Toyota Dealers Face $2.5 Billion Monthly Loss

One part of the calculus involved in the cost of Toyota’s (TM) recall of 8 million cars is what it will do to the profits of its more than 1,200 US dealers. BusinessWeek estimates that the aggregate loss among these business will be as high as $2.5 billion a month. That includes lost sales of both new and used cars.

If the recalls and shut-down of production of some of Toyota’s most popular cars continues for several months, there is a very real chance that some of the companies dealers may not make it.

While the weak US car companies such as GM and Chrysler have closed hundreds of dealerships and are embroiled in legal battles with some of those companies over their rights to continue to sell the manufacturers’ cars, Toyota has kept its network largely intact. That decision has been easily justified by the firm’s increasing market share in the US, which now stands at 18%. Any sharp drop in that share would substantially undermine dealer profits.

As is true with all large dealer networks, some locations are much more profitable than others. The weakest dealers may make little or no money, particularly because of the downturn in US cars sales in 2008 and 2009. Dealers who are barely hanging on in the hope that the market will recover this year may not survive if the most popular products that they offer are unavailable and their safety records are under a cloud.

Toyota will not have to close dealerships if its problems continue. Many locations will just lose large sums of money and go out of business on their own.

Douglas A. McIntyre