Beyond cash for clunkers

There's been lots of attention paid to crowded car dealerships, the result of the government's popular clunkers program. Of course, this is a relative blip in a year that has been nothing short of disastrous. However many additional cars get sold won't begin to stave off a major consolidation of the dealership business. Here in L.A., that consolidation largely predates the decision by Chrysler and GM to sharply reduce the number of dealers. My August piece in Los Angeles magazine gets into the ways in which the business has been changing.

Among the 25 largest dealerships in Los Angeles County, 18 are part of either publicly held companies like Auto-Nation and Group 1 Automotive or large private corporations. Only a dozen or so companies control much of Southern California's sprawling car market. Their growth has pushed out what had been the industry's mainstay: small family operations that sell only a few hundred cars a year. In 1960, L.A. County had more than 1,000 new-car dealers, some of them with one- and two-car showrooms that had been converted from garages or gas stations. Today there are 644, and that's with many more vehicles on the road and a much larger population.

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If the shift to megadealers happens to ring a bell, it's because having fewer but larger locations is part of a tried-and-true retail strategy. Over the years mass merchants like Wal-Mart and Best Buy have outmuscled neighborhood hardware and electronics stores. As a rule, they offer greater selection at a cheaper price. In the car-selling industry, mom-and-pops seldom generate enough revenue to make them viable in a market like Los Angeles, where the cost of doing business is so high. Japanese automakers, which have close to a 60 percent market share, prefer the bigger-is-better strategy: Chrysler's bankruptcy papers note that the average Toyota dealership sells far more vehicles each year than the average Chrysler dealership. Little wonder, considering that as of 2008, Chrysler had 3,298 dealerships and Toyota had 1,242 nationwide.

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Selling cars in L.A. has always been a high-risk, high-reward business. The headaches are legion: burdensome state and local regulations, inflated real estate, time-consuming litigation, heavy marketing costs. Then there's all the competition. When people walk into a showroom armed with quotes from Internet sites and other dealers, the choice is to match those prices or risk losing the sale. That often keeps profit margins below 2 percent, compared with 3 percent-plus in other parts of the country. But there is a flip side: Los Angeles is the nation's biggest car market, with more than 7 million vehicles on the road and 1.2 vehicles for every licensed driver. A dealer can pump up the minimal profit on a car purchase by selling high-margin extras like special wheels and service-protection packages. Besides, volume has a way of curing many ills: The more cars sold, the more money coming in the door. Revenues at the county's 25 largest car dealerships totaled nearly $4 billion in 2007.