Too many dealers?

My dad and I briefly touched on this topic during my visit this weekend: Does having too many GM and Chrysler dealers really hurt the auto makers?

Small, real-world example:

My parents live in a small town, and they're losing some dealerships. As a result, if someone wants to buy a GM or Chrysler--or get theirs serviced by a dealership--they now need to drive to the next town. How does this help GM and Chrysler sell more cars? On a related note, if someone wants to buy a new GM or Chrysler, who cares if the dealership is located around the corner, down the street, or 25 miles away?

These articles got me thinking about the topic again:

http://money.cnn.com/galleries/2009/smallbusiness/0905/gallery.car_dealerships.smb/index.html

http://money.cnn.com/news/newsfeeds/articles/reuters/MTFH39624_2009-05-20_01-57-57_N19463740.htm

Discuss.

I think that there are folks that will be hurt, but there are too many franchise dealers for the current product demand. Yes, people will have to drive to another town to get service, but many have done that for other brands for many years. What could happen? Less sales?-Maybe. Less choice?-Probably. Better maintained vehicles?-Likely. Why? Well, if you know that your dealer is the next town over, you won't put off service because you know the cost of getting stranded is too high. The first article did demonstrate the good business acumen of the owner by taking advantage of new business opportunities.

Or possibly you put off service because you don't have time to drive to the next town.

I live in a small town, population <2500. We have had the big 3 represented by two different dealerships in town for the past 35 years. They have bought and sold dealer rights throughout the years but right now they exist as a GM/Mopar dealer and a GM/Ford dealer.

Imports have never been sold new in town. Locals have been traveling distances for years to buy imports. The nearest BMW dealer is 40 miles, Volvo is over 50 miles away, Toyota Nissan Mazda etc are a 30 minute drive to the next town over.

People do complain about needing to plan 2 hours travel time to get their VW serviced, but when they want a VW, they buy one.

So, no, I don't believe overpopulation or thinning of the herd hurts them (at least in this area). People are willing to make trips to buy what they want.

Or how about Sacramento with 10 chevy dealers in a 25 mile radius. Necessary? My big question is who cares? I thought they were franchises. How does having too many dealers hurt the parent company?

Too many cars hurt Chevy, Ford and Chrysler. I think part of the franchise agreements are to supply a certain amount of cars for the dealerships to buy so some dealerships don't get shafted on availability while other dealerships get nothing but the "hot" models. So, with the contraction of cars for the big 3, there wouldn't be enough "vehicles" to go around to maintain franchise agreements.

I could be completely wrong however.

I've been wondering about this, too. One problem with too many dealers might be that if there are 2 or 3 dealers in close proximity to each other not selling enough cars to make a good profit, then they will undercut each other to make a sale. That sale doesn't make much money for the dealer, and it also cheapens the brand and lowers the price people expect to pay.

Also, the tactics used by the "desperate" dealer(s) will turn off many customers. Their slim profits will lead to a deterioration of their facilities and sales force. One healthy dealer in place of these 2 or 3 should be in better shape, and would be a better representative of the manufacturer.

This probably does not apply to the small-town standalone dealer that seem to make up a large amount of the closings, although since they don't move much metal or have a large local customer base, their profits are likely to be small, as well.

I know many will say "but they don't make much on new car sales anyway!" Maybe this is one reason why?

I don't understand what direct expense a manufacturer has to pay because of a dealer. There is some overhead cost in maintaining them as a customer, and in marketing, sales and service support but it seems like it should be minimal.

Our friend Steven Cole Smith from the Orlando Sentinel was on the local NPR station this morning discussing this very topic: Interview on the Effects of dealership closings.

You can follow the link to listen to the complete interview, but Steven did point out that Central Florida is losing so many dealers, there are some counties that won't have any at all. He worries that people aren't going to be eager to buy a car they can't get serviced locally.

Margie

What does Central Florida need besides a hand full of Buick and Cadillac dealers, and a supply of Left turn signal bulbs.

Wally wrote: What does Central Florida need besides a hand full of Buick and Cadillac dealers, and a supply of Left turn signal bulbs.

That and a big pile of used save-a-spares will pretty much service all our automotive needs.

