by Karen Epper Hoffman
More than the average car dealer these days, Gordon Hanna has seen his share of radical ups and downs in recent years. Even before the recent gas price spike and the domestic auto industry crisis rocked the market in 2008, Hanna, the general manager for Cadillac-Hummer of Metairie, La., just outside New Orleans, was experiencing a more tumultuous roller-coaster ride of boom and bust sales than most dealerships, due to the effect of Hurricane Katrina in 2005.
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When Katrina hit, it took out six out of 10 cars [owned by residents] here,” he says of the hurricane’s destruction. “That meant that at least one of the cars [in a household], if not both, were gone.”
More than three years after the devastation of Hurricane Katrina plowed through Louisiana, the retail auto market is, like so many inhabitants there, still struggling to return to normal. But, unlike most New Orleans residents and business owners, the car dealers there are also wrangling with a potentially even more damaging storm that’s raging in their industry — the ongoing crisis and bailout of the domestic auto-makers.
Immediately after Katrina hit in late August 2005, many observers surmised that the area’s retail auto market would never recover. The disaster pummeled the local auto market with a bevy of blows all at once. The most obvious was, of course, that the storm itself damaged about 230 Big Three domestic dealerships and all but wiped out nearly 50 stores across the Gulf Coast region, many of those in the greater New Orleans area. Car dealers’ inventory was destroyed, and the emergency that followed meant that car sales were virtually zero that September.
Also, the exodus of people from the New Orleans vicinity—some leaving briefly, and others who stayed away for good—created a smaller auto market with a smaller talent pool of experienced sales people and technicians to work the dealerships. Many have still not returned to their workforce levels of early 2005. (As of late 2007, greater New Orleans had only 137,000 households, about 70 percent of the 198,000 in July 2005, according to the New Orleans Community Data Center.) But while the first couple of months after Katrina proved to be the biggest of all busts, it led to a subsequent year of boom for the dealers that survived.
Bob Israel, president of the Louisiana Automobile Dealers Association in Baton Rouge, says many New Orleans residents with cars destroyed in the hurricane began receiving insurance settlements toward the end of 2005 and into 2006. And these folks used the money to buy new cars. “For almost 16 months after Katrina, we had a big boom in sales,” Israel says, adding that this benefited franchise dealers more because “so many independent shops were just wiped out and didn’t have the money to gear up as fast as dealers.”
Hanna at Cadillac-Hummer of Metairie, La., says that business at his dealership increased 40 percent to 50 percent in the eight to 10 months following December 2005. Despite the severe sales slump in the late summer and early fall of 2005, the loss of more than 100 cars, and the major population dip, Saturn of New Orleans in Harvey, La., reported a 23 percent year-over-year increase in revenues in 2005, mostly due to late-year sales. Some residents even used their home insurance settlements to buy a car, Hanna says. “People gottheir home money and had additional revenue to commit to cars,” he adds. But the uptick in sales after Katrina did not altogether map to previous sales patterns. According to Urban Science, a Detroit-based researcher, the population decreases and the damages effected car dealerships in the metropolitan area more deeply than in outlying areas.
Before Katrina, dealers on the outskirts of New Orleans commanded 63 percent of retail new-car sales (compared to 37 percent for in-city dealers); post- Katrina, the outlying dealers were selling nine vehicles to every one sold in town, says Mitchell Phillips, global practice director for Urban Science. Understandably, post-hurricane car buyers showed a greater preference for trucks – to haul debris, building supplies, and help navigate muddy streets. According to Phillips, the demand for pick-up trucks doubled in the last months of 2005 and through 2006, compared to previous years.
WHAT GOES UP, MUS T COME DOWN
Inevitably, the auto boom that dominated for most of 2006 gave way to a downturn, which began in late 2006 or early 2007. According to Israel, that yearlong slump saw sales decrease 15 percent to 20 percent percent compared to historical averages. Aside from the diminished population in the area, dealers also had to accept that as a side effect of the post-Katrina boom, they had essentially “pre-sold” a number of consumers who might not have been ready to replace their vehicles until later on. “The [boom] took people out of the market for two or three years afterward,” Hanna says. Israel of LADA agrees: “The normal cycle of replacement got out of whack.”
Typically, it takes about five years for a region to return to normal after a major natural disaster, according to Phillips. In fact he and others note that the New Orleans market in early 2008 was already beginning to rebound — but that was before the next shoe fell. The New Orleans market, like the nation, was slammed by the one-two punch of record-high fuel prices in mid 2008 and the financial crisis of the domestic auto makers. Car sales throughout the state fell 13 percent by November 2008; but Israel adds that that was better than the nationwide market, where sales fell an average of 30 percent.
Indeed, Israel believes the state auto market was well on its way to recovery until “Washington [D.C.] starts talking about bankruptcy and beating up the domestic [auto makers]. With all this negative publicity, sales dropped 40 percent [in Louisiana] in November.” He believes the ongoing auto industry crisis will effect sales similarly in December. “At this point,” Israel says, “Katrina is not even relevant.”
At this point, it debatable whether there is still the Katrina factor. Industry insiders forecast that the most likely result in New Orleans, as in the rest of the country, will be greater consolidation and more streamlining as the market becomes more competitive. The National Auto Dealers Association announced that it expects 900 dealerships out of 19,700 nationwide would close last year.
General Motors has already cut 6,500 of its dealerships; another 1,800 dealershipswill face the same fate over the next several years.
“The Detroit Three are in decline,” Phillips says. “Consolidation is happening, but it’s not any different than the nationwide trend.”
