By on May 24, 2009

1. Floorplan costs The more dealers you have, the slower the inventory turn. The slower the turn, the longer it takes to repay the debt. The longer it takes to repay the debt, the more money that’s required. By cutting dealers, the manufacturers cut GMAC’s capital requirements, which run into the billions.

2. Inventory Excess inventory ties up capital and increases the burden of the floor plan, due to the longer sales cycle. (Chrysler and GM have far higher days of inventory than Toyota, Honda, BMW, et al. All that metal sitting around wastes a lot of money delaying the conversion of assets to cash). If the automakers have fewer dealers to serve they should be able to produce fewer vehicles.

3. Resale value More dealers means more competition within the brand which means lower transaction prices.

4. Profit at the dealer level One would hope that you end up with better dealers if they can make more money (although that’s debatable).

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53 Comments on “Four Reasons Why 2000+ Domestic Car Dealers Had to Go...”


  • avatar

    In my storied experience, large dealers usually had the lowest (percentage) profits and were despised most by their customers for their awful service. The car companies loved them because they moved a lot of metal. Mid sized and small dealers usually were most profitable and most liked by their customers.

  • avatar
    fincar1

    I have wondered for some time what percentage of the total number of cars (both new and used) is sitting on some dealer’s lot waiting to be sold. From this standpoint a smaller number of dealers would seem to be good, up to a point. Of course the number of dealers is quite beside the point when unsold cars are filling up acres of old airports and such before they even get as far as a dealer’s lot.

  • avatar
    raast

    Points 3 & 4 were advanced by a local dealership on the evening news when the Canadian dealer closings were announced. I received in the mail a flyer detailing prices on the Torrent going from MSRP of around 31K moved down to $20K and another 1K “loyalty” discount, bringing it down to $19K.

    Here’e the thing: I won’t even CONSIDER buying this stuff at the discounted price. How ’bout you increse the price? Then I have to buy it, right?

    Mr. T had a saying…”I don’t think so suckah”.

  • avatar
    mel23

    I don’t think so.

    1. GMAC was a form of bank who decided which customers to loan to and at what rate. Each loan involved capital, but also a return. Unless they were required to finance floorplan for all dealers at a set rate, which I highly doubt, they picked the profitable deals.

    2. The dealers are carrying the floorplan costs; not GM.

    3. Again, competition within the brand is a dealer problem more than a GM problem. It’s competition from other brands that’s killing GM.

    4. I doubt the received wisdom of cutting dealers. GM has blamed everyone but their own management for their problems. It’s been the customers who were ignorant of GM’s improved quality, it’s been the greedy workers, etc. Only in the case of high brand loyalty will a buyer drive past dealers of other brands to buy and, have serviced, a new or used vehicle. But by the time the benefit of this “cure” fails to materialize, all the current players will be gone. If not the companies as well.

  • avatar
    CommanderFish

    Lots of dealers can be a good thing.

    Rural Americans buy more domestics (per capita) than any other group. Once you get outside of cities, domestic dealers are by far the most common.

    It’s convenience, plain and simple.

  • avatar
    holydonut

    I also agree that floorplanning is not a major factor in determining which dealers were selected. I don’t think every dealer that was cut was floorplanning all of its inventory through GMAC/ChryslerFinancial. In some cases the asset hits and risk were landing on the dealer and its relationships with it’s chosen lender.

    The biggest risk to the captive financing “banks” have been the credit worthiness of the retail customers and the residual value miss of lease returns. Dealer culls do not address either of these issues for them.

    I believe the logic persists in Detroit’s Mind’s eye (not my own) that the “supply” of vehicles at the retail level is predicated by the number of dealers, and also the number of cars in dealer inventory within a given region.

    Cutting dealers results in fewer cars on lots; which reduces supply by shifting the supply curve to the left. And logically (remember, I don’t believe this, I’m just saying it could be a logical thought) this would raise the transaction price of the vehicles to customers for the remaining dealers.

    Those dealers would have more volume to spread their fixed costs, which would make them more profitable. Profitable dealers are happy dealers that invest in themselves so they can sell more cars. Cars purchased from Chrysler and GM.

    Profits all around and bonuses for everybody!

