LONDON, Ky. -- Neither Johnny Watkins nor Elmer Gambrel had much growing up in southeastern Kentucky. Mr. Watkins's farm home had no indoor plumbing and he plowed the fields without a tractor. Mr. Gambrel, also a farm boy, joined the Navy after school and worked at a gas station.

But both had a knack for selling cars, and both eventually built thriving dealerships, bringing them wealth their parents never knew. With the profits, Mr. Watkins bought a Florida beach condo and Mr. Gambrel a plane.

That's where their business careers diverged. Today, Mr. Watkins's two dealerships, selling vehicles from General Motors Corp. gm -0.20% General Motors Co. U.S.: NYSE $34.84 -0.07 -0.20% Jan. 2, 2015 4:00 pm Volume (Delayed 15m) : 9.63M AFTER HOURS $34.88 +0.04 +0.11% Jan. 2, 2015 7:59 pm Volume (Delayed 15m) : 127,610 P/E Ratio 11.79 Market Cap $55.98 Billion Dividend Yield 3.44% Rev. per Employee $715,968 01/02/15 Crystal Ball 01/02/15 Crystal Ball: Send Us Your Pre... 01/01/15 GM Issues Three More Recalls t... More quote details and news » and Chrysler LLC, are closed, his condo is gone and his house, now owned by a bank, has yellow-and-red "For Sale" signs out front. But the Toyota dealership that was started by Mr. Gambrel, who died in 1991, continues to provide a good living for his four children.

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Tyler Bissmeyer for The Wall Street Journal

A Tale of Two Dealerships

See photos from London, Ky.

For decades, selling cars from Detroit paved a path to wealth for businesspeople in cities and towns all across the country. Even if the auto makers were hurting, the dealers typically did all right because sales incentives financed by the makers supported sales. But the American auto industry has never before faced the kind of forces now slowing sales to a crawl. They include tight credit, rising unemployment, home foreclosures and a widespread public mood of hunkering down and spending less.

GM dealers got some relief this week. Lender GMAC received billions of dollars in federal bailout money and offered GM more flexibility in how it structures loans for car buyers. GM and its dealers immediately began offering no-interest loans to try to kick-start stalled sales. (See related article on GMAC.)

Even some dealers who had been among the most successful were battered in 2008. Bill Heard Enterprises Inc., with 14 Chevrolet dealerships in seven states, filed for bankruptcy protection in August. Minnesota dealer Denny Hecker closed six of his 16 outlets and sold three.

One problem for the domestic-brand dealers is that there are so many of them. At the start of 2008, according to the National Automotive Dealers Association, the U.S. had 20,700 new-vehicle dealers, of which about two-thirds sold domestic makes. But those brands accounted for only about half of sales.

GM alone has 6,426 dealers, the company says. Toyota, with U.S. sales equaling about 85% of GM's, has just 1,461 dealers.

In seeking federal aid, the Detroit companies promised to close or combine thousands of dealerships. Although the recently approved loans for GM and Chrysler don't require this, the recession has been lowering the numbers anyway. The dealer association estimates that 900 auto dealers in the U.S. closed in 2008 -- 86% of them sellers of domestic makes. It expects about 1,100 more dealerships to close in 2009.

Dealer Distress

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The recession hasn't spared foreign auto makers. Toyota Motor Corp.'s tm +0.15% Toyota Motor Corp. ADS U.S.: NYSE $125.67 +0.19 +0.15% Jan. 2, 2015 4:03 pm Volume (Delayed 15m) : 248,569 AFTER HOURS $125.55 -0.12 -0.10% Jan. 2, 2015 4:12 pm Volume (Delayed 15m) : 1,400 P/E Ratio 10.49 Market Cap $214.91 Billion Dividend Yield N/A Rev. per Employee $749,605 12/03/14 Tesla May Run Slow on Cheap Ga... More quote details and news » U.S. sales in the first 11 months of 2008 were down 13% from the prior year. Honda Motor Co. hmc +0.24% Honda Motor Co. Ltd. ADS U.S.: NYSE $29.59 +0.07 +0.24% Jan. 2, 2015 4:01 pm Volume (Delayed 15m) : 1.15M AFTER HOURS $29.59 -0.00 -0.00% Jan. 2, 2015 4:12 pm Volume (Delayed 15m) : 2,200 P/E Ratio 8.84 Market Cap $53.14 Billion Dividend Yield 2.65% Rev. per Employee $593,976 12/02/14 GM, Chrysler, Honda Sales Rise... More quote details and news » 's were down 5.4% and Nissan Motor Co. 7201.to -0.56% Nissan Motor Co. Ltd. Japan: Tokyo ¥1,057 -6 -0.56% Dec. 30, 2014 3:00 pm Volume (Delayed 20m) : 6.88M P/E Ratio 10.16 Market Cap ¥4,778.40 Billion Dividend Yield 3.12% Rev. per Employee ¥73,482,600 12/30/14 Hyundai Plans Auto Production ... 12/22/14 The Future of Cars Looks Very ... 12/21/14 Corporate Watch: News Digest More quote details and news » 's were off 9.1%. But all three companies have held up better than Detroit, and so have their dealers.

