As part of GM CEO Fritz Henderson’s “Deeper, Faster, Oh, Baby” plan to implement GM’s previous plan—only more quickly and, uh, dramatically—the General wants to slice 1700 franchised dealers from their roster. Automotive News [AN, sub] reports that a combination of a bad economy and the American automaker’s piss poor management [reading between the lines, paraphrasing, stating the obvious] has shuttered 200 GM dealers so far this year. Only 1500 more to go; you know, in Fritz’s ideal world. Which raises the question: how are they going to do that? “GM officials have told dealers that they would identify underperforming locations and could move to terminate franchise agreements by June 1, a dealer who had received such a notice said on Wednesday.” As AN correctly points out, you can’t just pull the plug on a franchised car dealer without providing them with financial compensation, or stand ready to fight hundreds of lawsuits in all 50 states.
GM is counting on the spin-off or closure of its Saturn and Hummer brands — combined with dealership closures because of declining business conditions and tight credit — to deliver about half of its targeted cuts, according to the dealer.
For the remainder, GM is preparing to terminate franchise agreements without the kind of payouts that it made when it shut down its Oldsmobile division and closed some 2,800 dealerships. That process cost GM more than $1 billion.
I reckon either 1) GM’s rushing through these dealer terminations so the aggrieved store owners’ claims will go to the back of the queue when the automaker files for bankruptcy on June 1. (In other words, disappear.) Or 2) The Presidential Task Force on autos is preparing to create some legal wrinkle that allows GM to walk away from all its dealer obligations. Just. Like. That.
At the same time, federally-funded financier (lender cum bank) GMAC is still cutting a swath through dealers, calling in loans, hoovering-up unsold inventory and… what? This is going to get a lot more complicated before it gets even more complicated. Did I mention the unions? The money GM drew down from Canada? Time for another bailout roundup.
RE: Bailout roundup
Hence why I proposed a rolling total on an easily accessible page/chart/etc a while back. What I wonder now is, which metaphor is more appropriate? Snowball? Runaway train? Semi on a steep downhill grade with failed brakes? :)
That’s a lot of dealerships to close, and a lot of law suits to come. If GM shuts ’em down and the pulls the trigger on C11, that’s a lot of owners getting the shaft. Not that GMAC wouldn’t have eventually stuck them on floorplans anyway.
What about Chrysler, are they supposed to cut dealers, or is it strictly a Fiat (or other partner) or bust deal? I could just about tell you what Chrysler dealerships are going down in this area if they do have to close some, and no the answer isn’t “all of them”.
This is going to seriously hurt. To anyone who thought the economy was about to turn the corner, you’re about to get a wake up call. It’s about to get a lot worse.
No big loss for Hummer of South Portland. They’ve been selling new Subaru’s out of the Hummer dealership parking lot since late 2008. I think there’s one H2 on the lot at the moment along with some some other fine GM products like Cobalts, Uplanders and Chevy cargo vans.
The plan most definitely is to screw the dealers and let them languish in line when the C11 goes down. Sooner or later they will give up. No penalty for GM. The states can try all they want but Obama Motors will tell them to butt out. Having the Prez on the BoD makes suing them a non-starter. You’re about to see another reason why nationalization is not always good.
I’m showing my ignorance here, but could somebody please explain exactly how cutting the dealer roster will ultimately save GM money? I know I’ve read a thousand articles talking about how there are too many dealers, but I’m not able to make the proper connection to what that actually means for GM. Is it just a matter of too many mouths to feed and thus over-production of vehicles?
could somebody please explain exactly how cutting the dealer roster will ultimately save GM money?
The common media theory is that the dealers compete with each other, which causes them to lower prices.
Personally, I would largely reject that theory. The pricing problem of the domestics comes largely from the competition that they face from other automakers, more so than themselves. There is some degree of cannibalization, I’m sure, but most of the problem with a Cobalt’s pricing power is coming from the Civic and Corolla, not from other Cobalts.
I would suggest that the real problem is more of an inventory management issue. To keep a large number of dealers stocked with adequate inventory so that consumers have an adequate selection, GM has to build a lot more vehicles than they really need. The more dealers that you have, the more inventory that you need to have available so that all the dealers have what they need. The alternative is for each dealer to have too little inventory, which can cost them sales as customers who might want the car can’t find a specific color and options package that they want.
