Closing auto dealers: Dumb move

[pauldun170]

Complaining about closing auto dealers: Dumb move

explainer
Deal or No Dealership
Why is Chrysler closing 789 car dealerships?
By Christopher Beam
Posted Wednesday, May 20, 2009, at 6:20 PM ET

Chrysler disclosed in a bankruptcy filing last week that it plans to close 789 dealerships—about one-quarter of its total. General Motors, meanwhile, told the owners of 1,100 dealerships that it will drop them from its network. How does shuttering dealerships help car companies?

It saves them money. Car companies don't actually own dealerships—instead, they have contractual agreements that dictate factors like location, display space, signage, and service options. Nevertheless, Chrysler and GM and other auto manufacturers must maintain a large, costly field force of trainers (to train technicians to fix cars), salespeople (to persuade dealers to buy more cars), and auditors (to verify claims for reimbursement). The more dealerships, the more go-betweens a car company needs to employ and the more money it has to shell out.

Shuttering dealerships could also result in less intra-brand price competition. Car buyers will typically visit at least two different dealerships in order to compare prices before making a purchase. By playing dealers against one another, buyers lop an estimated 2 percent off revenues. But if there are fewer dealers, customers can't haggle as easily, and car companies make more money. There's a tradeoff, of course—fewer dealerships means customers have to drive farther. But at the moment, there are so many dealerships that the benefits of reducing price competition outweigh the harm of having fewer locations.

Another benefit: Shutting down dealerships weeds out weaker branches to help stronger dealerships stay viable. It also makes sense from a branding perspective, because when a dealership starts to fail, dealers resort to tactics that make the car company look bad. Think free hot dogs, "push, pull, or drag" sales, and giant inflatable gorillas on the roof. (Luxury car companies like Lexus explicitly forbid dealers from using the words price or sale in their ads.)

Finally, pre-emptive closings help car companies from getting saddled with tremendous amounts of debt. Let's say a GM dealer is just getting started: He'll buy hundreds of cars from GM with money borrowed from GMAC, the financing arm of GM. If the dealership collapses suddenly, GMAC may not get a lot of the money it's owed. So it makes sense for GM to shutter a dealership before it goes too far into the red.

When the auto industry first started expanding in the early 20th century, it made sense to have dealerships in every community. Much of the population was rural, and cars broke all the time, making proximity to the original vendor necessary. These days, with a more urban population and better auto engineering, it's not necessary to have so many dealerships. At the same time, people are willing to drive farther to buy or tune up their cars. As a result, more dealerships don't correlate with more sales. Toyota sells more cars than Chrysler with fewer than one-third of the number of franchises. (The average Toyota dealer sold 1,589 vehicles in 2008; the average Chrysler dealer sold 124.)

Got a question about today's news? Ask the Explainer.

Explainer thanks Glenn Mercer of the International Motor Vehicle Program and auto industry consultant David Stivers.
Christopher Beam is a Slate political reporter. Follow him on Twitter.

[goof2]

If I had to guess I can come up with a few reasons. First they thought that too many dealers of the same brand too close together creates too much price competition for the same vehicle. If a customer can get two dealers to beat each other up over price it cuts profits. Of course that ignores that customers will do that with competing brands as well.

Another issue is more dealers also usually means more inventory which, when things get slow require more manufacturers rebates to sell. The manufacturer is more exposed to changes in the economy or market trends (customers running away from SUVs when gas got expensive).

One other issue is, as was mentioned in the quote paul posted, some dealers had pretty shitty customer service. This presented an opportunity for manufacturers to dump the dead-weight that played a part in dragging down their brands. In the dealers defense though it is hard to have good customer service when the customer is buying a dogshit Chrysler. A problem with that fake letter from Chrysler paul posted is Chrysler wouldn't have much reason to be snarky after building those same dogshit cars since the Nixon era and managed to screw up the company so bad the best option was being bought by Fiat.

[Homeslice]

Originally Posted by goof2

If a customer can get two dealers to beat each other up over price it cuts profits.

Yes......however it may also result in the customer buying GM or Chrysler, instead of a Toyota.

[Particle Man]

Will someone pass the popcorn? This is getting good

[pauldun170]

I'm going to have to put some serious thought as to why terminating franchise agreements with dealers that don't meet the standards set by the manufacturer is a good thing.

Maybe get some powerpoint presentations on why having too many dealership is a bad thing when your are trying to build brand equity and increase profit margins.

I tried seeing it from the other side, that keeping an abundance of overlapping franchises benefits the automaker by increasing exposure but since we're not talking about fucking starbucks I can't get that simplistic

[pauldun170]

I've gone on one my tangents again.
Damn...i got problems

[Homeslice]

Brand equity, you say? Let's take the extreme case, if there was only one Chevy dealer every 500 miles. What kind of brand equity are you going to have then? Chevy isn't Ferrari, people don't worship their cars, so they can't get by with as few dealers as Ferrari can.

And yes, the manufacturers do regularly review dealers for standards and such, and do often threaten them with the loss of it, but.........When I was at Ford, it was mostly due to customer service issues, as well as lame attempts to get them to order more cars ......Not due to costs of doing business. The amount of time spent on each dealer is not as much as people think. When I was with Ford, the small rural dealers were treated to maybe 2-3 phone calls a month. Does having fewer dealers make things more efficient, yes, but for you to say that it will automatically help sell more cars?? Jigga pleaz....... that's where I called bs.

And when this is a Democrat administration that is allegedly supposed to care about jobs........

Seems like the only jobs Democrats understand are factory (union) jobs......Not dealership jobs, which are small businesses that the average big-city Democrat doesn't appreciate, other than spouting off a few pandering soundbites during election time. BOTH parties are sacks of shit that are just guessing WTF they are doing.

[pauldun170]

Originally Posted by Homeslice

blah blah blah Does having fewer dealers make things more efficient, yes

Glad you finally get the point

Originally Posted by Homeslice

yes, but for you to say that it will automatically help sell more cars??

Oh yeah...here is where I said that

Originally Posted by pauldun170

Dumbass

[Homeslice]

Originally Posted by pauldun170

Glad you finally get the point

Except those efficiencies are very minor, since the manufacturer doesn't own the dealer, and only helps him with a teeny bit of his expenses.

Oh yeah...here is where you said that:

Originally Posted by pauldun170

I don't know, I thought the point was to sell cars, not create sales jobs.

[pauldun170]

Originally Posted by Homeslice

Except those efficiencies are very minor, since the manufacturer doesn't own the dealer, and only helps him with a teeny bit of his expenses.

Oh yeah...here is where you said that:

I can see how you could interpret it that way.


My point is that the government helping Automakers get around all the legal bullshit concerning dealers in was assisting automakers in restructuring efforts.
The point of those restructuring efforts is to help automaker shed legacy bs and focus on selling cars.
Not focus on retail jobs, the focus of the original article.

Reread my posts and hopefully you will see that.

Dealerships purchase the franchise rights and represent the automaker in the market place. It is the right of the automaker to control that arrangement.

My perspective on dealer saturation is from an economist standpoint.
Are you going to standby your assertion that consumers cross-shop between GM products and Toyota products?