic times, our firm consulted for a number of dealership groups experiencing major financial hardships. The lesson that became obvious was that dealers needed to face their problems early and head-on, not waiting to see if the next month would get better. Those who delayed confronting their problems saw a mild illness turn into a terminal disease. The dealer mindset has always been to “sell their way out of a problem.”
Optimism is helpful, but it is not a strategy. In challenging times, intelligent reduction of expenses and restructuring of debt becomes urgent and essential to survival.
Many lenders spent the past few years working feverishly to deploy capital into flooring lines and other dealership secured loans. Private equity firms entered the industry with abandon. Automotive real estate investment trusts have grown their dealership portfolios during this last 10-year expansion.
Even with all of that enthusiasm, auto industry sales had leveled off prior to anyone hearing the term COVID-19, peaking in 2016. The most savvy did not see this crisis coming. No one budgeted for the apocalypse.
As a result, many dealers have been caught without adequate working capital to weather the storm. No lenders conducted stress tests to prepare for a cataclysm of this magnitude.
Just as dealers are forced to face this hurdle head-on and not hide from the inescapable, this is not a time for lenders to pull their boilerplate forbearance agreements off the shelf, follow their generic workout checklist or play hardball. It is not a solution for dealers to go out of trust and hope good times are on the horizon.
Like the rest of the nation, dealers and lenders must work together to return to some new sense of normality. No one knows how long the shutdowns will continue or how consumers will respond as the economic curve flattens out along with the COVID-19 curve. As of this writing, the contagion and the economy show few signs of improvement.