But inventories tie up cash and resources, which is particularly problematic during times like these. Also, the higher the inventories, the more tempting that it is to use incentives to reduce the inventories.
GM should learn from Honda, and reduce the number of options packages. The fewer options packages that there are, the less inventory can be carried, because the cars become more similar to each other. Production could be matched more closely to demand, and the money could be cycled back into the company that much faster. The dealers would also make more money, because their financing charges decrease if they can speed up the sales cycle, which increases their margins.
Sammy B : Personally I think you are onto something. It costs GM little to have a dealer remain open, maybe nothing. In fact, every dealer carries a certain amount of new vehicle and parts inventory. Pushing all that inventory onto the market is going to cause at least short and mid term financial losses to the manufacturer.
Another issue is where the dealers are. Every little town in America seems to have a GM and Ford dealership while few of them have dealers for the Japanese, Korean and European brands. Shut ’em down and GM is going to loose sales, especially if Ford is much more careful and selective about dealer consolidation than GM is. There are a lot of high profit car and truck sales into the more rural areas of the US, and getting out of those markets is going to be costly.
This isn’t going to end well. GM’s cost cutting moves never do end well.
Forbes Magazine: November 27, 1989
“As Roger Smith enters his last year as General Motors ( GM – news – people ) chairman, he maintains that the auto giant’s worst problems are behind it, that the new models beginning to emerge from GM’s design center will win back lost customers. This, combined with the cost-cutting measures Smith has taken over the past few years, could produce tremendous profit growth.”
How long have we been hearing that cost cutting and killer new models are going to save GM? Over 20 years now.
http://www.forbes.com/forbes/2009/0427/036-general-motors-forbes-flashbacks.html
What the hell is GMAC going to do with all of the cars they’re buying?
How long have we been hearing that cost cutting and killer new models are going to save GM? Over 20 years now.
It’s deja vu all over again.
Cutting dealers out of an outmoded distribution and sales model. Boo effing hoo.
It costs GM little to have a dealer remain open, maybe nothing.
On the contrary, excess inventories are quite expensive. They tie up a lot of cash, and that cash has to come from somewhere.
Every car built represents a pile of money spent that has to be recovered. If GM carries an average of twice as much inventory as Toyota, that means that all things being equal, GM has to float twice as much money to cover the costs of materials, parts, labor, storage and the rest. Meanwhile, GMAC needs to carry more debt, because their dealers require more time to repay their floorplan.
The car business is all about inventory turn. The faster that you can turn inventory, the more money that you make. If the domestics could borrow everything at 0%, it might not matter so much, but in this day and age, they can afford this even less than they could before.
Thanks for the input, guys. My personal theory has always been too many mouths to feed. GM has to keep production high(er) to keep all the dealers somewhat stocked (or face a revolt). The number of dealers also helps the UAW set minimum production requirements (ie, each dealer needs X Cobalts, so our minimum production = 50,000, therefore no fewer than Y jobs are needed at this plant). The UAW angle might be a bit of a stretch, though.
I hadn’t really thought about it from an inventory/working capital standpoint, but of course that’s big too.
Thanks again for the input!
1500 dealers by June 1 = 33 per day. Wow. Good luck with that.
It needs to be done, but it won’t sell more cars or reduce the existing inventory.
I heard a Ford ad the other day which stated they have 3500 dealers. That number ought to come down, too.
Closing dealers is one thing… what about all of that unsold inventory piling up somewhere? Does all that get shredded? Auctioned off?
Pch101: Personally, I would largely reject that theory. The pricing problem of the domestics comes largely from the competition that they face from other automakers, more so than themselves.
I think it depends on the city or region. Here in Harrisburg we had four Chevrolet dealers, all located within 20 minutes of each other. If someone was dead set on buying a Chevrolet, it was very easy to get price quotes from all four, and force them to compete against each other for the sale.
Here in Harrisburg we had four Chevrolet dealers, all located within 20 minutes of each other. If someone was dead set on buying a Chevrolet, it was very easy to get price quotes from all four, and force them to compete against each other for the sale.
I’m sure that’s true to a point. But I would contend that the gap between the GM and non-GM product is generally going to be substantially larger than the gap between individual dealers.
If there were fewer dealers in the market, the consumer isn’t going to pay substantially more for the car than he would otherwise. But at this point, there is no way that most GM vehicles can fetch as high of a price as the transplant dealer who is theoretically selling a competing product.
