Picking Up Speed

Auto sales are finally back in gear

Back Article May 31, 2012 By Robert Celaschi

Check out the license plates of your fellow motorists the next time you are out for a drive, and you may notice more dealer tags than usual.

“The year closed out like a lion,” says Rick Niello, president for The Niello Co., which operates a dozen dealerships throughout the Capital Region. “We started the first quarter of 2012 significantly ahead of last year, with March being a real powerful month.”

Registrations of new cars and light trucks in California grew 10 percent in 2011 to 1.29 million, and that followed a 13 percent growth in 2010, the first year marking a turnaround in auto sales. The California New Car Dealers Association tracks these numbers and predicts another 8.5 percent sales increase in 2012.

At its 2009 low, dealerships statewide unloaded just more than a 1 million units — half of what they sold in the peak years between 2000 and 2006. If the association’s prediction is right, California would sell about 1.4 million vehicles this year.

But there is still much uncertainty as to whether these sales trends will endure, and the answer holds implications for car dealers as well as city budgets.

According to some observers, the more recent increase in sales could just mean drivers are finally replacing vehicles they’ve been forced to maintain since the beginning of the recession. Once the vehicles have all been replaced, automotive sales could once again fall, they say.

Depending who you ask, the trend appears to benefit used cars over new ones. Despite the higher sales, local dealers admit to company downsizing and say they will maintain a conservative spending approach until the economic future becomes clearer.

“We’ve made many adjustments to be leaner and meaner,” including cuts to staff, says Niello. “Recovery seems to be underway, in a measured way. But you always have to qualify things.” The car business is a different game now than it was in the first half of the 2000s when more financing sources were available. “Everybody had a checkbook with home equity. They could buy cars and TVs and home appliances,” he says.

Last year, cumulative sales tax at Niello dealerships alone totaled more than $17 million for the four cities in which they operate.

To meet the cautious demand of fickle consumers, factories today are turning out a wide variety of models but in lower production numbers.

“Usually we have a lot more supply than we have demand. In today’s market, our supply and demand are pretty tight and very consistent,” Niello says.

Some brands are benefiting from the upswing more than others. At the Lasher Auto Group, which has 13 dealerships throughout Elk Grove, downtown Sacramento and Coalinga, every franchise is posting better numbers: Acura, Audi, Dodge, Chrysler, Chevrolet, Jeep, Buick, Suzuki, Volkswagen, Subaru and Gem.

Dodge in particular is way up, says General Manager Mike Franz, and “Subaru has gone way, way, way up.” Both were able to send more inventory from the factories, he says, and both companies followed up production with aggressive advertising.

But the action isn’t coming entirely from new cars. Dealers say late-model used cars are in demand and fetching high prices. TrueCar.com estimated March sales of used cars were up 9.5 percent from a year prior, with used cars outselling new ones by two-to-one.

And while Sacramento dealers are seeing more buyers, inland California communities in general are contributing less than coastal communities to California’s rising sales figures, says Jesse Toprak, vice president of market intelligence for TrueCar.com, an online automotive information firm based in Santa Monica.

“That has a lot to with the housing market,” Toprak says. When people don’t feel comfortable about their job stability and the value of their homes, they aren’t as enthusiastic about buying new cars.

Car dealers aren’t the beneficiaries of higher sales numbers. Every $1,000 spent on a new car means $77.50 of sales tax revenue for most municipalities in the region. Still, it only helps cities with a bunch of dealerships. And even for dealer-rich cities, it’s a double-edged sword: The more car dealers in a city, the more the budget benefits in good years and suffers in bad years.

Nobody knows that better than Laura Gill, who took over as Elk Grove’s city manager in 2008 as the downturn in car sales was already under way. The city’s general fund budget fell by $6 million to about $50 million that year, largely due to lagging sales tax revenue. “Luckily, we had enough in general fund reserves,” she says.

Car dealerships fund about 12 percent of the city’s sales tax. When Elk Grove’s general fund hit bottom in 2009, auto sales made up the second largest source of sales tax revenue for that city, and car dealers accounted for four of the top 10 sales tax producers.

By the third quarter of last year (the most recent figures available), auto sales had regained first place, and dealers accounted for six of the top 10 producers. That number could climb as the Elk Grove Automall, the largest auto mall in the region, has added Subaru and Mazda dealerships in the past year.

“Here’s the thing,” Gill says. “We would love to have other revenue sources to operate. But of the dollar in property tax that citizens send to Sacramento, we only get one cent of that. Even though we are dependent on our sales tax for revenue, we have the lowest per capita sales tax in the region.”

Elk Grove’s Promenade Mall was supposed to keep shoppers from spending money in Sacramento and Roseville, but the recession killed that project and the city is still working to revive it. The city has scored a couple of other victories in luring medical industry offices, but auto sales remain vital.

Gill fears that once Elk Grove residents replace their old cars and trucks, sales will skid to a halt again. Elk Grove is working with a sales tax consultant who is projecting exactly that scenario by 2014.

“We are looking toward the future to make sure we don’t put ourselves in a hole if what our consultant says is true,” Gill says. “Hopefully they are wrong.”

Automotive analysts are more optimistic about the industry’s recovery. While there is no question that part of the sales numbers comes from pent-up demand — according to the U.S. Department of Commerce, the average age of vehicles on the road is at an all-time high — consumers looking for cars priced above $40,000 are returning to some areas of the marketplace, too.

Buyers of BMW, Jaguar and Porsche helped give Niello a healthy 2011.

“In this segment, we are not selling transportation,” says Rick Niello. “The people who have a level of affluence are feeling like it’s okay to invest in a car.”

In another indicator of the recovery’s duration, dealers say they have noted improvements in credit availability for vehicle purchasers.

“It is much better for the marginal credit customer to get financing at this time. I would say over the last six months things have gotten better,” says Elk Grove dealership owner John Driebe.

The sales trends have been steadily pointing upward despite rising fuel prices — or possibly because of them. While observers note that higher gas prices lead to fewer miles traveled and perhaps fewer vehicle purchases, consumers are also under more pressure than ever to replace their gas-guzzlers with more fuel-efficient vehicles.

Thus New Jersey-based research firm TechnoMetrica calls rising pump prices “the biggest wildcard car manufacturers face today.”

According to the firm’s February study, 16 percent of Americans said they were considering buying a new car within six months. But a month later, when the national average gas price had risen by 30 cents a gallon, TechnoMetrica found only 8 percent still interested in buying.

But higher gas prices are also given credit for higher car sales. Rising gasoline prices shift demand toward energy-efficient autos and away from light trucks, according to the Department of Commerce. Sales of new cars made up 53 percent of all motor vehicle sales in the first quarter of 2012, the highest share since the third quarter of 2009.

Whether the overall sales numbers mean a brief spurt or a steady march toward prosperity, automotive dealers are optimistic about a nearly 40 percent sales increase over three years.

“It’s a great time to be a car dealer,” says Franz from Lasher Auto Group. “It has really come around.”

 

 

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