By on May 30, 2011

It took a bit of research to fully parse the California New Car Dealer Association’s complaint against Chrysler and its partially company-owned store in Los Angeles, and our finding is that the CNCDA is actually gunning for Chrysler with gusto. But, argued some of the B&B, surely Chrysler doesn’t want to be kicked out of California? Surely Chrysler’s California dealers don’t want to see their manufacturer banned from selling vehicles in the state? Well, it turns out we were missing a little context that seems to indicate why Chrysler’s California dealers are willing to go to war over a single dealership: Chrysler is overhauling its California retail presence with the help of Wall Street hedge funds. Having used the bailout to wipe out 789 dealerships across the country, Chrysler appears to be working around franchise law to exert more control over its retail network in the Golden State. No wonder then that California’s dealers are standing together to attack Motor Village, the most egregious example of Chrysler’s new retail model. And there’s no knowing where the conflict could end…

Automotive News [sub] reports

California Superstores, a new dealership group owned largely by a New York hedge fund, is buying up former Chrysler Group dealerships and at least one existing store in California.

And Chrysler is buying the real estate for the group as a way to beat California’s high cost of real estate and to rebuild Chrysler’s weak market share in the state.

Here’s how it works: Chrysler Realty has been buying the expensive California real estate for California Superstores, a dealer group backed by York Capital Management, and renting it to the outfit for below-market rates.  Both sides fully admit to the situation, with Chrysler’s VP for Network and Fleet, Peter Grady telling AN [sub]

“We’re buying the real estate and York Capital is funding the dealership operations with working capital,” Grady told Automotive News. “We expect each one to sell 100 cars a month. That’s significant volume we’re missing. We’ve still got a long way to go in California.”

The plan will help ensure that Chrysler gets “the right guy to operate the store the way we want.”

Grady said Chrysler CEO Sergio Marchionne is a “huge, huge proponent of the plan.”

Note that getting “the right guy” is the key to this program… even though that money spent buying new real estate could just as well be used to renovated an improve the existing dealerships that Chrysler says are suffering from underinvestment. Meanwhile, on the other side of the deal, California Superstores managing partner Hoz de Vila admits

Chrysler Realty will give California Superstores a break on rent for the first couple of years. The rent amount will gradually increase to market rates, he said.

“It’s not really a rent subsidy. We’re still responsible for our leases. At the end of the day, [Chrysler Reality’s] going to get their money back.”

This is essentially the same deal Chrysler has with the Motor Village dealership, with Chrysler Realty giving the new store six months free rent, and then increasing rates steadily until they reach $90,000 per month in 2015, for a retail location with a market rent level of $200,000. The major difference is that Motor Village is, in fact, owned by Chrysler. By contrast, the California Superstore locations are owned independently and backed by York Capital, with the founder of California’s largest Dodge dealer acting as CEO. On the other hand Chrysler’s funding of real-estate acquisitions is key to Superstores’ involvement, just as Chrysler’s desire to see “the right guy operate the store the way we want” is motivating this not inconsiderable outlay. In short, it’s one cozy little arrangement which appears to violate the spirit, if not the letter, of state franchise law.

Clearly, California’s Chrysler dealers want to use the most egregious example, Motor Village, to draw the line on Chrysler’s attempt to gain control over its California retail network. After all, the CNCDA’s complaint cites a number of improper filings with the state board, full Chrysler ownership under non-qualifying terms, and misrepresentation by Chrysler of the dealership’s status. But if the DMV throws the book at Motor Village, the California Superstores network could be the next target, as its relationship with Chrysler is clearly different than the typical franchised dealer. One California Chrysler dealer, speaking to AN under the condition of anonymity, argued

When they [Chrysler] have so much investment in it, our biggest concern is they’re not going to allow it to fail. They will do whatever, at the expense of other dealers, to allow them to survive.

CNCDA president Peter Welch adds:

I’ve heard concern from our members about Chrysler providing below-market rent subsidies to dealers and that it’s causing dissension among Chrysler dealers because they’re not all being offered the same types of incentives.

John Tangeman, Chrysler’s national dealership placement manager, insists that Chrysler has shared its lists of open points with its California dealers, arguing

We have opportunities in the market and we have offered and discussed these opportunities with a lot of dealers.

And, of course, Chrysler’s California dealers are not blameless in the sense that their statewide market share is a mere 5.9%, compared to a 9.5% nationwide average. And, argues California Superstore’s Hoz De Villa

A lot of operators were not reinvesting in the brand because of the financial conditions

So, Chrysler may just be doing what it has to after demoralizing its dealer network with subpar products and a painful, arbitrary, divisive dealer cull. On the other hand, given how blatantly it appears to be violating franchise law with Motor Village, it’s likely that Chrysler’s California situation could get a lot messier before it gets better. And, after all, a 5.9% market share and underinvesting dealers is still better than getting tossed from the country’s largest market for cars. Which, as this battle widens, is looking more and more possible.

