By on July 30, 2007

chryl32.jpgAs previously reported, Chrysler's new task masters are getting tough in their efforts to cull the automaker's 3700 member U.S. dealer network. After excluding under-performing Chrysler stores from the company's dealer-only used car auctions, Sales Suit Steven Landry has sent 173 dealers formal notification that they have to increase sales in six months or else (i.e. lose their franchise). Hang on. That's not it. "We're not going after any dealers to get rid of them," Steven Landry told The Detroit Free Press. "The notes that we sent out say that you are under-performing by a very high degree compared to other dealers in your market, and we'd like them to improve their performance." The question is: how? Surely providing dealers with vehicles people want to buy is the best way to improve their performance. Surely putting so much pressure on the dealers that they cut corners, screw customers and sully Chrysler's name for decades to come is the worst possible solution. Oh wait. Private equity firms don't think long term. Right. Carry on.  

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25 Comments on “Chrysler Tightens the Screws on 173 Dealers...”


  • avatar

    Private equity firms think longer term then most public companies. They also know how to lie. And that is certainly the case here. They may have not be going after dealers to get rid of them, but eh they will be rid of them.

  • avatar
    Dynamic88

    From the Detroit Free Press article

    “Leo Jerome, who owns a Chrysler Jeep dealership in Lansing, said he received the letter earlier this month and plans to fight it. “It’s a crazy thing,” he said, adding that area dealers have struggled because of a nearby General Motors plant, and he doubts anyone new could do better. “I am ready to take them on,” he said of Chrysler.”

    The dealer in question is a mile or so from my house. It’s got to be hard pushing Chrysler products anywhere, but this is a GM town. People here tend to buy GM if they buy American. A half a mile down the road is a Chevy dealer. (Maybe less than a half mile)

    As an aside, this Chrysler/Jeep dealer used to be an Oldsmobile dealer. A pretty successful Olds dealer.

    Now Chrysler has him ready to fight with the corporate honchos, rather than concentrating on running his business.

  • avatar
    nonce

    Private equity firms care about being able to sell the company for more than they got it for.

    If the parties who would buy the company aren’t very discerning, then short-term moves would do fine.

    If those parties are rational, however, they’ll heavily consider a company’s long-term plans.

    I’ve read on this board for years that the US carmakers need to trim their dealer networks. It seems that Chrysler is finally doing so. I’m not sure what it’s called when you call on someone to do something, and then criticize them for actually doing it, but it’s probably something latin.

  • avatar
    Dynamic88

    I’d like to know more about all these “iron clad” protections for dealers I’ve been reading about. Either it’s not really that hard to trim the bloated dealer ranks, or Chrysler is starting fights it can’t win.

  • avatar
    AGR

    Most manufacturers don’t have the stomach to get adversarial with 173 dealers that are non performing. When careers can get altered due to new ownership, suddenly the “intestinal fortitude” appears.

    As per most franchise laws, the manufacturer must give a 180 day notice to improve sales sales performance, which is what they are doing.

    Its pro active window dressing, will save careers, and if it sells a few more units everyone including the dealers are ahead. The bad blood and frayed relations are a different story.

  • avatar

    Maybe The dealers should send Cerberus a letter notifying them that Chrysler has to increase the desirability of their products in six months or else they lose Chrysler to Toyota.

    Although I hate auto dealerships, I fully sympathize with them in this case. If I buy or own a business with the right to sell Chrysler products, then Chrysler should have no more right to take it any more than the I should have the right to take Chrysler from Cerburus for under perfomance of Chrysler products. I just hate the concept that someone thinks that because they are bigger and stronger that they can simply take something from you that you own.

  • avatar
    Orian

    But what exactly do the dealerships own? And what are the laws regarding them now?

    A dealership is permitted to use the manufacturer’s name and sell their products, correct?

    What I see the dealerships as owning (and this may be totally wrong) is the lot and building they sell cars from, and the cars they purchase from the manufacturer to sell.

