From the perspective of the general public, one of the most visible results of the Chrysler and GM bankruptcies has been the impact on their dealers. Dealerships are closing literally by the thousands. Those dealerships have strong ties to the local communities through the people they employ, the organizations they sponsor, etc. So they, appropriately, get a lot of sympathy as another victim in the restructuring of Chrysler and GM. Many in the general public question why GM and Chrysler want to close all these dealers right now –“won’t having more dealers help you sell more vehicles?” is a reasonable question. And in the short term they may be right. But ultimately, having a smaller, healthier dealer body is the right direction.
So why reduce dealership counts now?
One, because they can – bankruptcy gives the Chrysler and GM a short window to do this without the protracted and expensive legal battles that pulling a franchise agreement typically presents.The American retail consumer market has evolved immensely over the last 40 years. The U.S. has gone from a country with small local diners, local car dealers, and downtown retail shopping…..to a fast food nation with large malls, big box retailers and mega dealers. Starting in the 70’s almost every retail business has specialized, franchised or been absorbed by chains. One of the last bastions has been the “Big 3” group of local car dealers, holdouts in a fast changing retail auto market.
Two, because it is the right thing to do in the long run to get their distribution network more in line with their main competitors and with modern retailing. The move under bankruptcy by GM and Chrysler to dramatically reduce their retail dealer networks will start to remove a significant competitive advantage enjoyed by Toyota and other Asian companies.
Since the 70’s GM, Ford and Chrysler have reduced their dealership ranks significantly, primarily focusing on cutting out small volume retail dealers. At the same time Toyota and Honda, having the luxury of a “clean sheet,” chose to focus on growing large dealers with big territories, while the Big 3 struggled with far too many dealers in metro areas, competing with each other rather than the emerging Asian competition.
So what’s the advantage of a lean retail dealer network with fewer larger dealers?
On the new vehicle sales side, larger dealers mean higher volumes/dealer with higher grosses – as a result of reduced marketing costs and not being discounted to death by three or four same-make franchises - all fighting for the same customers.
Larger, higher volume dealers also should mean that vehicle inventory turns faster. Faster turns saves money on inventory, and may also allow for increased breadth – you can stock more variety if overall you have less inventory. This improves the choices available for customers.
On the quality front there are several potential benefits. That reduced inventory and faster turns means fewer days on the lot, which means less chance for dings and dents. So the customer gets a better vehicle when they buy. It also means quality “fixes” or product changes introduced at the factory take less time to reach the customer since there are fewer inventory vehicles that have to be cleared out first. At the same time, fixing a problem with existing vehicle inventory is a lot less costly when you only have 30 days of inventory rather than 80 or 100 days.
Wal-Mart has used these same principles as one of the key drivers of their success. Wal-Mart’s vaunted performance in sales efficiency ($/square foot) and inventory management provides the same type of strong foundation for their business that dealerships with high vehicles sold per outlet and (historically) low days of inventory provide for Toyota and Honda.
Another advantage to a lean retail network has to include quality control within the dealer prep and service departments. It is significantly easier to install and maintain service standards at 1500 large profitable Toyota dealers compared to the resources and time required to train and control 6000 smaller GM retailers (or the remaining Chrysler outlets), many of which are slowly going out of business.
What about the parts side? If you have to ship parts to four dealers to cover a given geographic area, while your competitor only ships to one, you’ll have higher costs. If the competitor has one large dealer they’ll have higher volumes on slower moving parts which generates less variability, greater breadth and far fewer parts returns. The greater breadth means faster repair order fill and happier customers.
Another big advantage is that service bays are maximized while the parts inventory generates greater profits on higher turns, which in turn generates higher fixed ops coverage for the individual dealer.
To summarize: Big Dealers equals:
- High Volume / High Profit Franchises
- High Inventory Turns
- Great Inventory Breadth (consumer choice)
- Quick Reaction to Market Changes
- High Quality Service Through Standardization
- High Parts and Service Profits
- Faster Feedback to the Factory On Defects
- Fewer Vehicle Problems Due to Shorter Time On the Lot.
Probably yes to all those questions.
And just how many dealers do mass volume companies like GM and Chrysler really need. Well, if Toyota’s 1500 dealer network works superbly for them, Chrysler probably doesn’t need much more than that number.
GM’s a bit different due to its Buick/GMC channel, but around 2000 to 2500 should be more than enough. In other words the ‘Big 3’ may need to consolidate far more dealers than currently have been announced.
The streamlining of GM’s and Chrysler’s networks does not mean that there’s no role for some smaller rural dealers. They are in a category by themselves. They don’t really hinder the corporation and may offer some strategic geographic advantage.
Additionally, some of the closing metro retail points could also be utilized for local service by surviving franchises if they want to keep the aftermarket at bay.
Regardless, it’s in the metro areas and suburbs that more than 80% of the new car volume is sold and that’s where the game will be won.
The Detroit 3 have been making tremendous gains in matching the product quality and execution of the Asian makes. Now the restructuring provided by bankruptcy will go a long way toward reducing structural costs and making Detroit more cost competitive. The next big hurdle will be to make the Detroit 3’s dealer networks lean and profitable enough to allow them to match their competitors’ strengths and truly move into the modern world of retailing.