    Unfortunately the short-run elasticity of demand for automobiles sold by an individual automaker is highly elastic due to the existence of many competitors and customers’ sensitivity towards spending more money than necessary. I don’t think a leftward shift of individual supply curves at Chrysler and GM is going to result in much total variable profit increase even if Detroit’s vision holds true. But it should help the remaining dealers since they won’t be competing against themselves as much for customers and resources.

  • avatar
    Bridge2far

    Less saturation and redundancy among GM dealers will do a couple of good things. All better for the consumer. You will have more centralized GM dealers selling more than one brand at a single location. Now instead of driving to the small Chevy store here and the bigger one 10 miles down the road, and a couple of GMC dealers here and there, etc. Joe Customer will be able to make a purchase decision (or not) at a modern well capitalized store in a convenient area. Also in theory, the best of the employees from the closed locations may migrate to the larger more profitable locations.

  • avatar
    Dr. No

    I concur with Mel23 –I don’t think any of this is accurate.

  • avatar
    MadHungarian

    Two words: Bill Heard. Horrible treatment of customers, and also evidence that being a mega dealer is no guarantee of profitability.

  • avatar
    George B

    I agree that the domestic auto manufacturers need to reduce their inventory and other costs that don’t add value for the end customer. Not sure if 2000+ is even close to a deep enough cut.

    Maybe some of the small dealerships could be converted into factory authorized service centers. Not like there’s much link between sales and service in most dealerships. Once sales gets done extracting money from the customer, he or she NEVER wants to come back.

  • avatar
    WetWilly

    We’re being told that by cutting the number of dealers the sales-per-dealer statistic will increase at the surviving dealers. Doesn’t that make the arguably flawed assumption that overall sales aren’t going drop to the point that sales-per-dealer may end up unchanged?

  • avatar
    ihatetrees

    GM dealer density in many older suburban areas was too high. They too often competed on price while letting service suffer. Many of these dumps may have been great for those with toe-tag credit buying a disposable Cobalt. But these places also sold Corvettes! Talk about damage to the brand…

    Will some good dealers get caught in this? Sure. But GM is up against The States’ Franchise Protection Racket – laws that disallowed any sort of effective quality control. Given those laws, a brutal and imperfect cull was necessary.

    George B:
    Once sales gets done extracting money from the customer, he or she NEVER wants to come back.

    I’ve always thought that separate sales and service missions would be the best for any new brand starting off. Assuming that states’ laws allow it…

  • avatar
    Rday

    Seems to me that GM and Chrysler are missing the point…the customer. If they don’t want more selling dealers, convert the poor performing dealers to ‘service only dealers’. This way customers can get their products serviced the way they want to. The service dealers could even arrange with the remaining big dealers to order vehicles from them whenever a loyal customer wants one. The goal that detroit is forgetting here is the customer. Unfortunately for detroit, they have forgotten the customer for many years and this is why they are in the position they are in. They have forgotten that the Customer is King!

  • avatar
    yankinwaoz

    I agree.. it doesn’t make any sense that cutting a dealer will help a car maker. The reason it doesn’t make any sense is because we assume that there is a disconnect between GMAC and GM. We assume that once a car is made, it is sold to GMAC (or some other dealer finance vendor). GM gets paid right then, books the revenue, pays expenses, and hopefully keeps some profit.

    In other words, once a car leaves GM’s factory, it is no longer GM’s problem (except for warranty liabilities).

    This assumption is wrong. It would explain why cutting dealers is important to GM.

    The reality is that GM is using GMAC to move metal. Rather than letting GMAC make purchasing decisions and setting finance terms to dealers and consumers like a bank would, GM forced GMAC to subsidize GM.

    The owners of GMAC, GM and Cerbius, have an inherent conflict of interest. This is why GMAC had to be bailed out. The owners propped up the car making side at the expense of the finance side. They effectively hid losses at GM by forcing them on GMAC. Sort of like how Enron was run.

    All the accounting tricks aside, the bottom line is that GM dropped from over 50% to less than 20% of the market. They shrank 60%. Based on that fact alone, it makes sense that 60% of the dealers must also die. Otherwise, they all do poorly and further drive down the market share.

    It sucks, but that is the way the market is supposed to work. But the market for dealerships is not a real market. It is protected by state laws. The dealer market is severely perverted and prevents the natural market forces from doing what must be done.

    So, like any other protected market, it eventually fails spectacularly like we are witnessing now.