The GM product isn’t really competing, because it needs to be marked down and loaded with incentives to be sold. That price is so low that GM can’t make money selling it.
Pch101 :
April 16th, 2009 at 9:38 am
The common media theory is that the dealers compete with each other, which causes them to lower prices.
Personally, I would largely reject that theory. The pricing problem of the domestics comes largely from the competition that they face from other automakers, more so than themselves. There is some degree of cannibalization, I’m sure, but most of the problem with a Cobalt’s pricing power is coming from the Civic and Corolla, not from other Cobalts.
For once, I completely agree with Pch101.
The low resale value of a Cobalt is not due to prices wars between the dealers, but it’s due to Cobalt being an inferior product (which in turn is due to low productivity, but let’s not argue about productivity here).
I mean, if GM holds the GM-to-dealer price steady, why should GM care if dealers gets into prices wars? No dealer is going to sell below the acquire price, at least not for long.
If the cars just sit on lots and cannot be sold without a big discount, GM should:
1) re-examine it’s price structure
2) re-examine its products (and which is really its productivity).
For once, I completely agree with Pch101.
Great. Now I’m going to be forced to reconsider my position…
“On the contrary, excess inventories are quite expensive. They tie up a lot of cash, and that cash has to come from somewhere.”
Dealers pay for, or start paying interest on, vehicles as soon as they land on the lot. GM doesn’t have the carrying costs. In fact, GMAC was long the profit center of GM, and GMAC holds most of the floor-plan paper. Yes, this requires GMAC to borrow money on the financial markets, but they borrow it at lower rates than the dealers pay in floorplan costs. We are not talking about GM’s owned inventory here, we are talking about the retailers who carry GM’s products to market.
Closing x% of GM’s dealerships is not going to improve GM’s sales and it isn’t going to improve GM’s profitability.
How many manufacturers of any kind of product have increased market share and profitability by dramatically reducing the number of stores which sell their products? Name one, please!
Pch101: But I would contend that the gap between the GM and non-GM product is generally going to be substantially larger than the gap between individual dealers.
I agree with you that GM has more serious pricing problems, and that getting rid of dealers won’t necessarily solve them.
GM doesn’t have the carrying costs.
Of course they do. They don’t get steel, parts and storage space for free. They have to pay for it, or borrow to pay for it.
The car business ties up a lot of cash, given the cost of production. Tying up cash for twice as long as your competitors is a strategy for falling behind. This is one of the main attractions of Just In Time inventory — less money committed to supplies before they’re needed, and less storage space required to carry them.
GMAC was theoretically a profit center, but it was a matter of robbing Peter to pay Paul. The dealer pays the floorplan, but the dealers in turn demand more incentives for the slow sellers — which in their case is just about everything — to make up for the fact that their holdback isn’t adequate to cover their interest charges.
The holdback covers about 2-3 months worth of interest. A car that gathers dust on the lots for months becomes a real burden to the dealer. That burden gets passed back up to the manufacturer.
Closing x% of GM’s dealerships is not going to improve GM’s sales…
That’s probably true.
and it isn’t going to improve GM’s profitability.
It should reduce their overhead costs, which should cushion its losses. It wouldn’t save GM, but for a long-term comprehensive restructuring, it would be a necessary action to take, for both the companies and the dealers who have been selected for survival.
I think the role of dealership is not well defined.
Are they flippers, just as in house flippers? If so, they should pay GM upfront for every car in stock. Then GM shouldn’t worry about this whole thing.
If they are not flippers, then are they just a store front? In that case, GM should just have a no-haggle price policy. Not unlike Walmart.
If they are not flippers and not store fronts, are they the sales team? But GM don’t pay them salaries and cannot lay off them, so that’s not true here either.
The dealership is just trying to be many things at the same time, which doesn’t work.
If I were in charge of GM, I wouldn’t ask to close any of the dealerships. I would, instead, ask the dealers to pay for the stock upfront at invoice. Make dealerships car flippers.
That way, GM can get over the “overhead” issue and dealerships won’t get into price wars.
Eliminate 1,700 dealerships?
And here I was thinking they only needed to keep no more than 1,700 dealers.
I would, instead, ask the dealers to pay for the stock upfront at invoice.
Then there would be no GM dealerships at all, which I suppose would fix the problem.
The dealership model is built around full leverage and float. The dealer borrows the entire invoice, and makes a spread between that and the aggregate of the sales price, pack, trade-in, holdback and incentives.
