As America’s car dealers gather in N’orlins– an ironic enough venue given that some 80 percent of U.S. car loans are “under water”– the talk of the town is culling. Where once there were too many domestic car dealers, now there are too many car dealers full stop. Now you might think that a process of natural selection would have untied the Oldsmobile-shaped Gordian knot (i.e. 50 states’ worth of franchise laws say they can’t simply pull the plug and be done with it). Nope. In a story that somehow got culled from The Wall Street Journal website, Sharon Terlep provides a reality check. “NADA in December predicted about 900 dealerships — including small numbers of foreign-based auto makers — would go out of business in 2008. But Detroit’s auto makers alone lost more than that, company executives said this weekend. About 300 Ford dealers closed last year, while 401 GM dealers and 287 Chrysler dealers went out of business. Consulting firm Grant Thornton estimates about 2,500 of the nation’s 25,000 new vehicle dealerships will close in 2009. However, 5,000 would need to close to have a healthy level for this year’s anticipated level of auto sales, the firm said this week.”
“Chrysler Vice President Jim Press said Chrysler doesn’t have a target for the number of dealers that should close, but that a ‘Darwinian’ process is occurring that will cull the number naturally. Of the 287 Chrysler dealers to go out of business last year, 92 left as part of Chrysler’s strategy to get its Chrysler, Dodge and Jeep brand dealers under the same roof. The remaining 195 left for economic and other reasons.
“Press said the auto maker is being less aggressive for fear of losing market share. ‘We want to consolidate, but not at the risk of losing market share,’ he told reporters on Saturday.
“GM also is less active in its dealers’ affairs, in part because the cash-strapped auto maker doesn’t have resources help dealers close or merge, GM’s [marketing maven] LaNeve said. The auto maker has said it plans to cull 750 of 6,450 stores from its dealer network as part of a viability plan presented to the government as part of the loan request. The reduction is not a condition of the deal.
“‘It costs money to consolidate,’ Mr. LaNeve said. ‘And we’ve slowed down the activity while we figure out our brand and nameplate situation.'”
[The WSJ has pulled this story from their website and redirected the link to another piece. We’ve found another source for the story, and asked the Journal to explain.]
It’s really quite simple. iF you are a dealer in line to lose everything but your property (which in the current real estate climate is not worth much), you have one chance left. Your State’s laws protect you from termination in most cases. Maybe you have a chance of some of the bailout money from the Govt. on your way out. If you can tie up your franchise in State courts while lobbying for dealer compensation, you have a chance at your place at the government’s table. It is easy to see you have no other recourse but to take the full loss yourself. This is un-American in the present financial climate. Profit is privatized, losses are shared.
Why would an automaker want a dealership to go out of business? It seems to me you would want to have the most people you can trying to sell your product. If a dealership is operating at a loss, it it their choice. Eventually they will go away, if that is the goal. What am I missing here?
npbheights,
I’ve asked the same question before. If you’re GM, and these extra dealerships aren’t costing you a penny, then why not allow them to exist? You’re better off having more dealers out there, if for nothing else than customer accessibility.
It’s not like the automakers stand to lose money if the dealerships are not profitable.
It is better to have a smaller number of healthy dealers that work closely with manufacturers to represent their products in a positive manner than a large number of unprofitable dealers who don’t update their stores or participate in manufacturer initiatives to support the brand. There is also some cost at the manufacturer level for field reps, audits, administrative support etc.
As Boston points out, dealers cost manufacturers money.
Too many dealers also cost the dealers money (too much competition for the same customer). This leads to a lowered msrp, which leads to cost cutting, which leads to lousy looking, cut-throat dealers, which leads to lousy dealerships, which destroys the brand.
For GM, the surfeit of dealers lock them into brands they can’t support with product, marketing or, well, anything. At the same time, GM can’t afford to kill Saab, HUMMER, Saturn, Buick or Pontiac because of the dealer blowback (a la Oldsmobile). And NONE of them are profitable.
They are a constant drain on GM’s now-meager, taxpayer provided resources that lead to crap products and stupid ass marketing.