    So there you go. GM plays financial games with GMAC. Dealers play games with state franchise laws. Now both are paying the price.

  • avatar
    dwford

    2. Inventory Excess inventory ties up capital and increases the burden of the floor plan, due to the longer sales cycle. (Chrysler and GM have far higher days of inventory than Toyota, Honda, BMW, et al. All that metal sitting around wastes a lot of money delaying the conversion of assets to cash). If the automakers have fewer dealers to serve they should be able to produce fewer vehicles.

    The flip side of this is that with the cutbacks in production, having all these dealers means each store has a poor selection to choose from. Instead of going to 1 Toyota dealer to choose from 100 Camrys, a customer would have to visit 10 Chevy stores to see that many cars, or have the dealer find one for them, which then incurs other costs.

  • avatar
    mel23

    In other words, once a car leaves GM’s factory, it is no longer GM’s problem (except for warranty liabilities).

    This assumption is wrong. It would explain why cutting dealers is important to GM.

    No. This assumption is correct. If a buyer craps out on his payments, GMAC, or the credit union, etc. was holding the bag. GMAC carried the manufacturing side of GM for several years before everything went to hell. GM ran out of other pieces of furniture to throw into the fire and had to sell 51% of GMAC to Cerberus. Proving Wagoner & Co. were WAY more lucky than good, the subprime quake hit not long after that and GMAC went into the red with Cerberus eating most of the losses instead of GM. I’m not saying GM didn’t do some arm twisting of GMAC to do some deals; I don’t know. But I’d think that would have stopped when Cerberus got involved if it ever occurred at all.

  • avatar

    without question this is the most ridiculous and ill informed article I’ve ever seen on this site. hopefully this isn’t a sign of things to come.

    DEALERS ARE THE CUSTOMERS OF THE MANUFACTURER!
    closing them is even worse than spinning GMAC.

    again this is a foolish and totally absurd story and should be pulled for absurdity.

  • avatar
    TomH

    Even being charitable, you got three out of four wrong…

    1. Floorplan capital costs are borne by the dealer not the OEM. (e.g. Chrysler said they would NOT repurchase inventory sold to canceled dealers.) One of the big reasons Chrysler got into the poor financial shape during its last crisis was that it continued to build inventory WITHOUT dealer orders.

    2. OEM production is a function of manufacturing capacity not dealer population. Chrysler was actively soliciting orders from ALL of their dealers right up to the point of halting production and declaring bankruptcy.

    3. Franchised dealers have virtually no unique effect on resale value. OEMs have a much bigger potential impact with rebates and overproduction that can kill resale value. (e.g. GM’s sales to rental companies kept plants open, but killed resale values and current model sales of Cadillacs and certain Chevy’s in the early 90’s.)

    4. Maybe, but profit is a trailing indicator in that it is a result or function of a number of factors.

    That being said, you probably qualify for the Auto-Politburo assuming you contributed enough in the last election cycle.

    Oh, by the way, there is a huge difference between the GM and Chrysler announcements. Chrysler actually eliminated the ~800 dealers effective June 9, while GM merely signaled their intent to not renew the agreements of their ~1200 dealers at the end of this agreement cycle in 2010. GM’s announcement was pure Task Force Theater

  • avatar
    TomH

    The irony in all of this is GM is the one who needs to shed a couple of franchises worth of dealers NOW. There are no real savings in culling part of your dealers, rather, the big money is in eliminating the costs of an entire division. Duplication like GMC Truck / Chevy Truck costs real money.

    The irony is that Chrysler actually went through the pain of dropping Plymouth focusing Dodge on trucks, and they sent real termination letters, while GM still has more brands and dealers and less volume/market share then they did in the mid ’80’s while their letters talked about GM’s late 2010 intentions.

    As noted earlier, GM’s letters should be more accurately viewed as PTFOA Theater.

  • avatar
    Adrian Imonti

    Thanks for your replies so far. This blog was not written to present my full analysis of this situation. Mr Farago requested a few quick bullet points on dealer cuts presenting the “pro” side of the dealer cull argument.

    As it happens, I don’t find one of the points (#3 – resale value) very compelling myself, but as it is commonly cited as the primary argument for culling the dealers, I brought it up in the context of what I thought I was being asked in the email. My own opinion is that in practice that most of the pricing problem is due to how the domestics compare to the transplants, less so than how they compete with each other.