The dealer makes money because his out of pocket costs for new car inventory is low, and because he uses the new car business to get trade ins at a steal and to drive a service department. Take away the leverage, and they may as well dump GM entirely and just sell used cars.
How in the Hell do they define ‘underperforming’?!?! I’d like to know, and I’d like to think GM will consider the plight of their rural dealers.
For example…rural dealers do not sell a lot of new vehicles; they tend to sell more used than new. Yet while they do not move a lot of vehicles, they frequently move a high percentage of new higher-margin light-duty trucks, vans and heavy-duty trucks. Rural dealers (about half of GM’s dealer network BTW) also make a lot of their margin on used vehicles much more than new ones and also because rural folk tend not to be habitual new-car buyers and not have a lot of service options, the rural dealers can make a decent margin in their service departments as well. Additionally, a lot of rural folk either make their own financing arrangements through their own bankers or pay cash. Cash transactions are very common at rural dealers, much much more than urban or suburban dealers.
So I have to ask ‘ what defines an underperforming dealer ?’ Because if the yardstick of performance is simply volume, GM will rue the day they try to shutter their most profitable dealer-the rural market where they actually still can make a decent margin.
In the small town where my parents live, the local GM dealer closed a few months ago because they had overextended themselves with new cars on the lot and could no longer afford their floor planning costs. Under ‘new management’ brought in by third-generation owners from the city to ‘stir things up’, the new management was so new-car volume focused that they overlooked the successful formula of used cars and service. So now the nearest GM dealer is 20+ miles away. As such, with no GM dealer around, people will simply gravitate to the other brands that have dealerships still in their town-they will probably not drive 20 miles to get their Chevy serviced. They will however be left with the options of Ford, Chrysler, Honda and Toyota resulting in even less sales for GM.
Pch101 :
April 16th, 2009 at 12:33 pm
Then there would be no GM dealerships at all, which I suppose would fix the problem.
The dealership model is built around full leverage and float. The dealer borrows the entire invoice, and makes a spread between that and the aggregate of the sales price, pack, trade-in, holdback and incentives.
———————————————-
Yes, but in that case GM didn’t force them to close. They did so voluntarily.
The dealership model you just described is very similar to the subprime home mortgage model. It just explode at the first sign of market softness.
No amount of bailouts or cuts can save GM, unless the subprime ponzi scheme is fixed.
All of the automakers operate or contract for delivery fleets to gets parts from their Distribution Centers to dealers. They are supplemented with outside Parcel and LTL carriers but it is mostly done in-house. With 4 times as many dealers you have to run 4 times the fleet. When operating commercial vehicles at $1.40-2.00/mile this adds up fast.
When a GM dealership closes its doors the parts are returned to the DC.
Sidoti is on the money about the differences between rural and (sub)urban dealerships. Unless you are a die hard loyalist you are not going to purchase an new Chevy pickup if you have to drive to the next county for parts and service.
Personally, I would largely reject that theory. The pricing problem of the domestics comes largely from the competition that they face from other automakers, more so than themselves. There is some degree of cannibalization, I’m sure, but most of the problem with a Cobalt’s pricing power is coming from the Civic and Corolla, not from other Cobalts.
I’d have to agree, but I’d just like to note that there are 6 Chevy dealers within 10 miles of me, along with 2 BPG and 1 BG dealer within the same distance. Of course there are 2 Saturn dealers within 10 miles as well. That gives me 11 dealers to buy from (Not even getting into Caddy/Hummer/Saab) and depending on model, several of them will be selling essentially the same car.
Even if I don’t play one off the other for the lowest price -and why wouldn’t I? – they are dividing a market area which is served by one Honda Dealer, One Toyota dealer, one Nissan Dealer, one Subaru dealer, 1 VW dealer…..etc.
Based on my travels, GM dealers from areas with declining populations (like the Northeast) are too densely packed.
Rural small town dealers are GM’s strength.
The problem (from the era of 40 percent market share) is rust belt cities. Those with 5 Chevy dealers within 20 minutes of each other need their ranks thinned. Especially those that seem to exist primarily to employ mullet-sporting relations of the owner.
And they DO compete with one another since many GM buyers won’t even consider import bands.
The guy that owns most of the dealerships in my county just moved his Pontiac-Buick-GMC franchise across the street, thus creating a “Chevrolet-Cadillac-Pontiac-Buick-GMC” dealer.