Margie

I have been trying to understand this. More dealers sell more cars. The dealer is an independant business and if he makes a profit or not is his problem. There probably are other reasons that I don't know about. The factory sells their vehicle to the dealer, so they get their money, what ever the dealer sells the car for is his business and profit or loss. One thing, the bigger dealers can afford to buy all the special diagnostic stuff the factory requires. What I also don't get, is the rational of picking dealers to close. In my area, there are two GM dealers who have been succesful for years and GM wants to cancel them. In the Chrysler case, a local LM/Jeep dealer got canceled. He is relatively small, doesn't stock a lot of vehicles, but has been succesfull for over 40 years. Now we have a mega dealer 12 miles away who is also a Dodge dealer and can stock hundreds of vehicles. Actually, he has another place 15 miles in the other direction. Then you have two Dodge dealers who are 4 miles apart in my small town. Neither stocks a lot of vehicles. they got by passed. Go figure.

among other things...too many dealers:

a. creates a bad image for the company. Since theyre willing to be ruthless to attract customers.They cant afford to provide good service to the customer after the sale because theyre not bringing in enough bucks to hire good sales people and good techs.

b. Managing the supply line to all those dealers is a very expensive project ...but dont ask me how or why

C. making the product a little less accessible makes demand raise and therefore sales dollars...but the important thing here is that the product has to be valuable in the customers eyes first. I think the decreasing dealerships bit had to happen eventually, but the first focus has to be on re-creating the image that GM is something you want. And thats gonna take dtermination, ingenuity and quick action. 3 things GM is incredibly inefficient with.

I don't think the dealers outright buy all of the cars that are sitting on their lots. There are most likely contractual obligations that GM has to provide a certain level of supply for each dealer as well. So, the cars sitting on all of those lots are unsold supply for GM and most likely tie up the company's capital.

Within the realm of what I'd consider "in town" there are 5 Ford brand dealers, 12 GM brand dealers, at least 7 Chrysler, 2 Mazda, 2 BMW, 1 Subaru, 1 VW/Porsche/Audi/Jag, and a few others.

There are too many GM dealers here.

There are logistical and support costs involved with too many dealers, just one example is our daily parts delivery. That involves a 18 wheeler every day. Cut down the number of Mom and Pop dealers he has to deliver to and you cut your parts delivery costs. That's just one example of the mfgs costs associated with dealerships.

I think that, at least in the larger urban areas, you will see satellite service locations pop up. It's a lot cheaper to rent, say, a closed down tire store or something like that and put some fast moving parts etc in there than it is to opeen up a whole dealership. In fact, at one time Ford was talking about doing that, close down dealerships which were too close together and then require the remaining dealerships to open satellite service locations based on population density etc. Supposedly there were pilot programs that were being started in some of the larger cities, I don't know if that ever came about.

ive got the solution...

factory direct...

nuff said

First Detroit mfgr to do this = the one who wins this little game

We got a New nISSAN and a new Honda dealership , the money they spent a year or so ago thinking big profits is probably strangling them now . I hate car dealerships and salesmen good riddance . And they can keep their free hotdogs to eat . The lights at night are pure pollution , blinding . Factory Direct ! Fly in to detroit and drive home LIKE BMW

4cylndrfury wrote: ive got the solution... factory direct... nuff said First Detroit mfgr to do this = the one who wins this little game

I'm all for it!

pick color, engine, transmission, and have shipped to your door. why not?

I was thinking the same thing...

Personally, I have seen a dealer network that hubs all of its parts and cars from a single large "depot" lot. They would buy old Goodyear and Firestone stores for their outlet stores. The major repairs (engines. transmissions) went to the depot store and all maintenance would stay at the 4 outlets. The depot store would shuttle parts to all the outlets and between the outlets allowing for a lower stocking level at each store. The outlets had a dozen or so new cars, a half dozen CPOs and a 2 - 8 bay shop with a small show room.

The funny thing was IIRC the dealer that I saw doing that took a load of crap from GM for doing it even though it is probably a better model of efficiency

Grtechguy wrote:

4cylndrfury wrote: ive got the solution... factory direct... nuff said First Detroit mfgr to do this = the one who wins this little game

I'm all for it! pick color, engine, transmission, and have shipped to your door. why not?

