Thursday, June 04, 2009

About Dealer Closings

I don't regard the "political considerations" line to be well-founded. Small businesses tend to be conservative, and auto dealerships are small businesses.

But there is something about this whole dealer-closing thing that is bothersome.

In general, auto dealers purchase the franchise--the license to sell and service the product, obtain/resell parts, etc. The dealer puts up his money to make that purchase. The dealer puts up his money (albeit borrowed, perhaps) to purchase the inventory of vehicles, the land and building, and the parts inventory.

The dealer puts up his money to hire the sales and service personnel. He puts up his money to install the phones, put up the website, and keep the electricity on.

So.....why does the manufacturer (GM or Chrysler) give a rip about keeping or not keeping the dealer, assuming that the dealer plays by the rules and maintains a good reputation?

After all, the dealer buys cars from the manufacturer. Why would GM or Chrysler cut off CUSTOMERS who pay for their product?

There may be something I don't know about this, but I cannot determine how a dealer is 'a cost' to the manufacturer.

So enlighten me...

UPDATE: In the combox, one Eastern dealer mentions that the manufacturer may own the real estate of a given dealer franchise. While that is not a "cost," per se, closing that dealership allows the manufacturer to monetize the land (and, perhaps, the building.)

The dealer also observes that, with typical State 'franchise laws,' it is very difficult for manufacturers to dump lousy dealers, so this is an opportunity for the manufacturers to do so without onerous legal actions.

Well, yah--but that also puts a cloud on ALL the dealers whose franchises were revoked.

Not exactly the reputation you want if you were a clean, competent dealer, eh?


Neo-Con Tastic said...

I was thinking that very same thing myself. My guess is:

1) The cost of running the lines of credit to the dealers (opportunity costs)
2) The cost of servicing those relationships (account teams, etc)
3) The cost of advertising dollars (the more dealers, the more commitment to advertising).

I'm sure there are many more and really, once you add that all up, it's probably a pretty penny.

Dad29 said...

Unnnnhhh....not really.

1) The credit lines were profitable and were "off-book", financing by GMAC, not GM itself.

2) Account management IS a cost, yes.

3) Advertising cost does not vary by number of dealers. In fact, with fewer dealers, co-op ad cost will rise both to GM AND to the remaining dealers.

Andy said...

I'm not entirely sure...
But I do recall reading SOMEWHERE about a sort of "dealerships union".

I think the dealership schema is one from waaaaay back when, and they have a lot more power than we would think.

PS - This is now Andy K. (If anyone cares)

Anonymous said...

Auto and truck dealers in Wisconsin have manipulated the legislature over the years into enacting the most onerous, anti-manufacturer franchise laws in the country. (This "protectionism" isn't limited in Wisconsin to auto dealers, but the trade association which represents them has been the most aggressive.)

Having said that, it is shocking to find that the automakers can "fire" the dealers with apparent impunity.

Anonymous said...

I am a Chevrolet Dealer in Virginia. The mass dealer closings are really only possible in bankruptcy because bankruptcy law trumps state franchise law. What you say above about the dealer's investment is true. It is also true that dealers don't cost manufacturer's anything from a dollars and cents measureable perspective. That is why there is so much outrage directed at the administration and the task force. While I am very upset at the manner in which they are retaining some of us. Basically they are forcing us to sign a very onerous amendment to the existing dealer agreement which basically requires us to sign away all our rights. It is absolutely unfair and unAmerican. The state laws that protect dealers from this kind of heavy handed-ness also make it nearly impossible and extremenly costly to terminate dealers who fail to live up to their end of the franchise agreement. The dealer agreement calls for the dealer to satisfactorily represent the brand in a specific Assigned Geographic Sales and Service Area (AGSSA).
How many times have to been to a dealer where:
the facilities were old and dirty? the salesforce was untrained?
the management unprofessional?
the dealer didn't stock a sufficient selection of product?
The service department was incompetent?
Most importantly, these dealers also tend to perform poorly in the area of retail sales which does cost the manufacturer in the form of lost business. The manufacturer spends a ton of money just trying to get on the consumers list of cars to consider. If he can manage to do that and the consumer's visit to the local dealership is less than a positive experience and he leaves the dealership without buying, the manufacturer has to pray that the consumer will give them a second chance at the next dealership representing the brand. Chances are the consumer will not. So you see, it does cost the manufacturer dearly if the dealer isn't getting the job done.
Any time a dealer like this is allowed to continue representing the franchise, he gives all dealers of that brand a bad name. As much as I hate the way they are doing it, this is GM's once in a lifetime chance to get rid of these poor performing dealers. They must take advantage of it.
The Chrysler debacle is much worse because their decisions on which dealers to eliminate seem to be unjustifiable. In some cases keeping the poor performer because they own the dealer's real estate or hold the mortgage on the property.