Multimillionaire car dealer Rick Damelian has been dethroned. Nobody’s calling him the ‘King of Taverners Hill’ (on Parramatta Road in Sydney) today. His dealership’s website still trumpets “Immediate Delivery” and “Just 1 Day Left!” but right now security guards are turning people away from his 10,000 square metres of prime car retail real estate worth an estimated $65 million. The receivers have moved in to begin their joyless work clawing back the debt – estimated at a whopping $80 million. It’s believed to be owing to the National Australia Bank, which recently declared the risk not to be worth the potential reward.
Above: The king is, not exactly dead, but at the very least dethroned
It’s very rare for car dealers to disappear into a financial black hole – it’s bad for the brand. Or in this case, brands. Mr Damelian’s company holds seven new car franchises – Honda, Suzuki, Renault, Citroen, Fiat, Alfa Romeo and Skoda – as well as a prestige division that earned him the reputation ‘dealer to the stars’, and a significant used-car operation.
All but the Skoda franchise have entered receivership. It’s believed Mr Damelian’s Skoda operation has briefly sidestepped the chop because a different financier is involved there. Don’t hold your breath for a happy outcome there.
This exit, above, is one very few new car dealers take – partly thanks to rigorous screening by car companies before franchise contracts are executed
Importantly, it’s being reported that customers with signed contracts and deposits paid on new cars will take delivery of those cars. That’s a very palatable alternative to negotiating with the receivers as an unsecured creditor – especially considering the NAB would be holding its hand out, as well as being far ahead of you in the queue. Palpable relief all round for customers in that position.
Frankly that second option (negotiating with the receiver for three cents in the dollar – or whatever – worth of your deposit back) would be a disaster of epic proportions for the parent car companies involved. If that were to occur, millions of dollars in marketing budgets might as well be ripped to shreds in a highly publicised outcome heralding the term ‘rip off’ in tabloid promos everywhere.
Above: Sales of new cars are formally suspended at Damelian dealerships
Steve Sherman, one of the receivers appointed by Ferrier Hodgson (and the same bloke who handled the wind-up of the One.Tel disaster) said in a statement the receivers would be “engaging with the manufacturers to clarify … whether sales can be completed to customers who have paid deposits on vehicles”. Apparently, they can – a happy result for all parties concerned.
Above: Car industry consultation, behind closed doors, has saved the deposits of an unspecified number of customers who have signed contracts and are yet to take delivery
This ‘silver lining’ type outcome speaks volumes for those parent companies’ commitments to not leaving customers, with signed contracts for purchase and deposits paid, out in the cold.
High profile car dealers fall into a financial black hole about as often as a Grand Alignment of the planets. Mr Damelian’s empire once reportedly turned over $300 million annually and sold more than 100 cars per week. It was unassailable. The facilities were (and are) truly first-rate. The group even survived a multimillion-dollar loss eight years ago, thanks to an investment in car audio and mobile phone retailer Strathfield Group, which imploded.
Above: Liabilities outnumber assets on the Damelian balance sheet – by a considerable margin
Today, however, the Damelian Group’s assets – including the $65 million in prime freehold property – are dwarfed by its liabilities.
How could this happen?
The global financial crisis didn’t help. Transactions within the Damelian Group’s prestige division’s fell from 50 high flier’s cars a month to around 30 when the credit crunch bit. Fewer of Lara Bingle’s ilk were fronting up for their next Aston Martins, basically. At the same time as the world’s finances were well into the S-bend, the Australian car industry’s two biggest ‘floor plan’ financiers shut up shop and went back to the USA. Car dealers everywhere needed new batteries in their pacemakers
Above: Global financial crisis re-wrote the book on car dealership finance
(Dealers buy their stock – new cars and parts – on credit, known in the game as the ‘floor plan’. When a dealer takes delivery of a car the car company is paid using this line of credit, which explains why dealers are highly motivated to sell you any car they have in stock right now – to minimise interest charges. That’s why “Is it in stock now?” is a key question for you to ask in any new-car negotiation. If the answer is ‘yes’ you can always bargain harder for a discount. Unethical dealers – and we’re not for a moment pointing the finger at any particular dealer or group – have also been known occasionally to put unauthorised items on the floor plan – like home renovations, overseas jaunts, etc. This came to light in the aftermath of the departure of the two prominent US finance companies, which must have made for some embarrassingly pregnant pauses in refinancing negotiations.)
When the traditional floor plan financiers moved out, the NAB moved in for Mr Damelian, advancing a $40 million capital loan and almost $40 million more for the floor plan. Banks get very nervous when they hand you a big credit card with an $80 million limit. In fact, they watch you like a hawk. They’d been placing Mr Damelian’s operation under intense scrutiny for months, apparently.
Above: The profound decline of Honda in Australia added to financial pressure at Damelian Automobile
The troubles at Honda – Damelian’s high-volume bread and butter brand –probably sealed the group’s demise. You can read more on Honda’s problems here, but suffice to say that Honda’s sales have atrophied from around 60,500 in 2007 to around 40,400 last year. Its market share has been slashed from 5.8 per cent then to just 3.3 per cent today. In a sense, Mr Damelian’s Honda operation out-grew Honda’s ability to supply the products Australian car buyers want.
As for the other Damelian franchises, Suzuki attracts just 2.5 per cent of new vehicle buyers. The rest combined – Renault, Citroen, Alfa Romeo, Fiat and Skoda – attract just 0.8 per cent of buyers. Well over 90 per cent of those in the market for a new car, who might pass Damelian’s array of high-quality showrooms, just aren’t buying what he was selling.
Above: New floor plan financier, NAB, is no longer prepared to extend its $80 million credit to the Damelian dealership group
Falling consumer confidence across the board generally has doubtless put the group under pressure equivalent to that final straw on the camel’s back. Then yesterday the NAB moved in, and the rest will in all probability be like watching a crash test in slow motion.
A last-ditch attempt to rescue the Damelian operation failed two weeks ago when the high-profile real estate housing Damelian’s Honda, Renault and Saab dealerships was passed in at auction. Reports there suggest the auction failed to attract a single bid.
Above: Are other dealerships struggling with falling consumer confidence, oversupply and financial pressures generally?
This is a big issue for the car industry. How many other high-profile dealers with megabucks tied up in retail real estate are on the same cusp of foreclosure? With some pundits predicting a second financial crisis is imminent, perhaps we are all about to find out.
Me? I wouldn’t be putting down an almighty deposit on a new car any time soon.