The WRC hasn't declined constantly since the end of Group B. From the late 90s until around 2004, the series was hugely popular. The years of Subaru v. Mitsubishi v. Ford v. Peugeot v. Citroen. This period will be fondly remembered for years.The big-time feel of the factory teams did it, IMO (along with video-game-fueled fascination with Lancers and Imprezas).
It's possible to overcome fans' negative perceptions stemming from performance reduction. It seems to require factory participation and the accompanying hype and promotion. The ALMS was able to inject some life back into US sports car racing with international flavor and factory efforts such as BMW, Audi, Viper, and Corvette. The 2007 and 2008 seasons were the best seasons for the sport since the GTP era using prototypes with roughly half the horsepower of those from the 80s (although they cornered like motherfuckers). People wore the shirts, painted their backs, wore appropriately colored wigs, and cheered on their favorite brand or team.
Once again, I think we'll see the truth if/when the big 4 come back to AMA road racing.
I know, I started watching towards the end of the Makinen era, and I gave it up during the Loeb era (same as everyone else). WRC car was still very popular when it was introduced in 1997; however, the series has been in steep decline for 6-7 years now, and most people attribute the decline to the WRC car which has not maintained manufacturer interest.
You're right that manufacturers smooth over all problems, but the manufacturers are just marketing. They affect the amount of money in the series, the number of factory cars, and the amount the TV companies are willing to pay. They don't represent high technology. If 10 manufacturers participated in a Super1600 series it's still going to be much less sophisticated than LMP1. The substance of the rulebook is frequently overlooked for marketing intangibles, imo.
You could put a 500cc GP engine in the back of a Superkart and it would break all track records for cars less F1. How much would it cost? $30,000?