So that’s fun.
Reducing the number of dealers is NOT a cure-all for the Big 3, at least in the short term. Fewer dealers means fewer sales. Period. How does that help?
I see the threat as a sort of straw man, giving the Big 3 leverage with the labor unions. It supports the notion everyone is feeling more pain and it’s time UAW bend over again too.
It IS important the Big 3 dealers be profitable, and too many dealers hurt their competitiveness for people and facility improvements, but it’s a long-range challenge.
Frankly, if GM cuts Saab, Hummer, Saturn, Pontiac loose, then they’ve whacked the requisite # of dealers without having to close existing Chevrolet and Cadillac points (GMC and Buick may survive as well).
“GM doesn’t have the carrying costs.
Of course they do. They don’t get steel, parts and storage space for free. They have to pay for it, or borrow to pay for it.”
Those costs are largely on the dealership’s backs, not GMs.
How has the consolidation of Buick, Pontiac and GMC dealerships into a “single channel” helped the mother ship? Sales and profitability continue to plunge.
Reducing the number of dealers is NOT a cure-all for the Big 3, at least in the short term. Fewer dealers means fewer sales. Period. How does that help?
I don’t think it does -depending on how they go about it. Again, to use my own local as an example, one Chevy dealer could easily service the area now being served by 6. No reason the one dealer can’t make the same number of sales, to the same people, in the same area.
As PCH was pointing out, each of the 6 dealers doesn’t need to have 20 trucks on the lot, and a dozen Bu’s, and a dozen Impalas, and a dozen Cobalts, and so on, and so forth. One dealer can have that inventory (or perhaps just slightly more) and be able to meet the needs of most of the Chevy buyers in the area. GM wouldn’t have to produce as many cars , at once, the dealer would have a much higher sales to inventory ratio, and wouldn’t have to hang on to the vehicles as long.
The 6 Chevy dealers are competing with each other in the used car market as well, along with the independent used car dealers.
Rural dealers should survive because there is little competition, foreign or domestic.
Frankly, if GM cuts Saab, Hummer, Saturn, Pontiac loose, then they’ve whacked the requisite # of dealers without having to close existing Chevrolet and Cadillac points (GMC and Buick may survive as well).
Using my local once more, if Pontiac, Saab, Hummer and Saturn get the axe, there are still too many Chevy dealers in the area.
Rural dealers are GM’s strength, as former CEO Red Ink Rick told Congress last year. However, GMAC did not get that memo. My local GM dealer, in business for 35 years, had its floorplan credit cut off by GMAC five days before Christmas and closed for good. THis dealer was at one time the top GM fleet dealer in the US and had sold almost two million cars for GM. However, the dealer owner was required by GM to build a new facility (financed by GMAC)which opened in March 2007, just as the economy tanked. He was five days late on his mortgage payment to GMAC. (This dealer principal also operated a Toyota and a Dodge-Chrysler-Jeep dealer in this mini-auto mall – they were closed as GMAC floored the Chrysler and Toyota store also). The nearest GM dealer is now at least 30 miles away. I am angry that despite the bailouts, neither GM or GMAC offered any help to this successful dealer. As a result, my 25 year-long ownership of GM vehicles is coming to an end. GMAC is the one killing dealers for GM. GM doesn’t finance dealers, so closing down a dealer isn’t going to help them. Closing any dealer, especially rural ones, will cost GM loyal customers. We will now look at other makes, such as Toyota. BTW, they had no competition, only a weak Ford dealer across the street who lost his floorplan financing two years ago and only sold used cars (he has since shut his doors) My rural area now has no new car dealers of any brand for the first time in 60 years. That is not acceptable. The problem with GM, FOrd and Chrysler is that they don’t even know where these rural areas are because if they did they would lift a couple of fingers and spread some of the bailout moneys to help them.
Those costs are largely on the dealership’s backs, not GMs.
No, they aren’t, because that burden is quantified in a slower sales cycle, which ultimately gets translated into buyer and dealer incentives, all of which are paid by GM.
When GMAC was wholly owned by GM, the money collected by GM on the sale of its cars to the dealers was coming from loans provided by GMAC. So in effect, GM pays itself with its own money to buy its cars, and only receives fresh cash once the car is sold to the end user.
