More than a decade ago, the auto industry was in the grip of a dealership purchasing frenzy driven by public companies hungry for bottom-line results. While this frenzy cooled down long ago, the fact is that the trend toward dealership acquisition is again growing, but this time around the reasons behind the trend are very different. As the auto dealership industry enters a period of wholesale transformation, dealers will increasingly find slimmer profit margins, a more transparent sales process, and ultimately the absolute need for a new kind of total cost efficiency. In order to compete and thrive in this changing marketplace, dealers who want an advantage are already beginning to acquire new stores – and they are finding profits through a disciplined and well-planned process of expansion.

Dealers Association (NADA) reported that 25% of all dealerships did not reach profitability in 2005 (the NADA definition for profitability is that the dealer makes at least $1). In other words, there are approximately 5,500 dealers out there losing money, and for many dealers who continue to pursue business as usual, that downward spiral is expected to continue.

So how long can these unprofitable dealers survive before they use up all their working capital and leverage all their assets? Another year? Maybe two if they are lucky? Ford has already announced plans to consolidate or eliminate points in certain markets, and with bankruptcy looming GM will likely have to close or consolidate points. Chrysler’s long-term plan is to consolidate all of its Dodge/Chrysler/Jeep franchises to one location, much like GM with Buick/Pontiac/GMC. Mitsubishi will be closing points in the months to come.

For dealerships on the 25% side of the equation – the unprofitable dealerships – and for the other 75%, expansion should be top of mind right now. This prescription for change applies in particular to the dealerships on the losing side of the equation. The truth of the matter is, if your dealership has been losing money over the last few years, that trend is not likely to change, at least not without some drastic measures.

While it may be difficult to swallow the concept of expanding if your dealership is losing money, it is vital to understand the components that are causing your dealership to miss the profitability boat. In many cases, expansion makes sense. For other dealers, it may make sense instead to sell.

For the sake of simplicity, let’s categorize the dealers that are losing money into two groups: those that have a challenged franchise in a challenged market, and those that cannot effectively manage a dealership. Of course, most dealers will not admit to ineffective management, but it is wise to remember that denial is the first response of an owner whose store has gotten out of operational control. For those dealers facing management issues, it may be time to start exploring an exit strategy before the operational situation becomes worse and the manufacturer imposes its discretion.

Dealers with a challenged franchise in a challenged market, however, should understand that expansion really may be the key. By expanding and consolidating with another point, a dealer can maximize some important efficiencies of scale. As mentioned previously, manufacturers with dealerships that are on the unprofitable side of the equation have already mapped out a course for franchise and dealer survival. The manufacturers will have to pursue consolidations or closings, so it is really up to the individual dealer to choose a position for future action. Keep in mind that no one understands the strengths and weaknesses of the market better than you the dealer, so you cannot expect the manufacturer to understand that you’re the best point in the market on their own. As a dealer facing some challenges, you need to position your dealership in the best position, and explore all the currently available opportunities for consolidation or expansion before the manufacturer even comes to town to make an assessment.

Considering that compensation and advertising are the dealership’s largest expenses, multiple opportunities for savings are brought to the front through consolidation. If a dealer can acquire or merge with a local competitor of the same brand, inventories can be right-sized to provide an adequate level of selection without running up inordinate flooring expenses. Across the board, you can look at saving about 20% in expenses when consolidating and streamlining two dealerships – and that 20% savings might be all you need to solve the financial challenges you face. Through efficient consolidation and the resulting savings, an unprofitable dealer can move the income statement to a new realm – profitability.

In cases where additional revenue generation is limited, some dealers simply cannot afford to cut any more expenses, because further cuts would likely save them right out of business. For dealers in a difficult financial situation, this year is a true gut-check -- a time to really determine a course of action for the next five to twenty years. Many dealers have been applying financial band-aids on their operations over the last few years, hoping that a cure will make itself known. These dealers must now ask themselves how long it will be before all the working capital in the dealership is absorbed, and there are no other sources of equity that lenders are interested in financing. Dealers also must understand that the manufacturer will certainly not be able to save the day.

The truth of the matter is that the success of your dealership in years to come will be more a product of your efforts and less that of the manufacturer’s. Like a game of musical chairs, we all know that there will be more dealers than there are dealerships. To succeed and win, dealers must position their store and their overall business now to ensure a seat in years to come.