Identifying the Dying Dealership: A Guide for Lenders

Do you know if a car dealership is doing well? Is it growing? Will it survive to next year? Auto finance companies must know. They spend marketing dollars and invest risk capital to do business with dealerships, so they need to know if a dealership will still be here tomorrow.

A multi-year data study conducted by General Forensics reveals you can reliably predict which dealers are in the trouble – and, therefore, which to avoid – by watching their websites. As evidenced by the charts below, dealer websites are predictors of dealerships going out of business, including some easy to spot characteristics that say it’s time to step away from a dealership. It is just a peek at what was learned after four years by studying the dealership marketplace from the perspective of auto finance companies.

In the first analysis, the study shows how used car dealerships with less than 50 cars are experiencing significant shrinkage of 17% per month (across the country). This was revealed by measuring “inventory replacement rates” at over 20,000 dealerships at multiple points in time. Simply put, the data says used dealerships with less than 50 cars are not fully replacing their inventory after selling. They are getting smaller and smaller each successive month (see chart below). By contrast, larger used dealerships with 50 or more cars are on average maintaining their size or even growing.

Average inventory replacement rate for various sized dealerships, i.e. the rate cars are added to for each one sold. Multiple measures taken, 30 days apart.

As shown in the chart above, dealerships with 10 to 20 cars replace 83% of the cars they sell in each successive month (on average), and those with <10 cars will only restock half as many cars after a month. Yes, eventually going to zero cars; meaning game over, lights out. The shrinkage trend has been consistent over the past 12 months.

At first glance, the shrinkage phenomenon is startling and indeed for many small dealerships, a dire truth. However, not all small dealerships are shrinking: the chart above shows the average replacement rate. That means some small dealerships are, in fact, growing, while others are shrinking. The trick is to decipher which is which. Figuring that out must be a priority for every auto finance company.

How important is this really? In the second analysis (chart below), see how likely a dealership will “survive” based on its size. Specifically, the research measured web-based advertising as a proxy for survival: how likely will a dealer continue advertising at three, six, and nine months after a baseline point in time. While stopping to advertise does not mean the dealership is out of business, but it is a death rattle. It’s a move in the wrong direction that implicates both operating difficulties and cash constraints — all factors signaling that going out of business is increasingly near.

Likelihood that advertising continues for various sized dealerships. i.e. probability the dealership will still be advertising 3, 6, or 9 months later, measured from various time points.

As seen in the chart above, only 72% of dealers with less than 20 cars will continue advertising after nine months. This survival analysis, along with the previous inventory replacement analysis, shows that it is prudent to monitor a dealership’s size and one of the easiest ways to do that is simply keep tabs on a dealership’s website.

Fortunately, it’s straight forward to do that. To that end, General Forensics provided the following recommendations to lenders:

  • Verify your agreements with your dealerships — include permission for you to inspect their digital properties, as well as their physical ones;
  • Develop a process for visiting dealer websites on a daily or weekly basis;
  • Record when vehicles become offered for sale, and when they stop being offered, and other characteristics of interest like price;
  • Develop metrics on the data points you created that let you see trends on a daily, weekly, and monthly basis;
  • Measure the data points and trends against business performance to improve your operating decisions and profitability; and
  • Develop a process to automate your monitoring so you can scale it efficiently.

Alternatively, there are other third-party data providers (including General Forensics) that can provide various abstractions of inventory data. The challenge with vendor selection is ensuring the vendor can provide actual current listing info, on a daily basis, and also that it can provide the complete set of listings, not just recent sales data.

Josh Wortman is a Data Scientist at General Forensics. 

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