Death of a car dealership
Tony Van Alphen
Toronto Star
Nov 24, 2008
The Chrysler store had that strong, proud look as it dominated the southeast corner of Beechgrove Dr. and Kingston Rd. in Scarborough for more than half a century.
The lights, flags, flashy posters and showroom gave it a prominent community presence. It was a "five star" store, too, signifying the best the automaker could offer customers in service and satisfaction.
Chrysler proficiency awards and sponsorships of local hockey and baseball teams dotted the walls inside. The Scarborough Chamber of Commerce thought so much of the dealership's president that it selected him Business Person of the Year in 2003.
But Davidson Chrysler Dodge Inc. has shut its doors. It declared bankruptcy earlier this month with a deficit of more than $1.2 million. Only a few shiny Chrysler Caravans, Sebrings and Dodge Calibers remain on the 2.5-acre lot, along with the dealership's last "hottest hot wheels" promotion banner in the window.
Workers pulled down the red Davidson sign with the distinctive Chrysler Pentastar last week.
The economic storm blowing through the North American auto industry had reached the east end of Scarborough.
The storm, gathering force over the last two years, features product oversupply, lower demand and vicious competition. The additional element of tighter credit knocked the economy to its knees and threatens to put it in a deep freeze.
It has already devastated auto communities that make cars and parts, primarily in southern Ontario. But now, in cities and towns across the country, it's spreading to dealers, industry analysts say.
Dennis DesRosiers, who's studied dealership issues extensively, said although industry sales are still up in Canada this year, profit margins on new auto business have been dropping over the past decade, and are now at razor-thin levels because of fierce competition. That is forcing owners to increase revenues in other parts of the business, such as the repair shop, he said.
"As margins are squeezed, it is smaller dealers who will struggle to satisfy the demands of market pressures, imaging, technological change and the bigger investments in stores that come with it," he said. "It's tough, particularly for smaller stores in larger communities to survive because of that."
Some workers, plants, businesses and dealers will bounce back. But there won't be any recovery at Davidson Chrysler.
"It was the toughest decision I've ever made in my life," says owner and president Roger Davidson, 60, about filing for bankruptcy. "It was just an absolute heartbreak. I had 57 employees and many of them had been here for years."
Davidson also personally pumped almost $1 million into the store. He's a secured creditor, but doesn't expect to recover any of it.
The store's demise raises this question: If Davidson Chrysler – a top-notch, second-generation family store under veteran management – couldn't make it, how many other dealers are on the edge, facing failure in a deteriorating economic climate?
The Davidson bankruptcy is also instructional about some of the cold, hard business decisions that reeling auto giants are grappling with these days. A retailer's loyalty year after year in good and bad times counts for something, but not much when a company is fighting for its own survival.
Furthermore, the bankruptcy is indicative of a broader trend, where single-family dealerships are declining while businesses with deeper pockets control a number of dealerships. That allows them to lower overhead costs, exert more clout in the marketplace and cushion the impact of downturns better.
Chrysler Canada did not want to discuss the circumstances surrounding Davidson's bankruptcy, but chief executive officer Reid Bigland said 90 per cent of the company's dealers are currently profitable. That profitability has also improved this year, he said.
Bigland noted Chrysler can't be a strong company without profitable dealers making the necessary investments to continue generating business.
Bankruptcy trustee John Morgan, who is handling the Davidson case, said the dealer didn't make any major business mistakes that would sink his store.
Morgan said Davidson ran into circumstances in the industry and with Chrysler that he could not control. Davidson could see nothing but losses and misery on the road ahead, he said.
"Roger made an astute business decision, albeit a very difficult one, in walking away from something he had been associated with all his life," Morgan said.
Other auto dealers are in trouble, he added, and must take drastic steps, otherwise they will run into "serious repercussions."
Morgan, Bigland, Davidson and other dealers said that to survive the storm, store owners need to run extremely lean operations, keeping a close eye on staff levels and inventories. Dealers must also focus on generating revenues from sources such as parts, repair services and used cars, they added.
The Davidson store's roots originated in 1952, when Roger's father Jim opened a used-car dealership at the Kingston Rd. site. Four years later, he turned it into a Chrysler franchise that would sell thousands of vehicles and eventually become a business fixture in Scarborough.
Roger started washing cars there as a young boy. He eventually worked everywhere in the store, from parts department to sales counter. But he aspired to become a university professor – until one of them told him he was a born salesman.
Davidson heeded the words and opened what became a successful auto leasing business on the same site. He bought the dealership from his retiring father in 1978.
Davidson became one of Chrysler's top dealers in Canada, a member of The President's Club and an influential member of its national council for several years. He embraced new technology and processes to boost business.