    We all agree that the three US based automakers need to trim their dealership numbers, but what would be the best way to do it?

  • avatar

    We all agree that the three US based automakers need to trim their dealership numbers, but what would be the best way to do it? File Chapter 11 and cut the deadwood (and then some). See: Machiavelli.

  • avatar

    Orian they own the right to be that brands dealer. If I buy a McDonald’s franchise, I own the right to sell McDonald’s branded food products. I lose that right and I am basically out of business.

    The dealers own the right to sell Chrysler products which is every bit as real as Cerberus’ right to make Chrysler products.

    I would imagine that state franchise laws vary from state to state and I am sure that the dealers themselves will have different franchise agreements, many having been grandfathered in from god knows when.

    I still look at this to be morally (not legally) like the eminent domain issue where a town wanted to take private property to give to developer because the big development would pay more tax revenue.

    IMO the fact that more money comes in for someone else does not give them the right to take something away from you that you rightfully own. In this case they own the right to sell Chysler products.

  • avatar
    SpinningAround

    “We all agree that the three US based automakers need to trim their dealership numbers, but what would be the best way to do it?

    File Chapter 11 and cut the deadwood (and then some). See: Machiavelli.”

    A one line answer to a horribly complex scenario is a tad disingenuous. The problem is that, unlike say airlines in Chapter 11, there is a long term commitment from consumers to the car companies. If United is Chapter 11 I might refrain from booking tickets a year out (but that is a market for cheap, unprofitable holiday traveler tickets anyway). Buying a car from a company in Chapter 11 is a different thing.

    For Ford you could make that argument because they might be carried by their international divisions (Jag and Range Rover not withstanding). For Chrysler, Chapter 11 might really be death because it takes a while for the company to be able start unwinding their contractual agreements and in the meantime they could see their sales diminish to nothingness. Who is going to buy a car with a big question mark over warranties, parts, servicing, resale values and whatnot unless sold at truly fire-sale prices?

  • avatar
    Luther

    Private Equity firms know how to add value. Their long-term is actually longer than Public company quarterly.

    If they can chop even just a bit of deadwood they will add tremendous value…Immediately. The key is to increase value of assets which Private Equity knows all about…See Gordon Gekko.

    (Hollywood/Oliver Stone places Gordon Gekko as evil villain when in reality he is a hero…Increasing value of productive assets).

  • avatar
    LoserBoy

    Sherman Lin:

    There is no such thing as a right to another business’s products. Franchisees’ “rights” stop at the limits of franchise law plus whatever contracts they’ve signed with the franchisor, and it’s pretty hard for me to morally conflicted about two businesses arguing over the contents of a contract.

  • avatar

    LoserBoy
    I was simply responding to another poster who was wondering what a franchise owner actually owns. I am aware that the franchisee’s legal rights are specified in each agreement and according to their states laws. I was specifically avoiding what is legal and arguing for what I see as right in a moral sense.

    For me it is easy. If you paid for a business put years into it, I personally don’t think just because someone else says they need to make more money is a good enough reason to morally justify screwing over the dealer and I hate car dealers.

    My own personal sense of right and wrong tells me that companies like GM, Ford or Chrysler partly deserve to go under specifically because of examples such as this in which they have consistently screwed over everyone else if it was to their advantage. People and companies that do the right thing deserve to do well and companies that screw everyone over deserve a pox on their house.

    It is really hard for me to have any sympathy or understanding for any of the Detroit 3 when they have shown none to others. If they screw someone over because it is convenient then they deserve the same.

  • avatar

    Chapter 11 tends to be a bad answer, no matter what the question is, for any auto manufacturer that wants to keep selling cars. Americans have a strong aversion to buying a new car that is going to be an “orphan”, bereft of any parts or service support through the dealer infrastructure.

