Well he would say that, wouldn’t he? For one thing, David Cole is a Big Three scion, the son of former GM president Ed Cole. For another, Cole’s “Center for Automotive Research” (CAR) is funded by unspecified automobile manufacturers (guess who) and equally secret “labor organizations” (guess who). You may remember CAR as the organization whose statistically corrupt pre-bailout report took center stage, what with its wildly exaggerated predictions of plague, pestilence and famine—if the feds didn’t throw money at the ailing American automakers. And now Automotive News [AN sub] reports that David is telling Uncle Sam that New GM’s decision to cut thousands of dealers doesn’t make sense. “These cuts didn’t make any sense to me,” Cole told a government toady, whose visit may or may not have been stimulated by a missive impossible to the Presidential Task Force on Automobiles. “By pulling out, GM and Chrysler are giving a beachhead to Ford and some of the imports.” Beachhead? Dude, they’ve been eating Detroit’s lunch for decades. Anyway, speaking of pulling out . . . “Cole said he has no research expertise or experience with dealers, but that his personal interest in the issue was piqued and that he has spoken with a number of dealers and GM executives.” Glad to see that the guardians of our tax money are kow-towing—sorry “consulting” with all the right people in their endless pursuit of political accommodation.
I loved C+C Music Factory.
Not sure what they have to do with car dealers…..
The whole thing reminds me of the dairy farmer who won the lottery. He said after collecting his millions that he was gonaa stck with his dairy farm until it was all ($) gone.
What a stupid argument. You might as well not cut any divisions either, after all eliminating Pontiac or Saturn just gives Toyota a beachhead, right? Just leave everything how it was! It was fine.
True enough cuts were very necessary, however were they really strategically done, or were they haphazard, political, and or thoughtless ?
EVERYBODY DANCE NOW!
One thing about the “cut dealers or not” debate that I think gets overlooked is the PRICE aspect of dealer network density. The debate so far tends to revolve around COSTS: advocates of axing dealers assert “it will save OEMs money” (e.g. technician training, dealer bonuses, etc.) while their opponents assert “it won’t save much” (since most of these costs are driven on a per-car basis not on a per-dealer basis: a rebate of $500 per car, across 100 cars, for example, is the same whether 2 dealers each sold 50 or 1 dealer sold all 100). But what gets left out is the PRICE impact. If in Town X there are two Ford dealers, and in Town Y only one, the dealer in Y (and by extension Ford) will get a better price for the car than in X, where a customer can play off the dealers against each other. The over-dealering of GM, Ford, and Chrysler made sense decades ago, when cars broke often (so you needed a dealer close by to fix it) and the population was mostly rural (so you needed dealers scattered across remote areas). The Japanese and Koreans and Europeans really arrived in force in the 1960s and later, when neither condition no longer held: and they built smaller networks. My own calculations indicate probably a 2-4% revenue “hit” to the Detroit Three from excess dealers: doesn’t sound like much except with a $25,000 average transaction price even 2% is $500 badly-needed bucks. However, this aspect gets ignored in the debate, I think in part because people just don’t like it: imagine if GM said “Why we really want to reduce dealer count is so we can raise car prices.” Not good…
PS: By the way I do realize prices of cars are set by inter-brand competition as well as intra-brand competition, so if in Town X or Y there is a TOYOTA dealership (or not) that affects the equation as well. But there is good data showing that when a buyer gets down to the last 48 hours of shopping for a car, they tend to shop one model across multiple dealers… not two different models from two different OEMs. In general.
the dealer in Y (and by extension Ford) will get a better price for the car than in X, where a customer can play off the dealers against each other.
Glenn, doesn’t the manufacturer basically sell cars to the dealer at a wholesale price independent of the negotiated retail price? Higher profit margins definitely help the dealer, but the manufacturer doesn’t get a cut of dealer profit as far as I know.