There is only one solution: bankruptcy. In C11 GM and Chrysler can simply say asta la vista to any dealer it chooses.
The Auto industry can learn a lot from the Cellular Phone industry.
Years ago, people used to buy cell phones from a local mom and pop shop. I remember selling and installing cellphones that cost $1000 and ran you $5 a minute to use.
Cell companies also used to pay a residual to the contract originator of the customer’s monthly bill. We had $30,000 a month coming in from customer residuals.
Once the cell companies got big enough, they got greedy – they did not want to continue paying mom and pop shops to get and retain customers. It cost too much.
So the cell companies ended the residual program, and started opening company owned stores. These stores, staffed by kids, cost very little to operate and the phone company kept all of the customer’s bill.
Eventually most mom and pop cell phone shops went out of business – or started selling other things.
GM could do the same. Start selling cars direct to the public, undercut the dealers, and eventually force them out of business.
I’m not saying this is the right thing to do, or that it will save GM, but it would eliminate a bunch of dealers fairly quickly.
-ted
I wonder if many state laws would allow the following:
Saturn, SAAB and HUMMER dealers could be given exclusive rights do do warranty work and repair work on their former brands as well as exclusive rights to sale of parts for their respective brands.
These 3 could also be given all refurbishment work on GM vehicles destined for the Certified Used program and could have exclusive rights to Certified Used vehicles of any of the 3 discontinued brands.
If Pontiac goes, too, any dealers not already selling Buick and/or GMC (are there any left?) could get the same deal as the other 3 brands’dealers.
@zerofoo: in most states, dealer franchise laws prohibit direct sales from auto manufacturers.
@akatsuki: (2 posts down) the dealers have quite the pull with state governments, so not possible. All politics is local, right?
Bad dealers do cost GM a lot of money. A LOT of money, in the form of customers who got screwed by a dealer. Letting starvation thin the herd will probably get more bad dealers than good.
Also, an overabundance of, say, Chevy dealers, makes them compete not just against everyone else, but against other Chevy dealers for sales.
Also, the various brand dealers all want a full lineup of cars for the brands they sell; see all the badge engineering that resulted.
Maybe it would just be better if we got rid of all those state laws protecting dealers? Seriously why the hell should they get so much more protection than anyone else?
Here’s an idea:
Allow all GM dealers to sell all products. If you are a factory trained Pontiac Tech, I’m sure you only need one or two quick courses for Caddy.
No B-not0-P or Chevy/Caddy, forget the “tier” concept. All GM products at all dealers.
Then, slowly cut out the “duplicate” models and make each car as a “one off” version.
I don’t see much, if any, difference between the Caddy showrooms and Chevy showrooms in my area.
@ akatsuki
At the first sitting of the federal auto bailout banquet, there was talk of creating a federal exemption on franchise laws for The Big 2.8. But man, what a stink that would have caused; car dealers are an extremely potent political force.
Anyway, why bother? Pull the trigger on Chapter 11 and this all goes away. Poof! Just like that.
Given the proven eagerness of GM to gouge suppliers, dealers and everyone else in sight to the extent possible, I wonder if dealers really cost GM anything.
Sure GM has some people tied up supporting dealers, but this doesn’t mean they’re losing money in the process. If dealers cost GM money, how do we explain GM’s eagerness to sell so many franchises close to one another?
I know a formerly PG dealer who just got a Buick franchise with an excellent PBG dealer 10 miles away. And the newly franchised Buick dealer has a facility and service reputation that pales in comparison to the established PBG dealer. The only thing that makes sense to me is GM’s getting another franchise fee.
In urban areas, a dealer disappearing might not mean much, but in rural areas, it will. Lots of rural dealers have been in business for years and it’s not unusual for the customers to know dealer personnel, and even the dealer himself, on a personal basis. Customers feel some security in this. And I include towns above 50k in population in this group.
What looks like brand loyalty is in many cases dealer loyalty. If the dealer goes away, so will a good hunk of business. If a GM/Ford customer now has to drive 40 miles to a bigger city to a dealer who may well be just one of many side-by-side on a ‘dealer mile’ situation, They’ll be far more likely to give a Toyota a shot than when they knew the dealer down the road 5 miles.
