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Aaron Jacoby, Chair of Venable's Automotive practice, was quoted in a August 2009 article in Los Angeles Magazine on the future of the automotive industry.

While the recession has been tough on the car industry, a growing gap between mega dealerships and small shops is also reshaping the business. Small family-run operations that sell only a few hundred cars a year are struggling. These mom-and-pop shops seldom generate enough revenue to make them viable in a market like Los Angeles, where the cost of doing business is so high. Only a dozen or so companies control much of Southern California's sprawling car market and mega-dealerships with fewer but larger locations are part of a tried-and-true retail strategy.

According to the article, the industry has been going through its own weeding-out process since before the recession. When Chrysler announced the names of the 789 dealers that would be dropped as franchises, only four were in Los Angeles County, which is less than 1 percent of the total number of new-car dealerships.

"L.A. is a more sophisticated, more whittled-down market than other places," said Jacoby. "The dealers are scrambling to see which ones will be able to survive."

Car dealerships are like financial centers, where huge amounts of money get moved from one bucket to another. The dealer's most substantial investment centers on a practice called "flooring," which is when millions of dollars are borrowed from an automaker's financial arm to pay for an inventory of new cars. Once a vehicle is sold, the dealer gets money from the customer, which is used to repay the automaker. The sooner that repayment is made, the better, though the dealer usually is allowed a float of at least several days. If he is struggling to make payments on other obligations, like payroll or rent, having several hundred thousand dollars at the ready can be a lifeline.

The problem is that despite a lengthy float, the dealer must still find a way to pay back the loan. "In a rising market, guys who ran their business like that could be saved by having a big weekend where they sell 50 cars," says Jacoby. "They have enough money to pay for last week's money." If they sell only 25 cars, "they're in trouble."

The fallout of troubled dealerships also has a larger economic impact - if people don't buy cars, local governments suffer a sharp drop in sales tax revenues. The closing of a dealership leads to, among other things, a budget deficit (along with a subsequent reduction in government services) and vacant land that cannot be easily used for anything else. All this skews heavily in favor of the mega chains that aren't as dependent on short-term sales.

But, according to the article, even large dealerships will have to narrow their expectations. "The entire industry, both manufacturers and dealers, have to get used to a reduced number of sales," said Jacoby. "They will have to direct the economy of their operations to that number."