    I am also not completely persuaded by #4, as it isn’t clear to me that there is a relationship between a dealer’s profitability and whatever benefit that may provide to the OEM. I’d say that it is, like #3, a relatively minor factor from the automaker’s vantage point.

    That being said, the first two reasons are the most compelling, and unfortunately, some of you who don’t follow the finance problem have missed it. The real problem with slow inventory turn is the amount of cash that it ties up. This article entitled “The Dollars and Cents of Inventory Turn” provides a reasonable summary of explaining why faster turn is preferable to slower turn.

    This is particularly important to the auto industry, because the difference between the 45+ days of turn you find commonly among the transplants and the 90+ days of turn common to the domestics adds up to billions of dollars of poorly deployed capital by the domestics. Fewer dealers should speed up the turn, which should improve efficiency and increase the likelihood of profitability.

    George B : I agree that the domestic auto manufacturers need to reduce their inventory and other costs that don’t add value for the end customer. Not sure if 2000+ is even close to a deep enough cut.

    Absolutely right. This is really a drop in the bucket, and if anything, the cuts weren’t nearly deep enough. I’m guessing that they had to cut a fine line between doing the smart thing for the company and doing the politically correct thing for the economy.

    TomH : Floorplan capital costs are borne by the dealer not the OEM.

    That’s ultimately false, because the OEM pays holdback to cover the finance charges. The manufacturer has to float billions of dollars in inventory and debt at any given time before it can turn a real cash-on-cash profit.

    General Motors and Chrysler are cash poor. Having debt extended to dealers for extended periods simply ties up cash that would be better used elsewhere. The companies have to carry more debt than they should because of the size of the dealer network and the slow pace that it takes to sell cars.

    dwford : The flip side of this is that with the cutbacks in production, having all these dealers means each store has a poor selection to choose from. Instead of going to 1 Toyota dealer to choose from 100 Camrys, a customer would have to visit 10 Chevy stores to see that many cars, or have the dealer find one for them, which then incurs other costs.

    Exactly right, well said.

    yankinwaoz : The reality is that GM is using GMAC to move metal. Rather than letting GMAC make purchasing decisions and setting finance terms to dealers and consumers like a bank would, GM forced GMAC to subsidize GM.

    Precisely. In the auto industry, the finance companies and the OEM are Siamese twins. The financing company supports the sales operations of the OEM.

    The slow inventory turn and the need for incentives go hand in hand. When it takes a long time to move the metal, the need to convert the car into cash causes them to increase the incentives. That creates a downward spiral, where car buyers won’t look at the domestic unless there is a huge incentive to go with it. If it’s always supposed to be on sale, many people won’t buy it until the red tags are out in force.

    Thanks again for your comments.

  • avatar
    TomH

    Adrian,

    Not quite sure where you learned about dealer wholesale financing, but Holdback at ~2% of the invoiced amount is trivial in comparison to the dealers’ exposure. Your understanding of the industry’s financials also misses on the arms length relationship between the finance companies and the OEMs.

    Again, the proof of the inventory relationship is in the Chrysler decision to NOT buy back inventory; if it were a Chrysler liability as you position it, they would have to take it back, as they “own” the liability: they don’t and they’re not. (i.e. The dealer bought the car, so they own it. Further, many dealers obtained wholesale financing independently from the “captive” finance companies, thus further undermining the OEM liability argument.)

    Sorry.

  • avatar
    gmbuoy

    Adrian

    The first 3 points are meaningless for PTFOA for the manufacturers. They may be true but aren’t on the decision tree for the Dealer cull.

    Point 4 is right on.

    For those who protest like Dollinger : Not all the small rurals are being closed. It’s like they used to say in the university “weeder” courses “look to your left, then look to your right, one of you won’t be here next semester”.

    Closing the dealership that is willing to sell their Cadillacs (fill in any other brand you want) to any used car dealer or off brand dealer for 500 over so that the real Cadillac dealers in the urban markets have to take skinny deals to compete is to my mind what needs to happen. That leaves those Cadillac dealers uncompetitive verses the Lexus and Benz dealers when they arguablely have the best cars they ever have had.