You need to look at the whole chain of events to put things into their proper perspective. Ironically, you’re reiterating the logic of the GM bean counters, who thought that this was a good deal, when it wasn’t. They tried to pretend that these sales issues were strictly problematic for the retailer, when they ultimately owned the problem and had to pay for it.
The current system works fine if the dealers can quickly and reliably turn inventory into cash. It eventually breaks down if the parent company forgets that the system is doomed to fail if the dealers can’t actually sell the cars. They can conceal the damage for a time, as they have, but the problem is lurking and eventually can’t be hidden anymore, which is what is happening as we speak.
Why the need to terminate the agreements in advance? If GM would go for Chapter 11, according to US Bankruptcy law they could terminate any agreement and the resulting loss claim would as well go to the end of the line of the creditors. Therefore, this urgency is surprising, unless GM would expect that government provides for a special “GM bankruptcy law” avoiding a real bankruptcy but allowing GM to get rid of already existing claims and debts.
amadorgmowner: you are willing to drive 30 miles for a Toyota, but not for GM? Or maybe your nearest Toyota dealer is only 20 miles?
Or are you just choked at GM for not coddling your local dealer?
As usual, PCH’s analysis is excellent.
The Presidential Task Force on autos is preparing to create some legal wrinkle that allows GM to walk away from all its dealer obligations.
Isn’t there this awkward thing called “The Law”?
Barney Frank might spit that as lawmakers they can make whatever law they want, but I would have thought your Constitution and previous Supreme Court judgement appears to protect current contract from retrospective laws. Any change Barney/PTFOA might suggest can only apply to new dealer contracts or debt seniority, not the existing ones.
What certainty is there for any business arrangement otherwise??? (Existing Ch7/11 codes not withstanding).
Any Constitutional lawyers here B&B??
I am totally convinced one GM exec does not know what the other is doing. They seem to make up the rules as they go along. That is not a plan that is flying by the seat of your pants. They just haven’t got a friggin’ clue what to do if the truth were known.
More dealers must equal more sales, but the problem is if they struggle to make a living, they may cheapen the brand through desperation to make a sale by discounting, or providing poor service, or not maintaining their properties.
How many dealers should there be?
Assume 2-car households, each car replaced every 4 years. That’s a new car every two years per household. If a dealer needs to sell 20 cars per month, that’s 240 cars per year, which will be required by 480 households. But there’s competition. Say your brand has a 20% market share. Then you need 480/0.2 = 2,400 households in your catchment area.
Realistic?
The Presidential Task Force on autos is preparing to create some legal wrinkle that allows GM to walk away from all its dealer obligations.
Isn’t there this awkward thing called “The Law”?
No need for that kind of magic. Note the date — they want to cut these dealerships by June 1. The same date now frequently predicted for the Chapter 11 filing. It’s real simple. 9:00 AM, file the Ch. 11. 9:01 AM, file the motion to reject (cancel) the dealership agreements. All those state law protections, so much fish wrap.
Martin B:
I don’t think the average two car household replaces their cars every 4 years. Perhaps once every eight years.
There are only two groups of people I know who turn over cars that fast or faster: businesses who lease their vehicles and people who treat their vehicles like fashion items (who tend to also lease their vehicles). The latter is becoming an endangered species.
The question I have is: Why haven’t natural market forces culled the dealership heard?
How is it that GM finds itself in the situation of having to terminate franchise contracts, or play hardball with financing, in order to save itself?
The market for GM’s products has shrunk. Therefore the weaker dealers should have died and allowed the stronger dealers to survive and thrive.
Why can’t a dealer who doesn’t like GM’s new floorplan terms shop for better terms somewhere else? Why hasn’t Wall Street created an investment fund of bonds for this purpose and compete with GMAC for a dealership’s credit needs? How is it that GMAC can screw with a dealer that bad?
That is what I don’t understand.
GM and their dealers strike me as two drowning men trying to stand on top of each other to save themselves. It isn’t going to work.
Why haven’t natural market forces culled the dealership herd?
They have been. In 1993, GM North America had about 11,000 dealers. At the end of 2008, they had 7,360. That’s a loss of about one-third of the network in fifteen years. Some of those were Olds dealerships, but among those, others have died off or have been consolidated.
How is it that GM finds itself in the situation of having to terminate franchise contracts, or play hardball with financing, in order to save itself?
Because they can’t afford to continue with their practices of channel stuffing, given their current lack of capital. Channel stuffing sucks up cash that they no longer have.