Selling American cars was still lucrative when Mr. Watkins was coming of age in rural Kentucky. Growing up in the 1960s on a tobacco and cattle farm, with a house heated by coal, Mr. Watkins used a mule to plow the fields. By age 13, he was working six days a week in a grocery store after school. He went off to Eastern Kentucky University and came home one day to find the farmhouse had an improvement: a flush toilet.

After college in 1973, he took a job at a Chevrolet dealership, expecting to stay only until he could get into his chosen field of accounting. But when he sealed his first sale, of a Chevy Nova, he was hooked.

One afternoon two years later, a brunette who came in to have work done on her brother's Monte Carlo caught his eye. In 1977, he bought a share of the dealership and that brunette became Mrs. Watkins.

Mr. Watkins says he often worked 12 hours a day, six days a week. With the money he made, he bought a farmhouse on 18 acres. In 1997, he made a big leap: He acquired a Chrysler dealership, in an area of London full of car lots festooned with silvery streamers. And in another part of town, he bought a Buick-Pontiac-GMC dealership.

Twenty miles away in Corbin, Ky., Elmer Gambrel moved up from his gas-station job to owning a wrecking yard. In 1967, he started offering a few new cars there, too: Corollas and Land Cruisers. Two other London businessmen did the same, one of them the owner of a fruit stand. But when the Japanese manufacturer of the cars insisted that sellers buy a sign identifying themselves as Toyota dealers, the other sellers declined. Mr. Gambrel bought a sign and became the local Toyota dealer.

He was up against strong buy-American sentiment in rural Kentucky. In 1979, when Chrysler was in financial straits, people picketed his business with signs saying "Don't Buy Japanese." Betty Brimm, a saleswoman, was sometimes afraid to go out on the lot. "People would curse at me," she says, or remind her who bombed Pearl Harbor.

When Mr. Gambrel sought to purchase a Chevy-Cadillac-Oldsmobile dealership, GM wouldn't allow him to as long as he controlled a Toyota business. He sold 51% of the Toyota dealership to his son Larry.

Then his Toyota business caught a break. The Japanese company broke ground in 1986 on an assembly plant 90 miles away, in Georgetown, Ky. "That made all the difference in the world," says Ms. Brimm. "When Toyota came to Kentucky, it was OK then."

Parts suppliers for Toyota soon opened up in Kentucky. One, Aisin Seiko Co., built a plant in London in 1996, to make aluminum engine heads. It donated money to the high-school rodeo club, the county fair and the local fire department, according to its Web site.

Today Toyota employs 8,400 people in Kentucky, including Ms. Brimm's son and a cousin of Larry Gambrel. Over the past decade, Toyota has added assembly and engine plants in Texas, Alabama and Indiana as well, each helping the Japanese brand to win over more American drivers.

Johnny Watkins

Mr. Watkins's Chrysler dealership also thrived in the 1990s, as drivers took to sport-utility vehicles such as Chrysler's Jeep Cherokee and later the Grand Cherokee. Mr. Watkins's eventually became the No. 2 Chrysler dealership in the state, he says.

He and his wife, Doris, enlarged their home, adding a big new kitchen and a TV room. They purchased his wife's family's 275-acre farm in 1990, and four years later what was to be their retirement home, a condo on the beach in Ponce Inlet, Fla. At that point, by his reckoning, he was worth about $3.5 million.