Its too bad that C11 is not an option.
Right now seems like a great time to be re-organizing since everyone is in the crapper anyway. Then when (if?) things rebound your restructuring is complete and you’re in a much better position to profit on the upside.
There is the problem of DIP financing but hey if we’re willing to stump for bailout bucks now anyway. Of course at this point you’d risk the taxpayers having to take a haircut on the money already loaned which would be hugely unpopular.
jerry weber said:
Profit is privatized, losses are shared.
The best summary of the current so called crisis.
The horrible mistake was bailing out GMAC and Chrysler’s lending division.
If those dealer lending companies were allowed to fail then the dealer counts could have been quickly corrected, and at no cost to GM or Chrysler.
Why would an automaker want a dealership to go out of business? It seems to me you would want to have the most people you can trying to sell your product. If a dealership is operating at a loss, it it their choice. Eventually they will go away, if that is the goal. What am I missing here?
Not being in “the biz” I can’t say for sure but off the top of my head, given that the dealer is the “face” of the manufacturer to the customer, unprofitable dealers have a strong incentive to cut corners in every way possible, like by trying to nickel-and-dime customers on every sale (remember the “undercoating” scene in the movie “Fargo?”), denying warranty claims so they can be turned into more profitable out-of-warranty repair claims, lowballing trade in values and then inflating used prices, etc.
Also, just the fact that dealers have to constantly cut, cut, cut in order to sell damages the ‘brand identity’ – how would you like to buy the car that is sold as “Almost as good as a Honda/Toyota but a lot cheaper?”
So while in the abstract, a manufacturer could care less about dealer’s non profitability, in the real world there’s a lot of ‘collateral damage’ that a failing dealer can do to the customer’s image of the product that the manufacturer makes.
Auto dealer insiders: Am I on the right track here? This was a WAG on my part but it makes sense to me.
I have an idea for GM:
Obama’s “Cadillac” limo, not based on any particular model gave me an idea:
GM, since they want to be a “make” and not just a parent company as evidenced by their tacking a GM logo on everything maybe they should take their 8 best cars and make each one represent the whole division:
ie: Malibu is the only Chevrolet and it just called GM Chevrolet.
GM Pontiac (I would say G8, but thats kind of a flop.. make it work)
GM Buick (Enclave)
GM Saturn (Sky)
GM GMC (truck line)
GM Hummer (maybe dump that anyway)
GM Cadillac (CTS look… maybe AWD as to differ from Pontiac)
GM Saab (premium small car, make the new Cruze a “Saab”)
GM Corvette
So that would give you a midsize FWD family car (Chevy), a premium RWD sports sedan (Pontiac) A Crossover (Buick), a cool roadster (Saturn) A flagship (Cadillac) Truck Based Pickup and SUV (GMC) and Saab (Premium Small Car), and Sports Car (Corvette-barely a “Chevy” anyway)
The GM Volt could be the 9th car.
Talk about focused Brands… only 1 car per brand…Make every GM dealer a full line GM dealer. Old and busted dealers that cant afford a redesign to bring the showroom up to a modern standard go away, and the franchise problem goes away because all of the old makes are still around. I don’t run a car company, so I don’t have all of the answers, but its another idea .
The small unprofitable dealers don’t treat the customer right, whereas the big high profit ones – like say Bill Heard, are building good will for GM.
“Why would an automaker want a dealership to go out of business? It seems to me you would want to have the most people you can trying to sell your product. If a dealership is operating at a loss, it it their choice. Eventually they will go away, if that is the goal. What am I missing here?”
It costs GM a ton to support all those dealers in sales, parts, and service. Meanwhile, dealer co-marketing budgets are multiplied and diluted at the same time. The surplus of dealers is a bigger problem for GM than the supposed UAW/labor cost issue. By far.
These are highly fluid numbers, but I believe Toyota has around 1700 dealers while GM has ~6600 at last report. With roughly equivalent sales volume… or at least headed that way.