I would think the cost savings for GM come from not having to build and support Chevrolet, Pontiac, Buick, GMC, and Saturn versions of the same damn vehicle. The too many GM dealers problem was a symptom of too many GM brands. During GM’s last chance bankruptcy, they failed to merge Chevorlet, Buick, and GMC into just plain Chevrolet and probably compensated by cutting some small market dealers just to look decisive to their new government masters.
You are absolutely right that for any one transaction, over the short run, any discounting by the dealer does not affect the wholesale price earned by the OEM when it sold the car to the dealer X days or weeks or months earlier. But in the long run, over time, the retail price the dealer get ABSOLUTELY feeds back into the price the OEM can charge the dealer, on the wholesale side. This is gonna take some explaining, so bear with me, but I can attest to having all the following verified by numerous dealers, both public (e.g. AutoNation executives) and private.
Imagine two dealers in Town X, A and B. Identical in every way except they are selling cars from two different OEMs. At our pretend starting point both dealers sell 100 cars annually at $25,000 each, buying them for $20,000 each from their respective OEMs. Ignore service and parts profits, finance profits, everything else: these two dealers each have $500,000 a year in gross margin. From the gross they pay expenses (say, sales people, rent, etc.) of maybe $4,000 per car… clearing $1,000 per car or $100,000 in profit before tax. They each use the profit for personal stuff (say, trips to Vegas, college for the kids) and to pay off the capital charges of the business (they didn’t get the land and building for free: if their investment cost perhaps $5,000,000 maybe half their annual profit goes to paying off the debt incurred to buy and set up the dealership). With me so far?
All is well until today, when B’s OEM installs a second same-brand dealership across town from B. Now B has to compete not only with A (different brand) but this new dealer C (same brand). B is facing an over-dealered situation, and finds that to maintain volume of 100 cars he or she must cut price by $200 per car. Expenses stay the same so now profit per car is $750, or $75,000 per year total. No change in price paid the OEM: still $20,000 for each car A and B buy.
But the drop in profit hurts B. One kid can’t go to college now, or a trip to Vegas is canceled. Worse, maybe it is hard now to pay off the bank loan that he used to buy the dealership. He starts to take measures to recoup profit. Maybe he cuts salesperson pay; maybe he decides not to refurbish the showroom this year, but leave the old carpet in place. This saves $250 per car and we’re back where we were.
But these cuts come at some cost. The cheaper salesperson has poorer selling skills, and sales volume falls to 90 cars per year. The cruddy showroom turns off buyers, and sales fall to 85 cars per year. Now profits are way down. The dealer, desperate, starts putting out TV ads offering “Wild and Crazy Low Prices!” Volume climbs back up to 90 cars but now price obtained is $23,500. Bad things are happening.
At this point the OEM has to act. The dealer is destroying the brand image with the stupid TV ads, the inept salesmen, and the cruddy showroom. Dealer C across town is starting to feel the pain, too, as buyers ask him to match the $23,500 price B offers, and C is starting to do dumb things as well. The OEM might be able to ignore the price decline for a while, but a volume drop hurts the OEM even if he holds the wholesale price firm.
Maybe if he had stayed just with B, B could have grown volume to 200, but B told him there was no way Town X could absorb 200 of these cars… 150, tops. But instead he put C in business, hoping each dealer could do 100 units. He was wrong.
What can the OEM do? His volume is not where he had planned it to be and the dealers are killing price. He has to restore dealer profit to a viable level… and so he cuts wholesale price to the dealer. He might disguise it in off-invoice payments (e.g. forgiving floorplan interest, throwing in bucks for advertising by the dealer, etc.)… but he cuts price. Now the dealer is back in the black and can hire better salesmen, etc., stop the stupid ads… but OEM profits are down.
That’s the long version. The short version is: no manufacturer can ignore the financial health of the channels for long, because the rivals’ healthier channels will have the financial wherewithal to kick your dealers’ butts. If you over-dealer, and so erode your dealers’ profits, sooner or later you have to put up with either tragic volume losses (what did the average Buick dealer sell each year, EIGHTY units?!!! the average Buick dealer was making more money servicing Buicks than selling them, so why would he try hard to sell more cars?) or collapse in your own margins as you shovel life support to dealers. OEMs often don’t want to admit all this because in their hearts they are producers: they see cars as industrial goods, not as consumer goods, and thus begrudge the dealer every dime he makes. The Asian and European makers understand better that a RICH dealer is your BEST dealer, because then they are motivated to work with you (and get richer) and affluent enough to not do stupid things.
