Used car dealerships feeling the pinch

As Skyway Chevrolet in South Chicago prepares to close its doors, General Manager Dan Biegel’s advice to other car dealerships is simple: Get the right inventory.

With credit availability low and gas prices high, drivers are looking to buy the cheapest cars with the best gas mileage. As a result, unlike fuel-efficient models such as Toyota Motor Corp.’s Prius, gas-guzzling trucks and sport utility vehicles have been downright unpopular with prospective buyers.

Which means, for used car dealerships heavy in bigger models such as the Chevy Tahoe, Ford Explorer and Chrysler Town & Country, the past twelve months have been, at best, rocky and, at worst, devastating.

“I’ve got a 2001 Tahoe some guy traded in for a Cobalt and I’ve had that Tahoe for 62 days,” Biegel remarked. “Normally you like to keep stuff 30 to 60 days. I’ve had nobody in even to look at it and I’ve advertised it for really low prices.”

Skyway, which is a used and new car dealership, has operated for four years under its current ownership and opened in the 1940s as Seip Chevrolet.

But after more than 60 years, Skyway will close for business on July 31. Although there have been rumors of a prospective buyer, liquidation is likely.

“It got bad when gas hit $4 a gallon,” Biegel said. “I live in Indiana and come into Chicago every day, but we saw it first in Chicago and it was definitely the driving factor. The value of trucks or fuel inefficient cars–their wholesale value–has just dropped off.”

Between January and April 2008, the number of retail used light vehicle registrations in the Chicago area totaled 127,772, a 4 percent drop from 132,877 registrations in the year-earlier period, the Chicago Automobile Trade Association reported.

Biegel points to the usual suspects to explain the downturn: the sluggish economy, soaring gas prices and tightened credit requirements.

“It’s a combination of everything,” he said. “Now it costs more to get a car. And discretionary spending isn’t what it used to be.”

With the Conference Board Consumer Confidence Index having logged its fifth lowest reading ever in June, retailers across the board are experiencing problems. July Consumer Confidence is due out next week and is expected to dip again to a reading of 50.0 from 50.4 in June, according to economists surveyed by Briefing.com.

“One of the first things to go in an economy where consumer confidence is at these levels are the discretionary things, the things you don’t have to have but are nice to have,” remarked Drew Cardonick, a partner in the bankruptcy group of Goldberg Kohn Ltd. in Chicago. “You don’t see food companies or grocery stores getting as hard hit because you have to eat. But you don’t necessarily need to have the latest and greatest cars.”

Biegel, who has been in the car business for 30 years, remembers a similarly dismal time for car dealers in the early 1980s when the prime rate hit 20 percent and, with the economy in trouble, people cut back on spending.

“When you get a car loan, your car loan is generally pegged to the prime rate,” Cardonick explained. “So when the prime rate is 20 percent, it makes it harder to buy the car at that interest rate.”

The Federal Reserve’s federal funds target rate, the rate used by banks to lend overnight reserves to one another and to set their prime lending rates, is currently at 2 percent, the lowest level since November 2004, while the prime rate is at 5 percent.

Still, Cardonick believes that the economic hardships of the early 1980s are analogous to current conditions, with low discretionary spending a hallmark of both periods.

“In the 80s, when interest rates were high, you were affecting the first cost” of buying a car, he said. “Today you’re affecting the gas cost.”

With market forces putting extreme pressure on car dealerships nationwide, it comes as no surprise that Skyway is only one of several local dealers that are suffering.

“Sales have slowed down since the economy is the way it is,” reported Robert Glowa, owner of Glowa Auto Sales in Wicker Park for 44 years. “In the last three years, sales have gradually declined.”

Glowa, like Biegel, is also closing up shop. Because his dealership specializes in cars with more than 100,000 miles that sell for $5,000 or less, no one is interested in his product right now.

“My business is for sale,” he said. “I’m at the age where, after 44 years of doing it, I’m done. I’ll just keep eight or nine cars until I sell them, but I don’t even expect to sell the property because the real estate market is off. It’s coming down to where you’re losing your savings.”

Cars with hybrid electric engines, which are expected to account for 6.5 percent of U.S. auto sales by 2012 according to a report by J.D. Power and Associates Automotive Forecasting Services, might not be available to used dealerships for some time. It typically takes two to five years for new cars to cycle through to resale points. But by that time, it might be too late for many area dealers.

“A few drivers are looking for hybrid cars, but we don’t deal with those cars because they are too expensive,” reported Syed Mateen, owner of Asia Motor Inc. for the past 14 years. “Maybe in the next five years, but they aren’t available now. The hybrid dealerships have control on those hybrid cars and they are selling at more than the market value.”

Mateen, who buys General Motor Corp.’s Chevrolet Impala and Ford Motor Co.’s Crown Victoria models from police departments and sells them to cab companies, said such vehicles are the only options for taxi services who need cars to run 24 hours a day, seven days a week.

Although Mateen has not seen a drop-off in sales, he is nevertheless unable to raise prices because clients are unwilling to pay more money for these cars with gas costing what it does.

“They don’t have a lot of options even though they are crying,” he mused about cab drivers’ need for the large, sturdy “gas-drinking machines.”

Unfortunately for cab companies and car dealers alike, options will continue to be scarce and what Mateen refers to as “crying” will be a fact of life until gas prices settle and hybrid cars become widely available for resale. But no one, not even those who have been in the car business for more than 40 years, has any idea exactly when that will be.