    GM had a pretty tough time making the last of the Oldsmobiles go away, and that was with the customers knowing that there was nothing in the Oldsmobiles that wasn’t in a Buick or Chevrolet – that is, service and parts were going to be a snap at any GM dealership.

    B Moore – Autosavant.net

  • avatar
    LoserBoy

    Sherman Lin:

    I understand what you’re getting at, but I just can’t see it as “getting screwed over” IF Chrysler is operating within the confines of the contract, for the simple reason that the franchisee willingly agreed to the terms of said contract. (Without knowledge of franchise laws and the contents of a real contract, this discussion feels way too hypothetical to me. It’s hard for me to get emotionally invested when reality might be in direct conflict with the conversation.)

    My personal sense of right and wrong says that Leo Jerome deserves to go under for trying to operate a Chrysler dealership in what is clearly a GM town. The fact that his business is smaller than Chrysler—the fact that his business is a franchise—is irrelevant. He’s trying to sell ice to Eskimos. Pointing out that his ice supplier is getting impatient with him only confuses the issue. Many savvy businessmen would eventually conclude that maybe Mr. Jerome should try selling them something else, and that his ice supplier is actually doing him a favor.

  • avatar
    Pch101

    I just can’t see it as “getting screwed over” IF Chrysler is operating within the confines of the contract, for the simple reason that the franchisee willingly agreed to the terms of said contract.

    Of course, it’s a matter of getting screwed over. The dealers have to build and maintain all the infrastructure of the retail business, including the showrooms and repair bays. It’s not as if the dealer can simply turn that into a Burger King when Cerberus gives him the heave ho.

    But, it’s something that needs to happen. The current situation is not sustainable for either the company or the dealer network. The dealers cannibalize each other, and the level of intra-brand competition just pushes down prices and hurts brand equity. Of all the choices available, this is the lesser of the evils.

  • avatar

    LoserBoy how is the Toyota dealer doing in that GM town? If the company has good products they will sell. So why should the Chrysler dealer be shut down by Chrysler for Chrysler’s own mismanagement.

    What is especially disturbing to me is from what I have read it appears that Chrysler for the past few years has been begging, coercing etc the dealers to take more cars than they can sell to help out the parent company.

    Now that many dealers are in revolt and are refusing to take on the additional cars, Chrysler tries to cut them loose. Wow what gratitude, Chrysler really sounds like a company that other companies and people will want to do business with.

  • avatar
    LoserBoy

    It’s not as if the dealer can simply turn [the infrastructure] into a Burger King when Cerberus gives him the heave ho.

    Surely that thought occurred to the franchisees before they signed on the dotted line? Did they really think a franchise was guaranteed income for life? On what logical basis?

    Every business venture is a balance of risk and reward. One of the risks of being a franchisee is that the franchisor might fully exercise its rights under the terms of the contract, including the right to terminate the franchise. If you aren’t comfortable taking that risk, you shouldn’t become a franchisee. (Wasn’t Chrysler nearly bankrupt once already? What did the franchisees plan to do with their infrastructures then?)

    LoserBoy how is the Toyota dealer doing in that GM town? If the company has good products they will sell.

    I honestly don’t know, but like you, I assume they’re doing quite well.

    That said, another of the risks of being a franchisee is that the franchisor might have a bad (or at least unappealing) product. And even if the product is good/appealing today, what steps is the franchisor taking to maintain quality and/or appeal? Again, if you can’t get satisfactory answers to these questions, you shouldn’t become a franchisee. This is all basic due diligence.

    Now that many dealers are in revolt and are refusing to take on the additional cars, Chrysler tries to cut them loose. Wow what gratitude, Chrysler really sounds like a company that other companies and people will want to do business with.

    It sounds like Chrysler’s reputation will (deservedly) suffer, and they’ll have fewer people willing to be franchisees. Of course, fewer franchisees is exactly what they want, so maybe they don’t care about their reputation among prospective franchisees.