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16 Comments on “Chrysler’s California Dealer Battle: Wider War Already In Progress?...”

  • avatar

    Good reporting. This one will be interesting to watch.

    It seems that there are two givens in the world of car retailing: First, the process is antiquated and needs a major overhaul. There seem to be so many people who have a foul taste after a dealer experience. Second: every state has franchise laws which work to prevent any significant change.

    The first company to come up with a way to solve or work around these two constants simultaneously will have a big advantage.

    • 0 avatar
      SVX pearlie

      “a 5.9% market share and underinvesting dealers is still better than getting tossed from the country’s largest market for cars. Which, as this battle widens, is looking more and more possible.”

      Not really. Chrysler can afford to drop out of California for the next few years. The Dealers, not so much. After a couple years of no new Chrysler product, due to a lack of license in the state, they won’t be Chrysler dealers.

      At that point, Chrysler corp will have the entire state for themselves.

      And California becomes an object lesson to any other dealers in the country.

      Totally worth it to break the back of the Dealers in the largest, most visible market in the US.

      • 0 avatar

        .Chrysler can afford to drop out of California for the next few years.

        I desperately want to disagree with this, but given how the story appears to be unfolding, I have to assume Chrysler has at least considered the possibility and thinks it’s worth the risk. After all, Chrysler doesn’t have much to sell to Californians at the moment, and it will be a few years until Fiat brings CA-friendly products into the fold, so maybe a timeout wouldn’t be the end of the world. Chrysler’s either thinking like that, or the Motor Village situation was horribly bungled.

        Either way, California is an important market on volume alone, and I believe it’s important for more intangible reasons as well. Plus, dealers are no slouch when it comes to political infighting. I just hope Chrysler has really thought this thing through…

      • 0 avatar

        It’s not a bad thing to leave the state. It would actually be a good idea for all new car manufacturers to leave the state. Maybe it would break CARB’s back by calling their bluff. It’s not like Chrysler needs California for the next few years.

        Anything that speeds up the change from the current car sales model is good by me. Franchised dealers are relics that should be cast aside.

      • 0 avatar

        Agree. No CA Chryco dealer can survive 2 or 3 years with nothing to sell. In the worst case scenario, given how little brand equity “Chrysler” has in CA, Chryco may even re-enter the CA market under a different name, maybe … LANCIA? Chryco can even try the Dell online built-to-order model and eliminate dealers altogether. Perhaps partnering with AutoZone to provide parts and service.

      • 0 avatar
        SVX pearlie

        The Dealers will want Chrysler to offer the same terms that they offer Motor Village, and the DMV will be have no choice but to demand that Chrysler comply, “or else”. Meaning that they pull the Chrysler license.

        The problem for them is that Chrysler is in a position to call that bluff.

        California is indeed an important market for the country, but Chrysler (like the other domestics) undersells here, so it’s not such an important market for them. Further, Chrysler is heavily fleet, which doesn’t go through the dealer body. When you look at it from a hard numbers standpoint, that 5.9% market share is probably more like a 4% retail share.

        Without a license and freed of local dealer franchise restrictions, Chrysler would be in position to contract with national fleet sales & service organizations to replace the California dealer body entirely. Wal-Mart / Sam’s Club (Arkansas) and Sears / K-Mart (Illinois) would be the most obvious candidates, due to their national retail footprint and on-site auto service capability.

        By the time the 2011 complaint is settled, we’ll be past the summer sales peak, and Chrysler will be able to pull the plug on their current dealers in preparation for a 2012 summer launch.

        From a customer standpoint, California moves to 100% Build-To-Order. You pay a non-refundable upfront Reservation fee to place the order, set up payment (which Sears & Walmart know how to finance) and deposit against cancellation once the options & color are scheduled to go onto the car. Then it’s just a question of delivery, which is a logistics task that Walmart & Sears can do with their eyes closed.

        In the mean time, the ex-Dealers wind down, and word circulates among the remaining Dealer body as to how the new sheriff works.

  • avatar

    It will be interesting to see how this will play out… A fight of normal market economy versus obnoxious dealerships who buy politicians. My guess is that the dealerships will win for now.

  • avatar

    It’s easy for Chryco to claim their CA dealers are under invested but the fact of the matter is they can only afford to invest at a rate that will provide a return. It is a business after all not a bottomless well of capital to be invested at Chryco’s whims.