But Mr. Watkins's Buick-Pontiac-GMC dealership struggled, as GM brands steadily lost market share. GM began offering rebates and other sales incentives in 2001, as did Chrysler and Ford Motor Co. f -0.90% Ford Motor Co. U.S.: NYSE $15.36 -0.14 -0.90% Jan. 2, 2015 4:00 pm Volume (Delayed 15m) : 24.25M AFTER HOURS $15.40 +0.04 +0.26% Jan. 2, 2015 7:56 pm Volume (Delayed 15m) : 525,592 P/E Ratio 9.78 Market Cap $59.12 Billion Dividend Yield 3.26% Rev. per Employee $802,447 12/30/14 Detroit’s Road Through China N... 12/22/14 Oracle Agrees to Buy Datalogix... 12/22/14 Oracle Buys Ad-Analytics Firm ... More quote details and news » The incentives, with manufacturers bearing the cost, were a big help to dealers in the brands. But at the end of 2005, the manufacturers dialed back the incentives.

Their move affected Larry Gambrel, too, because alongside Toyotas, his family was selling Chevys and Cadillacs. Then in late 2005, someone offered to buy his GM dealership.

He was torn. Despite his success with Toyota, Mr. Gambrel had a weakness for Detroit's cars. He often drives a black 1985 Chevy Silverado -- his pet, he calls it -- with a mirrored front license plate that reads "Made in Detroit: How God Intended It."

But Mr. Gambrel saw ominous signs. He says GM seemed to be slow in making payments on parts and warranties. And there were too many GM dealerships in the area. "Red flags were flying," he says. "I hated to sell it, but at the same time I couldn't keep it."

Elmer Gambrel

Mr. Gambrel decided to cast his lot solely with Toyotas. Selling his Chevy and Cadillac franchises in January 2006, for $500,000, he moved the Toyota business into his main showroom and filled his lot with Camry sedans and Tundra and Tacoma pickups.

Long a stickler for costs, Mr. Gambrel began paring expenses still further. He cut back on maintenance, advertising and certain services. "Lately, it's gotten to where you look harder and harder" to find any savings, he says. "But a dime, a dollar, 10 dollars, 100 dollars, and yonder, it starts to mount up."

His thrift has paid off as sales of Toyotas, too, have tumbled amid the economic travails. Gambrel Toyota has around 125 new vehicles on its lot, which is about 50 more than Mr. Gambrel would like. Because the car business ties up so much capital, he says, a slowdown in sales can quickly wipe a dealer out. Adding to the problem, high inventories give buyers more bargaining power, squeezing down prices and profits.

Last month, Mr. Gambrel estimated his sales of new vehicles were off about 15% for the year, and said they had been worse in recent weeks. He says the dealership sold only 27 vehicles in November, and even fewer in December, versus a normal month of about 40 to 45. But so far Mr. Gambrel, who is 55 years old, hasn't had to lay off any of his 35 employees, who include his three siblings.

Mr. Watkins tried to curb costs, too, but not on advertising. Instead, the Chrysler and Buick-Pontiac-GMC dealer tried to keep up his sales by advertising in Lexington, a metro area of about 500,000 people 70 miles away, hoping to draw business to his showrooms.

The steady surge in gasoline prices, until recent months, turned buyers off big vehicles like the Dodge Ram and Chevy Silverado. High fuel prices were especially bad for Chrysler, whose lineup included only one small car and one hybrid. Mr. Watkins stowed unsold pickups in a parking lot and adjoining fields.

By about a year ago, Mr. Watkins's dealerships were each running around $40,000 a month in the red. He fretted about his employees, many of whom had been with him from the start.

But he had seen many sales downturns, and they always led to recoveries. Anticipating better times, Mr. Watkins kept pouring cash into his business.

Finally, late in 2007, Mr. Watkins started looking for a buyer for the dealerships. He almost had a deal about a year ago, but at the last minute it fell through. After that, he found little interest.

On June 30, fending off creditors, Mr. Watkins closed the doors of both dealerships. Going from department to department, he explained his decision to the 70 people who would lose their jobs. "I just told them I'd run it as long as I could. I did the best I could," he says.

His Florida condo and all the cash he had saved are gone, used up as he tried to outrun declining car sales and his own mounting debt load. "We went from having practically everything we wanted to having nothing," Mr. Watkins said on a recent afternoon as he sat in his brown recliner, his voice broken with asthma. "Today I have no home and no money. At 56 years of age, I have to start over."

He now lives off the pension his wife earned as a school administrator. The bank that foreclosed on their house is letting them live in it until it's sold. "What made me successful brought me down," Mr. Watkins muses. "My hard work brought me up, and the car business brought me down."

Write to Kate Linebaugh at kate.linebaugh@wsj.com