The store was the first Chrysler dealership in Toronto to receive certification from the International Standards Organization (ISO) for implementation of top business processes and practices. It buzzed with action, peaking in the mid-1990s with annual sales of some 1,500 new cars and trucks.
But the store's fortunes started to wane four years ago.
While Chrysler sales increased in Canada, some local dealers said the gains were illusionary and didn't benefit them at all. That was because Chrysler factory representatives pressed for more deliveries than dealerships needed, in efforts to keep assembly plants humming.
Those plants produced a lot of gas-guzzling cars, trucks, and sport utility vehicles that were losing favour in the marketplace because of rising fuel prices.
Davidson said the frantic sales push reached the point where Chrysler was building vehicles dealers had not actually ordered. Lots overflowed, and dealers took losses on some cars to move the metal.
"It was unbelievable," he said. "We rented a farmer's field last winter where we put 60 cars. But horses ran between the cars and smashed the mirrors. Getting them out of the snow was quite another story."
Davidson played ball, hoping that when hot models were in short supply, he'd get them. It was a case of `I help you, you help me.'
"I wish I had watched that better," he said.
Bigland, who in happier times appeared with Davidson in a picture that was still hanging in the empty showroom this week, acknowledged high inventories for dealers was an "issue" a few years ago, but said the company has resolved it. And the factory doesn't build a vehicle without a dealer order, he stressed.
The incentive craze also cut into Davidson's business and profits. Some Chrysler dealers with more financial muscle continued incentives such as the "employee pricing" promotions after the manufacturer ended them.
Davidson saw just how far a retailer would go to win business when one rival gave $200 to Chrysler workers at the company's Brampton assembly plant so they would use their `employee pricing' certificates at the dealer's store. Chrysler discovered the tactic and stopped it, Davidson said.
Despite ballooning inventories and a falling customer base, Davidson said the number of Chrysler stores remained intact. He noted the three Toyota stores in his area outsold the eight Chrysler dealerships last year. Davidson's new sales tumbled to 500 last year, a steep drop from his all-time high of 1,500.
Bigland said the company is satisfied with the size of its dealer network, but agreed the numbers are out of balance in some mature urban markets.
The woes increased this summer for Davidson and other dealers when Chrysler exited leasing because of heavy financial obligations on gas-guzzling vehicles. Their values eroded when fuel prices spiked.
Leasing accounted for 30 per cent of Davidson's sales.
"I lost that overnight," he said.
And then the worldwide credit crisis hit and flattened the market. Tightening credit conditions significantly restricted borrowing for automakers, dealers and buyers, and was one reason Chrysler pulled out of leasing.
Bigland agreed the lack of available credit is hurting dealers who need funding to finance their inventories, and consumers who can't buy new autos without it.
"It is extremely acute in the marketplace right now," he said.
Despite all the turmoil and grim forecasts, Davidson would have persevered, he revealed in an interview.
But Chrysler killed any chance of that two years ago, he said, in an effort to address one of its many problems: Too many stores.
Chrysler exercised an option in its franchise agreement with Davidson that allowed him to keep operating under the company banner, but said he could not sell or transfer ownership to anyone except another franchisee.
That effectively eliminated any chance of a succession at Davidson Chrysler. Passing the store to salesman son Ryan and a third generation was no longer possible.
"It put me in a straight jacket," Davidson said. "But I also know others (dealers) got the same letter."
Davidson Chrysler had become collateral damage in the automaker's fight for survival.
In hindsight, Davidson said that as his focus moved away from the store's long-term future, he expanded a family used-car business outside of the city too quickly. Working capital for Davidson Chrysler dwindled.
"The cost of operations became too excessive," he said. "This store was geared to big volume and that wasn't happening any more."
In September, when the store's fate was inevitable, Davidson sought financial assistance from Chrysler so he could make severance payments to employees who would lose jobs. Chrysler refused.
"I could understand their situation," he said. "They don't have any money either."
Davidson closed the store days later. Bankruptcy filings show the dealership had liabilities of $3.46 million and assets of $2.21 million, for a shortfall of $1.25 million.
The biggest secured creditors are Chrysler Canada, with a claim of $2.5 million, and Davidson himself, with a claim of $900,000. More than 80 unsecured creditors will likely receive nothing.
This week, instead of selling cars, Davidson juggled calls on his BlackBerry and office phone while dealing with myriad bankruptcy details and creditor issues.
Davidson said he'll soon need to find another job, likely somewhere else in the auto industry.
"I'm not in a position where I can retire," said Davidson, an avid hunter, golfer and father of three. "I'm not a rich guy."
He expects to eventually sell the valuable real estate and buildings. Chrysler will get some of the proceeds but he'll also make money.
"I should be okay then," he said. "But all this has been pretty hard."