The linkage between retail and wholesale price IS very very strong: it doesn’t work over days or months, but over years it does indeed, and with a vengeance. An OEM cannot just say to its dealers, “Suck it up! B, just earn less money with me than you could if you went to my rivals,” because sooner or later the better dealers DO migrate to the rivals. Look at how many strong Toyota dealers today had maybe a Chevy or an Olds store deep in their past.
Sorry for the long post, but this is a complicated issue and as you know, in this industry no one wants to hear about “complicated,” they just want the short simple… and often wrong.. story.
Hi GM dealer, how are you doing, I’m Mark Walberg, I play a crappy actor in a movie where everyone dies, not just underperforming whiny GM dealers, say hi to your mother for me.
Thank you Glen Mercer!
Wonderful post.
If in Town X there are two Ford dealers, and in Town Y only one, the dealer in Y (and by extension Ford) will get a better price for the car than in X, where a customer can play off the dealers against each other.
Another variable is how close X and Y are to each other. If they are a 10-15 minute drive apart, then effectively people in X and Y all have 3 Ford dealers to play off.
If X and Y are also 15 minutes from Captial City, where there are 3 or 4 more Ford dealers, then people in X and Y , as well as CC have 6-7 dealers to play off each other.
I looked very carefully at Chrysler’s cull, and found that nearly all dealers being cut were within 25 miles of another dealer. Most were closer than that.
I know a lot of people want to believe there is all sorts of political intrigue involved in the dealer cuts, but there just isn’t. There are just too damn many dealers. If anything, the cull hasn’t been harsh enough.
It is a shame that responders to this and similar blogs do not have a clue about the retail auto business. First of all there is unequivocally no real cost for the manufacturer to service retail points and in fact they are potential profit sources. Technician training, information dissemination, most all “bonuses” are funded by monthly charges to the individual dealers. Both training and information exchange systems cost even small dealers hundreds a month paid into a central manufacturer fund. Bonus programs, most notably GM SFE, cost dealers tens of thousands of dollars a year with no assurance of a return on the investment. Any other representation by the manufacturer is a bold faced lie!
While over dealering is expensive to the dealer, it simply gives the manufacturer another outlet for auto and parts sales. The best example would be in the other two most spent on consumer products, food and consumer electronic goods. Buying a Sony TV or a can of StarKist Tuna across the street from another retailer with the same product is considered a “good” thing not a deterrent.
This whole dealer culling scenario is in reality a feeble attempt by the manufacturer to rid themselves of dealers they did not like and to seize an opportunity to raise their own profits by cutting dealers and raising their own per car margin by taking it away from the dealer. A move that eventually costs the consumer three ways. One by ultimately raising the cost of the product, two by reducing competition, and three by having the consumer bail them out with 50+ billion to pay for their previous idiotic decisions!
First of all there is unequivocally no real cost for the manufacturer to service retail points
Of course there are costs.
Low transaction prices make incentives inevitable. The manufacturer ultimately pays the price for the low transaction prices.
Producing too much inventory in order to stock too many dealers costs the manufacturer money and ties up capital as the manufacturer waits for it to be sold.
Financing too much inventory also is a drag that has to be supported by additional capital. (How quickly we forget that GMAC needed to be bailed out, in part to support the floorplan.)
Too many dealers harm the manufacturer, and the dealers are either trying to mislead the public about the costs of supporting too many of them, or else are themselves ignorant of the big picture issues involved here.
I’ll say this once again — if dealers paid cash for inventory up front and had no dependence on captive financing programs to make their businesses work, then they’d have a point. But since they don’t, they don’t.
MikeInCanada :
I loved C+C Music Factory.