Have you ever seen a car PDI'd? I can guarantee no one in the US wants to assemble their new Fusion after delivery

WilD wrote: I don't think the dealers outright buy all of the cars that are sitting on their lots. There are most likely contractual obligations that GM has to provide a certain level of supply for each dealer as well. So, the cars sitting on all of those lots are unsold supply for GM and most likely tie up the company's capital.

No, the dealer owns them. I think that they are required to supply equal amounts of supplies to each dealer, regardless of how close they are, which can easily over saturate a market, thus killing market value.

The only time the parent company gets involved with the deal is financing, where the finance arm them comes in as a partial owner or a lien owner on the title.

Other than that, all those 40,000 Chryslers that are on "former" dealer lots- it's the dealers problem, not Chrysler's- none will be take back.

The trading between dealers is just that- trading between dealers.

E-

As I understand the theory, too many dealers = too much cutthroat competition between dealers = lower transaction prices, ultimately leading to manufacturer subsidies (rebates) to move the metal that they have already made to be able to supply all those dealers with. It's the subsidies they are trying to ultimately get rid of to increase manufacturer profitability. I don't necessarily buy that theory, I think transaction prices fall where the market values the product and isn't greatly affected by an oversupply of outlets. I think it was GM a couple years ago that tried to cut out the rebates by simply lowering the sticker prices to more closely align with real-world transaction prices vs. the fantasy number they were putting on the Monroney. They failed because consumers had become so conditioned to bargain hard off the sticker and to expect rebates. I don't see how cutting the number of dealers is going to change that outcome.

It's a business issue. The supply chain to support the dealers comes with a huge cost. The market demand is the market demand. More dealers doesn't create more demand, it just dilutes the sales to each individual location. Why does GRM say, for example, have one distributor? If you had ten, would you sell 10x magazines? No, but you would have to staff to field 10x distributor calls per day, support 10x locations, have meetings that involved 10x people, and have 10x inventory because each location needs its own parts/tools/magazines. Does the number of dealers require you to have two zone reps instead of one? It's costs like that.

So yes, you need some coverage. And when the demand outstrips what one location can do, then you need two locations. Or if population moves and the marketers determine that you don't have enough brand image to cause someone to drive an hour to your store, then you need a new store in a better location, but more than likely won't close the old one. And everything can keep growing like this, until you reach a point where you get a correction because you've overextended or overprojected the market and you've made assumptions that sound good but weren't challenged, and the nay-sayers were dismissed as whiny pessimists. We grew 10% last year, we'll grow 15% next year.... "What goes up must come down."

It's fun to live in the "up" part, the "down" part really stinks.

GM has nothing to do with the cars sitting on Dealers lots.

Companies like GMAC and other big banks do what's called "wholesale" floor planning. A basic guesstimation of how many cars the dealer will sell in a year and how many days supply they need.

We just announced in Canada today the closure of 261 GM dealers (of the total 709)

Dealers will be given funds based on the total new vehicle sales in 2008 as compensation for the termination of their dealer agreement in December. This consolidation of dealers was done in the hopes that they can avoid the big B.

Cars remaining the the lots will be sold for whatever they can get but will also include the rebates still offered by manufacturers. After today none of the 261 terminated dealers can order fresh product and only rely on dealer trades and what they had previously ordered.

It's hard to build value in a product when you have 10,000 people selling it.

GM's dealer body at the star of the year was over 7000 in North America. I think the grand total come 2010 will be under 4000.

a year ago I was a technical writer (editor) for GM's print media, at the time they had 53 models incl. saturn and saab. I think it's going to shrink to the mid 30's by year end .

Toyota has less then 20.

JM GMAC- Inside the belly of the beast!

4cylndrfury wrote: ive got the solution... factory direct... nuff said First Detroit mfgr to do this = the one who wins this little game

Every time they've tried factory direct, it's been a nightmare. Ford bought all of the dealer in Salt Lake City a few years back, and had to sell them back to the original dealers for pennies on the dollar. The corporate "Meeting to have a meeting to plan the conference call about the meeting" mentality doesn't work. A dealer in our area hired a recently "retired" factory executive and he almost closed the place down single handedly. If the manufacturers could figure out how to eliminate dealers, they would have by now.