Chrysler's California Dealer Battle: Wider War Already In Progress?
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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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.
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.