Why can’t a dealer who doesn’t like GM’s new floorplan terms shop for better terms somewhere else?
Like Chrysler, GM has used floorplan to move unwanted inventory and to conceal low demand for its products. Without a good floorplan deal that is effectively subsidized, a dealer trying to sell GM products without support is playing a loser’s game.
In most industries, retailers shy away from stocking inventory that nobody wants, but in car sales, dealers are forced to take the bad with the good. When abused like this, floorplan makes the medicine go down.
Why hasn’t Wall Street created an investment fund of bonds for this purpose and compete with GMAC for a dealership’s credit needs?
There’s nothing to compete for. Floorplan has been used by GM as a way of parking cars that they can’t really sell on other people’s parking lots, while claiming the transfer to the dealers as a “sale”, which pumps up corporate revenue and humors management and Wall Street.
The inventory numbers should have been a dead giveaway that the revenues being recognized at the corporate level are being inflated.
High inventory numbers indicate that too much product is being produced for the market. In most businesses, unwanted inventory sits in the producer’s warehouse, but in the car business, a lot of it ends up stacked up at dealers, even though nobody really wants it. What GM should have done was either build fewer cars, or (better yet) build cars that people actually wanted to buy so that they could keep the dealers busy selling vehicles at a profit.
A lot of these dealers are in it for the service department and the used car sales. If the floorplan isn’t worthwhile, then it would be worth it to many of them to close up shop or become used car lots with an active service department.
Thank you Pch101.
From your answers, it seems to me like the GM is effectively having to pay people to be their dealers. Sort of like being so unpopular that you have to pay someone to be your friend.
To me, the answer is pretty clear. Knock that s**t off. GMAC should not be allowed to subsidize credit by not being answerable to GM. This means that the relationship between GM and GMAC needs to be severed.
This is similar to the problems at the Wallstreet firms that results in things like Enron. In Wallstreet, one part of the firm pushed stock, and the other part floated the same stock, a clear conflict of interest.
GMAC should compete with other sources of capital for a dealerships floorplan credit needs. A dealer should be able to have a choice.
And the dealers that hate new GM products that they have to be paid to warehouse inventory, then they can close their new car divisions as they naturally should.
From your answers, it seems to me like the GM is effectively having to pay people to be their dealers.
Sort of. In GM’s case, that happens to be true.
To me, the answer is pretty clear. Knock that s**t off
That isn’t it. This is how every major automaker manages its business. The business model is not unique to GM, and it works fine for most of them.
GM has been particularly good at abusing what is otherwise a perfectly legitimate way of managing the dealership channel. The problem isn’t with the model, it’s with the company misusing it.
This is similar to the problems at the Wallstreet firms that results in things like Enron.
Not really. The whole thing is quite above board. Contrary to what someone else said above, this is not a Ponzi scheme by any stretch of the imagination. (We need a moratorium on “Ponzi”, too; the term has been abused quite a bit as of late.)
This system exists because auto inventory is expensive. If a dealership had to lay out the invoice price for every car on the lot, the resulting return on equity for the dealership’s owners would be horrible, and there would be no reason for virtually anyone to operate a dealership.
It also exists because of the use of credit at the wholesale level. In most industries, the producer would sell the inventory to the retailer on credit, and the retailer would endeavor to sell as much of the inventory as possible before the payments are due, in order to reduce their need to borrow money. But in the car business, the sale is recognized when the dealer takes delivery, so the dealer needs to borrow money just to get the inventory. That difference creates the need for floorplan.
Borrowing the full invoice cost allows this business to be profitable. As a customer, you wouldn’t be able to buy cars at such low spreads above invoice if this system did not exist.
Also, the average dealership does not have millions of dollars lying around to buy inventory. They need to borrow a lot of money, otherwise the lots would be quite empty.
GMAC should compete with other sources of capital for a dealerships floorplan credit needs.
Competition provides no benefit here. A private party lender would charge higher rates, which means lower profits to the dealer. So that isn’t the answer, either.
The solution is fairly straightforward: Produce vehicles that the dealers can sell without needing too many incentives to move them. If a dealer can sell inventory quickly, the holdback becomes a profit source and the dealership becomes more efficient because the faster it can turn inventory, the more deals it can churn to cover its other overhead.
Faster sales cycles reduce the need for incentives, which increases cash flow and net revenues to the manufacturer. As usual, it goes back to product and service, along with a bit of branding to help things along.