    This is an age old problem, when the individuals cannot act for the collectice good. Try this ref.

    http://en.wikipedia.org/wiki/Tragedy_of_the_commons

  • avatar

    They should have cut more brands along with dealers. In addition, they should have pushed for Congressional repeal of all the special perqs that dealers get, so they could sell direct to the buyer.

    I am sure the dealers care about this, but I can’t imagine that anyone else cares at all.

  • avatar
    Darrencardinal1

    The cutting of dealers for the Big 3, especially GM, is long overdue.

    There is no way that you could lose as much market share as they have lost and still maintain this many dealers.

    GM and Chrysler are lucky the federal government is backing them up and they are only losing some dealers.

    Those of you who think closing these dealers is a mistake are living in Cracktown.

  • avatar
    folkdancer

    How much does it cost the manufacturers to “put up with” a dealer?

    Sending memos to a dealer, sending reps out to inspect him, keeping him on the mailing list for product information, inviting him to dinners to tell him how great he is, answering letters from irate customers, etc.

    For GM and Chrysler to have 2000 fewer dealers to put up with might be a good savings.

  • avatar
    Matt51

    Fewer dealers, fewer sales. GM and Chrysler will become even smaller than they are today. Maybe they won’t be American Leyland, maybe they will be more like American Daewoo.

  • avatar
    lw

    This is a great thread… The entire domestic auto industry has made a classic American mistake (and I’m American, so I should know)

    The mistake is to assume that if something is more complicated, then it must be better/smarter.

    The entire supply chain from parts to manufacture to dealer to financing is incredibly complicated. So complicated that NO SINGLE person or even small group of people completely understands it.

    After 50 years of “improvements” and “innovation”, we now have something that doesn’t work, that nobody understands and we can’t figure out how to shut it off. The crazy part is that it’s costing us BILLIONS of $ that we don’t have to keep it running.

  • avatar
    littlehulkster

    You forgot about competition.

    Say a dealership sells Pontiac, GMC and Buick, and the dealership down the street sells Chevy. They’re basically the same cars, but one dealer wouldn’t want you to leave and go to the other.

    While the imports have this problem to a lesser extent, less brands means less competition among your own products, which not only increases sales, but allows you to make a better product as you don’t have to dilute everything for 4 different markets.

  • avatar
    PeteMoran

    Actually, I believe we have to stop treating cars like an impulse-buy item. Fair enough, go in, get a demo drive, agree a price, but then place the order against the factory.

    The idea that you can walk onto the lot, pick the colours/options you want and walk out an hour later for such an expensive (to hold) item is absurd.

    It needs to stop, or Walmart they will all become.

  • avatar
    lw

    @PeteMoran

    Agreed. Driving a car off the lot is a luxury that the USA will have a hard time affording in the future.

    I’m thinking that lots will have a few models to choose from, you’ll test drive them, take your pick, put down a 20% deposit and wait 30-60 days. If you want a car today, see a used lot.

    Another thing that will likely make a big impact, kit cars. 16 year olds will be going nuts over magazines with small kit cars that are shipped right to your driveway. Build it yourself and fix it yourself. We will be too poor to do anything else and the next generation won’t care. It’s all they will know.

  • avatar
    holydonut

    Re: Adrian:

    The real problem with slow inventory turn is the amount of cash that it ties up.

    I think the point people were making was that some of the culled dealers were not using GMAC or Chrysler Financial to subsidize their completed goods inventory. As such, Chrysler and GM do not have much finished inventory. A finished vehicle that is in transit to a dealership is already the property of the dealer that ordered it.

    GM and Chrysler actually operate with negative working capital since their terms usually mean they pay suppliers with more days payable than the days receivable of their collections from their dealers. The only time you’d see a finished goods inventory is if they used a “sales bank.” But those don’t exist…. at least according to Detroit PR :)

    Chrysler and GM employ a “sell in” to the sales channel where they recognize their sale at the time a vehicle is completed. The likelihood of a dealer returning it is basically zero (as evidenced by Chrysler’s refusal to re-accept sold vehicles).

    This is in contrast to items like Sony TVs and Penguin Publishing hardbacks where they have to recognize a “sell through.” For these firms, a product has to be sold to an end customer before the sell-through firm can safely say that the product has generated a large portion of its revenue.