    And yes, it may spill over to the buying public (although it’s amazing what the general populace will believe when it comes from a corporate mother-ship). If so, Chrysler will (again, deservedly) suffer for it. But that doesn’t give franchisees a magic “keep the benefits, ditch the obligations” clause in their franchise agreements. If you want a franchise that could never be closed under any circumstances short of Chrysler (or whoever) going Chapter 7, why sign an agreement that doesn’t give you that? Is being a franchisee that important to you?

    None of these franchises sprang, wholly, from the mind of Zeus. They were all formed by people who could have and should have asked themselves (and Chrysler) a lot of pointed questions about the downside of being a franchisee. Most of the downsides have been there all along, although they might have seemed less likely at some times than others.

    Personally, I would never start a franchise, because I don’t see the potential rewards as outweighing the potential risks. Maybe I’m missing out on a lot of easy money running a Chipotle, but I have to wonder, “If it’s such easy money, why isn’t Chipotle running the store and keeping all that money for itself?” I don’t think of myself as being especially bright, so I find it hard to imagine that thoughts like this didn’t occur (or shouldn’t have occurred) to any of these franchisees.

  • avatar
    Dynamic88

    “My personal sense of right and wrong says that Leo Jerome deserves to go under for trying to operate a Chrysler dealership in what is clearly a GM town. The fact that his business is smaller than Chrysler—the fact that his business is a franchise—is irrelevant. He’s trying to sell ice to Eskimos. Pointing out that his ice supplier is getting impatient with him only confuses the issue. Many savvy businessmen would eventually conclude that maybe Mr. Jerome should try selling them something else, and that his ice supplier is actually doing him a favor.”

    It is a GM town, but does that mean no one should try to sell anything else? There are Ford dealers here too, not to mention many brands of import/transplant cars.

    I think realistically this isn’t going to be one of Chryslers best markets, so I’m not sure this guy’s store should be compared to stores in other places.

    I don’t know Mr. Jerome, but I do know a little about his business. He was an Olds dealer since sometime in the ’60s (at least that’s as far back as I can remember his dealership)and I’m sure he felt a bit screwed by GM. I’m just guessing at this, but I immagine he’d have prefered to remain a GM dealer, but we have enough of those already.

    No, he didn’t have to sign the agreement with Chrysler. At the time though, I immagine Chrysler was happy to get him. W/o knowing the details of the franchise agreement, it’s not possible to say whether or not this letter is significant. He did indicate that he was going to fight it, so at least in his mind, it is.

    If Chrysler gives him the boot he’ll concentrate on selling Nissans and Suzukis at his other store, and probably find another foreign make to sell at his current Chrysler/Jeep store.

    All this franchise business aside, there is also a Dodge dealer in town, and it looks to me as if there is just enough Chrysler/Dodge/Jeep business to support one store, selling everything in Chrysler’s fine family of cars (snicker)

    Theoretically I agree that dealer ranks need to be thinned out, but with such crap product, I’m not really sure fewer dealers can do a better job. What difference does it really make?

  • avatar
    Pch101

    Maybe I’m missing out on a lot of easy money running a Chipotle, but I have to wonder, “If it’s such easy money, why isn’t Chipotle running the store and keeping all that money for itself?”

    Because the franchisor and franchisee provide different functions. In the case of a car dealership, the dealer’s mission to work with the buying public, purchase used cars and market financing, whereas a manufacturer builds and designs products.

    It would make no more sense for an automaker to be a direct marketer than it would to expect a restauranteur to operate a wheat farm for making his bread or to acquire a cookware factory to make his utensils. These are different skills and those who are good at one are likely not going to be good at the other.

    I’m sorry, but justifying the burning of franchisees just because you have a personal issue with franchising is not much of a rebuttal. As much as I may have a dislike for car dealers, I also don’t blame the dealers who are in the crosshairs for being unhappy with this latest wave of attacks from above.