This whole issue mirrors GM’s other problem, too many divisions. It costs a lot of $$$ to design, develop, and produce all those brands and products. And time: it took GM from Cobo ’06 to Q1 2009 to bring the Camaro online. That’s just too long.
And even if the vehicles are identical except for the grilles and hubcaps (Chev vs. GMC trucks for example) you still need two separate and parallel marketing programs to sell the things. Again, multiplying costs and diluting their impact at the same time. GM has eight brands in North America. Toyota has three.
They will not be missed
zerofoo,
As mentioned, some states prohibit direct sales. And in other states, the private dealers greatly resent having to compete against a company owned store.
For example, I’m from Santa Barbara, CA. There is a local dealer who owns the Mercedes-Benz franchise, and they suck big time. The next closest Mercedes dealer used be 45 minutes south in Ventura. They were great. After them, the next dealer was 1.25 hours south in Thousand Oaks, a private dealer.
Mercedes was forced to close the Ventura store because of pressure from the Santa Barbara and Thousand Oaks private dealers. They hated the fact that customers like me would rather deal directly with the company store in Ventura than deal with our local bozos.
So in the end, Mercedes lost and the customers get screwed. The only winner was a local mechanic who knew his stuff and got all my business.
akatsuki :
“Maybe it would just be better if we got rid of all those state laws protecting dealers? Seriously why the hell should they get so much more protection than anyone else?”
Fat chance. In most areas they have their local political machines and state legislatures tied up. Who is BMOC at the local country club? The Rotary? The CofC? Dealer principals are more plugged in and hooked up than the UAW will ever be. That’s where these franchise laws came from. Many of these laws apply only to new vehicle dealers. If you operate an appliance or hardware franchise, TS.
It is a curious thing to me that the current pissyness is focused on the auto makers and the auto workers. If the average consumer has an axe to grind it is probably with the dealer.
highrpm:
The short answer is that dealers DO cost money directly or indirectly. More dealers means your local add money is spread thin, hard to get cars get hoarded (and over-priced) and sales on ordinary vehicles happen at cut-throat prices. The last doesn’t bother the maker much, the first two do.
Adding dealers doesn’t add comparable sales (twice the dealers doesn’t equal twice the sales). Dealers with low volumes will often have more than one line under one roof (do you want your Chevys being sold next to Kias?) They also may milk the system for the “hot” (mark-upable) car of the moment.
I doubt GM is trying very hard to kill the mom-and-pop small-town dealers. Those aren’t really part of the problem (unless they’ve honked off half the county).
magoo and dederer have it right. Look the Gm and other Detroit builders were predicated on doing most of the car sales in the country. Fifty years ago, GM was worth nearly 50% Ford 25% and chrysler 15%. The 10% was for the exotic foreign brands as the independent domestics were just about gone save AMC. So, if you have half the market share, you can’t have all of those dealers and brands, you are choking on your own bloated infrastructure. With Toyota and Honda both having stores averaging over 100 new per month, the efficiencies of these dealerships and supplying them becomes apparent. Two major brands for both GM & Ford with one forth of the dealerships would be about right to make money for the dealers and the factory. How to get there is the problem.
I sure would like to see data on how many of the 2.8’s “excess” dealers are in modestly populated areas.
Excess dealers in metro areas may be a real problem, but in many small to mid-sized towns in this nation there is often one each of the Detroit brands. Shut one of those three down and the local business will simply go to the other two. Close the Dodge dealer and the beneficiary is going to be Chevy and Ford … not the next nearest Dodge dealer.
@ John Horner
Shut one of those three down and the local business will simply go to the other two. Close the Dodge dealer and the beneficiary is going to be Chevy and Ford … not the next nearest Dodge dealer.
How do people get their non-Bigish3 product in those small towns? When I was in Wyoming, I saw plenty of Toyota’s but I can’t recall seeing a Toyota dealership. I did see Bigish3 dealers of course.
How small are you meaning? If a Chrysler dealer isn’t viable would a GM/Ford dealer be in much better shape?