Not sure what they have to do with car dealers…..
I thought the pic was a clever link to the subject of the article. You see, one of the “C’s” in C+C Music Factory was a recording artist and producer named David Cole.
http://en.wikipedia.org/wiki/David_Cole_(producer)
“Everybody Dance” was a great 90’s anthem, and I liked nearly every song on that record/CD.
RF,
According to what David Cole told me, CAR gets about 10% of its funding from auto industry sources. If I recall correctly, they get more funding from Toyota than from the domestics and the UAW.
It is a shame that responders to this and similar blogs do not have a clue about the retail auto business. First of all there is unequivocally no real cost for the manufacturer to service retail points and in fact they are potential profit sources.
The costs have been pointed out both on this thread, and the dealer restoration story – https://www.thetruthaboutcars.com/under-congressional-pressure-gm-hints-at-dealer-restoration/
This whole dealer culling scenario is in reality a feeble attempt by the manufacturer to rid themselves of dealers they did not like and to seize an opportunity to raise their own profits by cutting dealers and raising their own per car margin by taking it away from the dealer.
This doesn’t even make sense in light of the first thing you said. If there were no costs associated with servicing retail points, and they were all profit sources, then there would simply not be such a thing as a dealer that GM didn’t like. What’s not to like? In fact, if what you said at the start were true, GM would be trying to sign up more dealers, and the PTFOA would let them.
Your last comment also seems to acknowledge that the retail price sooner or later impacts the wholesale price.
Cronies R Us
It’s a small world politics (ditto the automotive world) and don’t we know how it all works by now. If this croney could be even more cheesy he’d be a blue cheese and there’s few people the whiff doesn’t get right up their nose!
Producing too much inventory in order to stock too many dealers costs the manufacturer money and ties up capital as the manufacturer waits for it to be sold.
Contrary to that erroneous thought, the ability to produce units and ship them to dealers is what makes them money. All units are shipped to dealers prepaid or not shipped at all. The manufacturer never waits for payment and those vehicles in dealer inventories represent already realized cash flow.
Those dealers who floor plan with GMAC are doing so with a company that is less than majority owned by GM and independent. GM sold a majority share to Cerberus some time ago in the dumbest move they ever made. GMAC is now a “bank” and a major recipient of their own “bailout” funds.
All in all, your thoughts unfortunately represent those of many who do not fully understand the dealer/manufacturer relationship. Obviously this includes many of the Congress members trying to sort the situation out and even more unfortunately many of the pundits who bought the factory propaganda hook-line-and sinker.
This doesn’t even make sense in light of the first thing you said. If there were no costs associated with servicing retail points, and they were all profit sources, then there would simply not be such a thing as a dealer that GM didn’t like. What’s not to like? In fact, if what you said at the start were true, GM would be trying to sign up more dealers, and the PTFOA would let them.
Your last comment also seems to acknowledge that the retail price sooner or later impacts the wholesale price.
GM has long lusted after the Toyota model where the dealers accept anything the manufacturer proposes because they are so profitable. Toyota has in the past told their dealers how many they are going to sell next month and they do… to the public or themselves… simply to protect their franchise.
This is another example of GM’s failure to accept blame for inferior product and attempt to explain away their own failures by shifting them to the dealers. They somehow think a diminished number of dealers will maintain the same number of sales and therefore the smaller number of dealers will sell more units per dealership. This will afford GM the opportunity to demand more of their dealers at a lower margin point per unit. Not likely but a normal thought in their deluded state of mind.
GM simply offered their favored dealerships a new contract that stated they would sell a certain amount of units(to be determined later) and would maintain a certain CSI rating (to be determined later) or they would also be canceled. It is the most one-sided franchise agreements in the history of the auto business but an offer that could not be refused when the option was cancellation and financial ruin.
The dealers they don’t like? Any of those who felt they had some smidgen of rights after investing millions of dollars getting the franchise. Anyone who actually owns one understands fully what I am saying!
Mind your P’s and Q’s when discussing dealers A and B then X and Z and sometimes Y and W.