    That being said, if I was one of the new operators of Chrysler Group, I’d be doing very much the same thing. One hopes that this is just one part of a broader plan to bring the company back to health. Dynamic 88 above is right — there needs to also be a product initiative, or else this isn’t going to help.

  • avatar
    Johnster

    Colorado newspapers had stories about Chrysler dealers located in smaller, rural communities that are being threatened. These dealers sell lots of used cars and these small towns don’t have very high average incomes.

    Still, most small towns do have a Ford dealer, a Chevy dealer, and increasingly a Toyota and/or Nissan dealer (although you might have to drive 25 miles or so to get to it). Unlike congested urban markets where Chrysler dealers compete against other, these small town dealers charge higher prices because there isn’t much competition, unless the customer is willing to drive 3 or more hours away to a neighboring twon. Getting rid of the small town Chrysler dealers is just giving away sales away to the competition.

  • avatar
    Martin Albright

    Okay, so what I can’t understand is this: If Chrysler actually is sticking it to these dealers, why in God’s name would the dealers want to remain Chrysler franchisees? If they can sell a more popular car, why wouldn’t these dealers welcome the opportunity to ditch the Chrysler millstone around their necks and start selling something that people actually want to buy?

    If Chrysler dumps its dealers in the smaller markets, they are effectively ceding that ground to their competitors, right? Because only a die-hard Mopar fan is going to drive 3 hours to the Chrysler store when there’s a Ford, GM and Toyota shop in his backyard, and let’s get real: There aren’t enough die-hard Mopar fans out there to keep Chrysler afloat.

    Ultimately by screwing the smaller volume dealers Chrysler may solve some of their short term problems but it seems to me that the price paid in terms of bad faith with the customers (who purchased a Chrysler vehicle that they now can’t get serviced locally) is going to be greater than any short term gain, right?

    I’m actually pretty neutral on the whole Chrysler-vs-dealers battle. They’re all big boys who understand what’s at stake and who know how the business works. If you can’t stand the heat, etc etc.

    Like the mafia says when they “whack” someone, “it’s nothing personal, just business.”

  • avatar
    Pch101

    If Chrysler actually is sticking it to these dealers, why in God’s name would the dealers want to remain Chrysler franchisees? If they can sell a more popular car, why wouldn’t these dealers welcome the opportunity to ditch the Chrysler millstone around their necks and start selling something that people actually want to buy?

    I don’t think that it’s necessarily all that easy for these small dealers to simply become a franchisee for some other automaker. I would presume that a lot of these guys would be left with either transitioning to a 100% used car business or else exiting the industry entirely.

    I’m guessing that some of these guys want the Chrysler brand because it allows them to get more and better trade-ins, lure in more repair work and command higher prices on used cars than they could if they were a pure used car lot.

    That, and a dealer can control new car inventory with very little money out of pocket (the dealers purchase inventory typically with financing approaching 100%, plus after-sales holdback payments), so once the dealership is up and running, you don’t have much to lose by trying to sell the product, no matter how tough it may be. They might prefer to have a Toyota dealership if it was possible, but if they can’t, this may be their best available option.

  • avatar

    I think that the number of Chrysler dealers here in Canada is very similar to the USA, If one picks up a Toronto newspaper called “The Sun” every other page has advertisements for Chrysler products every day, there seems to be a large glut of them, out here where I live in a very rural area, in my small local Town there is one dealer for each of the Big 2.5 and none for Asian vehicles, yet in the nearest large City there are lots of everything, it makes interesting times for all

  • avatar
    Geotpf

    If there are two dealers right next to each other, canibalizing each other’s sales, then, yeah, kill the lower performing one. But if there’s one in a rural area in the middle of nowhere than only sells a few cars a month, far from any other dealer of that make-keep it, especially if there is another car dealer (of any other brand) nearby, because if you kill it, you probably will lose 90%+ of those sales (unless sales are so poor that merely servicing the dealer (with signage, manufacturer’s reps, whatever) costs you more money than the profits from the sales at the dealer brings in).


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