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Tuesday, May 19, 2009

On Cutting Dealerships, Or, We Examine The Costs Of Selling Cars

So there’s a lot of conversation out there about car dealerships being told they won’t be selling cars for Chrysler and GM any more.

The idea, we are told, is to save the auto manufacturers money by reducing the number of dealerships with whom they do business.

I don’t really know that much about the car business; and I really didn’t understand where these cost savings would come from, but I was able to have a conversation with the one person I do know who actually could offer some useful insight.

Follow along, Gentle Reader, and you’ll get a bit of an education at a time when we all need to know a bit more about these companies we suddenly seem to own…and about the closure of thousands of local businesses that will make the news about our bad job market worse.

We know, at the moment, that Chrysler wants to close more or less 800 of its 3181 dealerships, and that the list of dealerships was disclosed as part of the company’s bankruptcy filing. The dealer relationships with Chrysler are expected to end June 9.

We also know that GM intends to end relationships with at least 1100 dealers. That list has not been publicly disclosed, and the dealer relationships are not scheduled to end until after the end of the 2010 “model year”, in October of 2010.

It is anticipated that GM will eventually cut 2600 dealers from its current network in an effort to get down to about 3600 dealers; suggesting a second round of cuts is yet to come.

(It appears that Ford is seeking to cut sales costs by about $600,000,000 annually while not cutting the number of dealerships.)

In order to protect the innocent, I’m not going to name my source for this story, nor the dealer for whom he works. For our purposes, let’s refer to him as the “dealer rep”.

So the first thing the dealer rep told me is that many of the dealers affected are “midlevel” dealers who operate in a market with several other nearby dealers; closing these dealers will hopefully reduce costs without substantially reducing overall sales in those markets.

He reports that it costs GM about $250,000 a year to support each midlevel dealer.

The costs include providing unique tools to dealers, providing training to dealer personnel, and advertising and promotional expenses.

I’m told that these are “co-op” costs, with dealers also paying a portion of the same expenses…but GM’s share, multiplied by every 1,000 midlevel dealers removed from the rolls, equals a $250,000,000 annual savings for GM.

He also tells me that many of the dealers are located in rural markets and sell a relatively small number of cars. For these dealers, there is the additional cost of having to deliver vehicles on partially empty transport trucks (or as the dealer rep put it: they’re getting paid less for the delivery than it costs to actually make the delivery).

If we assume that GM spends only 30% of that $250,000 spent annually on midlevel dealer support for these dealers, each 1000 dealers cut saves about $85,000,000 per year; if they spend 60%, the savings is about $170,000,000.

Add it up, and the potential savings for GM might be in the range of $400-500,000,000. Chrysler might expect to save roughly a third of that amount…but that would assume the composition of dealers, and the money spent, is about the same as for the GM dealer group.

(Here’s a quick bit of gossip that I have not confirmed through a second source: the dealer rep told me that some GM dealers are being cut not for lack of sales, but as a result of “customer service” issues.)

There is another group of dealers who will be cut “through attrition”. These include Pontiac dealers, who already know there will be no more Pontiacs to sell, and Saab dealers, who know they won’t be part of the GM future. There are also dealers who are (and have been) closing because of the general economy.

Hummer and Saturn dealers currently face an unknown future.

Something else you should know: the dealer rep told me that Chrysler filed for bankruptcy before terminating the dealer relationships, which may give those dealers more rights in a bankruptcy proceeding than GM dealers that were notified before any bankruptcy filing.

He suggested such a filing might occur as soon as the second week in June…but that is also something I did not confirm through a second source.

He also points out that the successful outcome of all of this is that the two companies are able to make the same sales goals as before with fewer dealers…and he has no idea whether that will come to pass or not.

As for options: the dealer rep reports that the one manufacturer seeking dealers today is Hyundai; but even if they became Hyundai dealers, a lot of stores—particularly in rural areas—are not going to be as successful selling Hyundais as they were selling Chevy, GMC, or Dodge trucks…which might turn out to be good news for Ford and Toyota.

So what have we learned?

GM and Chrysler could save substantial amounts of money by reducing dealers; that process is underway…and for some number of dealers, it’s not about sales volume as much as it’s about sales practices.

GM and Chrysler hope that they can sell the same number of cars with fewer dealers, but as of today there is no way to be sure if that will come true or not.

The biggest winners in this process might be the surviving dealers, or the Ford and Toyota dealers with whom the closed dealers are no longer competing.

The employees of nearly 3000 dealers—and the cities in which they are located--are unlikely to end up winners in this process; however, some (such as mechanics) might eventually find work at the surviving dealerships.

Finally, I apologize for the fact that this wasn’t as inspiring a story as we like to present in this space…but now that we are basically the owners of two major auto manufacturers, it’s a set of facts and figures we better get to know.

WARNING—Self-promotion ahead: I am competing for a Netroots Nation scholarship, and I was not selected in the first round of voting. There are two more chances to be selected, and the voting has restarted from scratch…so even if you’ve done so before, I still have to ask you to stop by the Democracy for America site and click on the “Add your support” link to offer your support for me again. Thanks for your patience, and we now return you to your regular programming.

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