    So back to your statement about inventory turn; this is not a big problem unless the sales bank goes out of control. Inventory turn at the dealer level is a big deal for the dealers and makes a big dent in their liquidity, but not so much for the manufacturer that supplied their product. It would become an issue for the manufacturer if the dealer inventories were preventing the dealerships from paying their invoices for those cars they just bought… but accounts receivable hasn’t been discussed as item that will be improved with a dealer cull.

    And, I concur with analysts that it’s really bad to have a 150 days supply of inventory sitting out there since the manufacturer needs to manage their supply chain effectively. Realistically, the fewer dealers out there would result in less inventory in lots assuming the surviving dealers maintain the same inventory turn ratio. But these topics aren’t the basis of your original 4 points.

  • avatar

    truly this thread digresses from the normal level of integrity here. there is failure to realize the criminal nature of these dealer closures. were it not for bankruptcy, this would never stand. these actions are misguided and even worse…evil.

  • avatar
    50merc

    gmbuoy: “Closing the dealership that is willing to sell their Cadillacs (fill in any other brand you want) to any used car dealer or off brand dealer for 500 over so that the real Cadillac dealers in the urban markets have to take skinny deals to compete is to my mind what needs to happen. That leaves those Cadillac dealers uncompetitive verses the Lexus and Benz dealers…”

    I don’t understand this. Eliminating a low-markup Cadillac dealership should help boost sales at high-markup dealers — but only when the customer is insistent on buying a Caddie despite the higher price, and dealer location is irrelevant. Are there many prospective customers who think this way? Won’t they be outnumbered by the prospects sensitive to price and location?

    You wrote that low-markup (rural, I infer) stores are forcing “real” dealers in big cities to take “skinny” deals, and that makes the latter uncompetitive against Lexus and Benz. Do you mean a Cadillac at full sticker price is more competitive than one priced at $500 over invoice? Or that a Caddie dealer that doesn’t discount much will be better off because it can provide superb service, and as a result it will draw customers away from Lexus and Benz? Again, wouldn’t the net effect on GM be smaller unit volume?

  • avatar
    50merc

    Today I bought a twelve-pack of Diet Coke for three bucks. The store also had other versions of Coca-Cola at the same price, but I prefer Diet Coke. It was only later that I realized how these marketing practices are ruinous for the Coca-Cola company. Having multiple kinds of Coke creates extra costs — think of how much it costs to carry all that product in inventory! Furthermore, the store that sells soda for $3 takes business away from other stores. That’s unfair. The Coke brand is cheapened and becomes less appealing against Pepsi. I think it would be better for the Coca-Cola Company if it would slash the number of places where its products are sold, and insist on higher retail prices.

  • avatar
    lw

    @50Merc

    WARNING: Flawed Logic

    If the store charged $25,000 per 12-pack you would be on to something.

    At $3 per six pack the entire supply chain can completely screw the pooch and the overall loss might be $15,000

    Trying screwing up 5000 cars at $25,000 a hit.

  • avatar
    Matt51

    50Merc is right. Wasting their dealers, will only help to finish off GM and Chrysler. One of GM’s few strengths is they have many dealers from the 30’s and 40’s who are still loyally willing to sell GM product. These dealers sell GM cars. Kill these dealers, they won’t sell GM cars. Most likely, people who have bought at these dealers will not stay captive to GM, they will go to Ford, Hyundai or whoever.

  • avatar
    Matt51

    Killing the dealers is just stupid. The Japanese have fewer dealers, so it automatically means to the uninformed that GM needs fewer dealers. As an example of this type of thinking, in industry, inventory became “bad”. So companies started having their suppliers hold the inventory of parts. This made the numbers look good. It did not reduce cost. Entire warehouses have been built so suppliers can hold inventory until the OEM needs the parts. OK, but then the inventory cost did not go away, it just gets hidden in the cost of the parts.

    So much of American MBA management bullshit is designed for public relations and sound bites. Unfortunately for the country, reality eventually catches up with public relations gimmicks.

  • avatar
    TomH

    The too many dealers question is not the simple sales divided by number of dealers proposition portrayed in Adrian’s article.

    In GM’s case there are undifferentiated brands that add significant cost but little value (e.g. GMC & Chevy Truck are largely interchangeable.) combined with brands that are too narrowly focused to support their dealers (e.g. Hummer).