    This scenario of Chryco buying the land and leasing it back far below market value is why all the states have franchise laws that basically prohibit such acts. Chryco has absolutely no business subsidizing a particular dealer group irregardless of how they think their dealerships should be operated. The state of CA will put an end to this and so would any other state. That is why franchise laws exist. If Chryco wanted to subsidize all of their dealers in this manner that would be a different matter. To do it for one select dealer group is nonsense.

    Auto manufacturers have long proven they are clueless about retailing their products and this is another example. Ford tried to run their own retail network about ten years ago in if I remember correctly Utah and fell flat on their face with all the stores they bought either closing or going back to private owners. Watch how quickly the state of CA puts an end to this nonsense.

    • 0 avatar
      SVX pearlie

      “Watch how quickly the state of CA puts an end to this nonsense.”

      You mean to fall right into Chrysler’s hands by pulling their business license?

      • 0 avatar

        I don’t think Chryco will push it to the point of having their business license revoked. Rather they will be forced to stop the grossly unfair select subsidization to one dealer group.

      • 0 avatar
        SVX pearlie

        “Rather they will be forced to stop the grossly unfair select subsidization to one dealer group.”

        And if Chrysler tells the CA DMV go pound sand”, and surrenders their CA Business License, what then?

        If Chrysler exits CA, the Dealers & State won’t have jurisdiction.

  • avatar
    Robert Schwartz

    I disdain the manufacturers, but I loathe the dealers, who are scum sucking maggots. Any bad thing that happens to the dealers will only bring a smile to my face.

  • avatar

    I’m pretty conflicted about this. On the one hand, removing a possible layer of crap by having more manufacturer control over a dealership could be good, less haggling/four-squaring/BS tactics.

    But I doubt it’ll make the transaction price lower for consumers.

  • avatar

    It is definitely an interesting conundrum. One one hand, the OEMs are leaving margin on the table by selling through franchised dealers (assuming that there is any actual margin left in new cars these days), but at the same time, they need dealers for much of the same reasons they turned to a franchising model in the first place… risk mitigation and capitalization.

    I suppose starving California dealers of anything to sell for a couple of years could clear out the weak ones but it would also kill off the stand-alone dealers first, and those are the ones theoretically most loyal to Chrysler. Others could survive on service, used cars, and the sale of other makes for a while. It’s not like they are selling a lot of Sebrings and 200s in the meantime.

    In the meantime, Chrysler’s service network would be decimated and it’s unlikely that any OEM, much less Chrysler, could build up a new retail network quickly enough to win back the sales they would lose during the hiatus. Potential customers would either be attracted to other makes and models and even those waiting to take a risk on a Chrysler would likely have concerns about a thin service network.

    Perhaps I’m wrong and Chrysler is willing to risk all of this in order to free themselves of their pesky dealer network in California and to scare the daylights out of dealers around the rest of the country. More likely, it’s a pretty interesting game of chicken to watch.

  • avatar
    DC Bruce

    Amid all of the smoke and noise, it’s easy to lose sight of the basic proposition: a manufacturer has an interest in having the best and most efficient (not necessarily cheapest) distribution network possible.

    Car dealers and service station owners are politically organized and active, so, at the state — and even the federal level — they have succeeded in getting legislation passed which, as a minimum, reduces the manufacturer’s flexibility in altering its distribution network.

    Quite properly, the dealers argue that its their money on the line and its their capital that financed these dealerships and built the product’s brand equity. So, the manufacturer, having benefited from the dealer’s investment in brand equity, should be permitted to harvest it by building a bunch of company stores that suck the business away from the franchised dealers.

    So, there’s the conflict. If it were possible to somehow to compensate the dealers for the value the brand equity they contributed, that would be the solution. Crap dealers who are not adding to brand equity (or who are detracting from it) are worth little or nothing, and should be compensated accordingly. Unfortunately, while the concept is simple, the implementation is not.

    And, the free rider issues, even among franchised dealers are huge. Imagine that dealer A give s good customer experience, has nice facilities, nice staff, maybe a free loaner for service. That costs money, which has to come out of the price of the new car. The customer can comparison shop from Dealer B who has none of these things, and can give the customer a better price on the car. So, this puts the dealer network in a kind of race-to-the bottom death spiral, unless the manufacturer has some ability to control it.

    • 0 avatar
      SVX pearlie

      “So, this puts the dealer network in a kind of race-to-the bottom death spiral, unless the manufacturer has some ability to control it.”

      In theory, this is measured via customer feedback surveys & ratings, and then rewarded via co-op dollars and so forth.

      In practice, it just doesn’t work at all.

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