How Long Will the Dealer Shakeout Last?

by

Note: the following is the “From the Editor’s” column appearing in the September issue.

“Fed Says Economy Is Leveling Out.” That was yesterday’s top news headline. Today’s? “Retail Sales Dip Unexpectedly, Jobless Claims Rise.” Mixed messages, but apparently the economy is about to turn around.

What about our industry? The other day I spoke with Laurn Rice of ADP Lightspeed, which services roughly 3,000 stores, mostly large and franchised. Here’s what he had
to say:
• From late November 2008 through February, the company confirmed that an alarming number of Lightspeed users had gone out of business or filed for bankruptcy.
• During this time, there were no ownership transfers, meaning nobody cared to buy these stores. There also were a slowdown in software upgrades and a rise in downgrades (for example, stores going from 10 users to six, or removing modules).
• Recently, bankruptcies and closures have dropped 60 percent, and store transfers have risen “dramatically.” Downgrades are down; upgrades, up.

“In the last two months we’ve seen a lot of business from existing dealersthat are actually growing again,” Rice said. “The main reason that has been happening is because stores in their areas were closing, and they were absorbing the business.”

Rice said the year-over-year decline in sales at Lightspeed stores has slowed. July was the first month in many that the percentage of decline decreased, going to 30 percent from June’s 34 percent. He added that sales at roughly a quarter of the stores have been up throughout the recession.

Which underscores the importance of location. After benefitting the most from the housing market, Sun Belt dealers are crashing the hardest, Rice said. But dealers in pockets of the Midwest and other areas are still doing well.

Rice said store closures began on the East Coast and made their way westward like wildfire. The bittersweet recovery, he said, is following the same pattern. Sticking with the analogy, I could say sales are growing like foliage in a burned landscape, finding the sun after the removal of brush. But much of that brush was far from dead; it was just at the wrong place at the wrong time.

Again, Lightspeed dealers tend to be large and franchised. A discussion including smaller stores and independents would be more complicated. For a broader perspective, I turn to Tucker Rocky president Steve Johnson. He fears dealer closings may be far from over. Using an analogy of his own, he pointed out that many retailers go out of business after Christmas. “The Christmas season in our industry is April, May and June,” he told me in late July. “And Santa Claus hasn’t come yet, so I’m a little concerned about some dealers, more in the fall than the winter, being able to pay the bills through those times when you have a normal dip in volume.”

I spoke with Johnson at the Tucker Rocky dealer show (page 10). His overall attitude was positive. The show, after all, was on par with last year’s. Dealers seemed to shop eagerly for commodities, which reportedly continue to sell well. Dealers also were on the lookout for items at lower price points that still exude quality.

At the end of the day, Johnson said, dealers will do fine as long as they have a broad base of business, and stay connected with customers by hosting events and creating a fun environment. ”In fact, they’ll be stronger on the backside of this.”

Exceptions, he said, will be those dealers who do all these things but are overly leveraged. Which harks back to my clumsy brush analogy. Good dealers temporarily dry of capital are more liable to get burnt.

Also in danger: discounters that profited from huge new-unit volume — as well as small stores that could be easily absorbed by nearby large ones.

I don’t know how long this forced consolidation will last. I only hope dealers who are forced to exit can find a buyer.

— Arlo Redwine

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