    There is also the dimension that OEMs lost control of their dealer network strategies, abetted by State franchise laws, so that brand messages get lost within multi-franchise mega-dealers. (No longer dependent on a single OEM, multi-franchise dealers “cherry-pick” car-lines to build inventories and spend advertising dollars with a “Greatest Hits” strategy.)

    The net of all of these factors is that US OEMs may not only be dealing with too many dealers, but they are also trying to resolve the fact that they may have the wrong kind of dealers as well.

    As you read the “Why me” comments on dealer closings, no one is talking about the forecasted fit between the dealer vis-à-vis the OEM’s plan for five years down the road. Back to State franchise laws, they are so biased in favor of dealers that bankruptcy is seen as a unique opportunity to reshape dealer networks based on future product plans.

    If only it were so simple…

  • avatar
    ihatetrees

    Matt51:
    These dealers sell GM cars. Kill these dealers, they won’t sell GM cars. Most likely, people who have bought at these dealers will not stay captive to GM, they will go to Ford, Hyundai or whoever.

    No. Most likely, they’ll drive 15 minutes down the road to the GM store that cleans its windows more than once per year.

  • avatar
    SherbornSean

    We seem to think in such absolutes. GM either has the same number of dealers today, or a far smaller number.

    What I would have advised GM to do is find a way to convert many dealers away from selling new cars, such that the net effect is fewer dealers.

    The way for GM to do that would be to introduce another brand (really? yes): The GoodWrench Service Center. Dealers which convert would get out of the new car business (where they lose money) and focus on the Servicing and CPO business (where they make money).

    They could CPO and inventory any used GM brand vehicle they like, and have access to private GM-only auctions. They would also have a lot more options for warranty and financing, improving the resale values of GM vehicles.

    There is a lot of value to be created in this end of the market, and an opportunity for GM to actually take market share away from the independents (sorry Steven Lang!). When’s the last time you heard of a credible plan for GM to take share in the US?

  • avatar
    happy-cynic

    Who is holding the bag, for the re-design of the soon to be closed Hummer dealerships?

  • avatar
    happy-cynic

    Good articles and replies.
    Too bad no one at GM is paying any attention to us

  • avatar
    50merc

    SherbornSean: “The way for GM to do that would be to introduce another brand (really? yes): The GoodWrench Service Center. Dealers which convert would get out of the new car business (where they lose money) and focus on the Servicing and CPO business (where they make money).
    They could CPO and inventory any used GM brand vehicle they like, and have access to private GM-only auctions. They would also have a lot more options for warranty and financing, improving the resale values of GM vehicles.”

    I’ve said much the same thing, but not as well. When I studied the list of Chrysler franchises that have been terminated, my reaction was “Well, Chrysler is forfeiting great stretches of territory to the competition.” Here in flyover country, many folks can’t “drive 15 minutes down the road to [another] GM store.” It’s often an hour or more. Most new car buyers aren’t willing to be that far from factory-backed service and warranty coverage. GM’s problem is more that of redundant and weak product lines than simply the number of dealers. (Not that there aren’t other huge problems.)

  • avatar
    Patrickj

    @ihatetrees

    You’re right about the dealer proliferation in older suburbs. Within 7 or 8 miles of me in the Washington, DC suburbs, there are three Chevy dealers. Two of the three look from the street like commercial truck stores with a single Corvette out front for show.

    When I bought my last car, I visited one to look at an HHR and a late-model used Impala, and found little interest in actually selling me a car.

  • avatar
    Bearadise

    Many of the affected dealers intend to stay in business via used car sales and service. Look for more franchise-type used car operations, a la CarMax. With more dealers needing to replenish a larger used car inventory, the prices at auction will jump and, once again, the American consumer will end up paying more.

  • avatar
    ravenchris

    Ultimately, the reduction of dealers and increase of profit per unit will result in lower across the board selling price per car. The remaining dealers will play this wild card in the face of the inevitable decline in sales. The De Beers talk must walk through the Walmart reality.

    With heartfelt gratitude today and all days.

  • avatar
    amadorgmowner

    Rural dealers do have high loyalty to the brand. Here in Amador County, Ca we had a long-time GM/Chrysler-Dodge-Jeep and Toyota dealer (one owner) shut down when when GMAC cut-off inventory financing credit lines when the owner was one month late on his mortgage payment to GMAC (just before GMAC was saved by the feds). There are more Chevy, Dodge owners around here than Toyota. You could buy a Cadillac here for $500 over. Now, we have no new car dealers here for the first time in 60 years. Customers are angry that they now have to drive one hour to the next closest GM and Chrysler dealer. They will not buy from GM anymore. I won’t – I have been buying GM cars from the Halvorson family dealers for 20 years. But since I have now had my tax dollars used to close my local dealer, I’m done with GM. GMAC could not and would not talk to the dealer owner, despite pleas from the community, elected officials and a story on CBS News Sunday (4-19-09). (See Ledger-Dispatch.com for story)This dealer sold over one million cars for GM since 1975 and they could not lift a finger to help. Rural areas are loyal to domestics. But when a rural areas gets screwed by GM or GMAC and its dealer is closed, we don’t forget and will no longer buy GM products. Don’t take rural areas for granted. I think that is getting lost on PTFOA and GM and Chrysler. Is Toyota listening? Our area is ripe for the pickings.

  • avatar
    Bearadise

    [email protected] “Ultimately, the reduction of dealers and increase of profit per unit will result in lower across the board selling price per car.”

    Um…how so? Fewer dealers will mean less competition within a given market so there will be less pressure to discount in order to beat the other guy (talking new cars here, not used). And how does an increase of profit per unit result in a lower selling price, unless the cost to build per unit has gone down which, given the new CAFE requirements, does not seem likely?

  • avatar
    MadHungarian

    On the one hand, I understand how slower inventory turn increases capital costs. On the other hand, reducing the number of dealers won’t necessarily make floorplanning more profitable. Lenders make money by making loans (duh, but it is something that seems to get lost in a “credit freeze”). Fewer dealers, fewer loans to make. Or, if the remaining dealers increase inventories to pick up the slack, the world has just become riskier for floorplan lenders, because each dealer represents a bigger percentage of the portfolio. If one fails, that’s more money down the rat hole.

    Which brings me to the other point. All the dealer statutes in the world don’t protect dealers who go bust. Which had been happening with greater frequency all through 2008. If there are really too many dealers, then some of them won’t make money, and they will close. Let attrition solve the problem. Chrysler is closing some dealers that just invested beaucoup bucks in expanding or building new facilities — at Chrysler’s behest or at least strong encouragement. This does not mesh with the idea of closing those dealers that were tottering on the edge anyway.

  • avatar
    ravenchris

    Bearadise,

    Do you think the remaining dealers can survive while operating entirely within a ‘given market’ that has been contracting for years? The break-out will come when the product’s content/price sweet spot is attained.

  • avatar
    Bearadise

    [email protected]”Do you think the remaining dealers can survive while operating entirely within a ‘given market’ that has been contracting for years? The break-out will come when the product’s content/price sweet spot is attained.”

    The content/price sweet spot will never be attained, because onerous Federal Government safety and emmissions mandates inflate the cost to build a car much more than what the content is worth. A new car won’t be worth another $1,300 just because it meets the Messiah’s new CAFE standard, but $1,300 is the estimated increase in cost to meet the requirement.

    I still don’t understand how you project that the sales price per unit will decrease by virtue of there being fewer dealers and higher gross profit per unit. Wouldn’t both of those factors lead to an increase in selling price?

  • avatar
    ravenchris

    Bearadise,

    Do you think the remaining dealers can survive…

    All the manufacturers will pay to meet CAFE. Do you believe their estimate is accurate?

    Do you think these companies can survive if they raise prices?

  • avatar
    Bearadise

    Their estimate of what it will add to a car’s cost to meet Obama’s arbitrary mileage requirement will probably end up being too low. Of course, the cost in American lives will be much greater than that of the war in Iraq but what’s a few thousand extra dead people every year compared to showing how much we love our planet? (We can’t waterboard terrorists but we can damn sure force our own citizens into vehicles that we know with certainty will kill a higher percentage of them. Makes sense, doesn’t it?)

    Will the companies survive if they raise prices? It’s a sure thing that they won’t survive if they don’t raise prices when their manufacturing costs go up. And when hyper-inflation hits in the foreseeable future as a result of the Federal Government’s uncontrolled borrowing, prices are going to skyrocket anyhow.

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