Forced Closuure of Dealerships

jemdandyMay 25, 2009

Ok. What am I missing? Can someone explain to me how forced closure of dealerships saves an auto maker money? This defies logic from my point of view. I agree that getting rid of a 'bad' dealer would be beneficial, but in my state, it is creating hardships, and seems so unnecessary. It appears that the closures are visited upon the smaller (low sales volume) dealers. We have a few small family owned dealerships that have been selling the same brand since the 1930s. These are located in small towns and areas without enough population or income to support a large volume of new car sales. Over half of the business in these shops is repair, service, and used auto sales. One owner has stated that his organization costs GM nothing and wonders why he should loose his dealership. I agree with him. What am I missing?

There is another nasty bug in these closures: These dealers are stuck with their present stock of new cars. After loosing their franchise, they can not sell their present stock of new cars (I suppose there is a warranty issue), AND GM won't take the cars back. What are they to do?

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I know some pieces of how this is going down and why, but would not be surprised at all of how much more there is to it that I don't know.

Working backwards, dealers being shut down are not being forced to keep their inventory of cars, and they don't even get forced to keep their sell-able parts inventory. Notice I said sell-able parts, many dealers when audited have a considerable investment in obsolete parts. My brother works for a company that goes into the Ford and GM dealers that get closed and they inventory the parts and box up and ship back what can be re-distributed. That helps the dealer re-cover a lot of the capitol that is invested in the business.

Now about getting rid of the dealers. I can look it up if you want me to be exact, (you can too) but Toyota has about half of the number of dealers that GM does and had gained steady market share to the point of selling as many cars as GM, and in fact surpassed them last year for the first time ever. The overall business model requires profits from sales, parts, and service. Expenses against those profits include wages, benefits, training, equipment, taxes, and of course anything to do with the property the business is built on. The property expenses are relatively fixed, however the more people involved at more places the greater the overall profit that there has to be to support it all. The better the people are, the greater the profit required to retain them.

Imagine three dealerships who's total sales are 2000 new cars a year. Say each dealership has 60 employees. For discussions sake allow that what you have at this point is three viable businesses, assuming there is a solid and repeatable service and parts business to go along with those sales.

Now start truly building better cars, so that they don't break as often as they used to. When they do break, imagine most of the things that occur beyond the normal services of oil changes and brakes as potentially being the one and only time a tech will ever see that individual failure in his/her career, and allow no room for anything less than a perfect repair visit. That demands a tech that is a lot better than average in God given talent, as well as decades worth of real training on top of that natural talent.

How may people like that are in the field today? Simply put, not enough and the current business model doesn't support what is needed to retain them when they are in the field. There are a lot of mechanics, and many of them are very good at what they (we) do. But the cars are changing faster than what training can keep pace with, and at the same time, breaking even less. That has left us with too few master technicians, and too many service bays. I've often talked about the impending collapse of the auto service industry, the glut of cars available has tipped the scales away from the dealer side of the equation for now. The fall out from that is the need to reduce the number of dealers to a level that can be sustained.

That's why where there were once three dealers, employing 180, one dealer employing 100 simply makes more sense. The result from there is better pricing to the automobile owner from everything from the initial purchase, to parts and servicing. All you have to do is "count the mouths to feed" and its easier to only have one piece of property, and 100 people earning a living off of the same amount of business than it is to have three pieces of property, and 180 mouths to feed.

At the same time don't forget the competition for the easiest service work from Quick Lubes, and Wal Marts, which create jobs for a few people, but not career positions for the future technicians. I've stated many times there is a difference between price and cost, and usually its in defense of what a shop needs to do to stay in business. What you are seeing is in effect just how under priced the trade really is and the end result of too much competition, and consumerism that wanted it that way.

    Bookmark   May 25, 2009 at 8:18AM
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I agree about what you said about the business model and what happens when there are too many dealers, but it did not address my original question: How or why does having a number of smaller dealers affect the bottom line of the manufacturer? I can see how it affects the bottom line of the small dealer, and maybe a neighboring dealer, and you have explained that effect with underlying causes and ills, but this a cost borne by the business owner, not the car maker.

Thanks for clearing up the feature about the manufacturer taking back saleable stock. That was the opposite to what was quoted in our local paper: a statement made by a small dealer who was going to be forced out.

    Bookmark   May 26, 2009 at 2:44AM
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How does this impact the bottom line for the manufacturer?

1. Warranty expenses. Everything from fradulent ones, which happen when a dealer tries to make up for losses, to ones where technician skill and training played a roll in the warranty expense.

2. Lower profits per vehicle. It seemed so good to so many people that they could find out the dealer invoice price and then beat the dealer over the head to get themselves a great price. Lower dealer profits ultimately causes the dealer to have to sell more cars to make the gross profit required by the dealer to be viable. For a while they did just that and now the market is saturated with cars. They litterally have millions of cars sitting on lots that have been turned in under a lease, or repossessed or whatever that are perfectly good cars, and they have litterally billions of dollars in stagnant inventory.

When I recently flew over the site linked below I couldn't believe my eyes when I saw all of the cars stored there.

That is one of three sites they use to store cars for the auto auction in Cranberry Pa. Every auto auction in the country is over stocked the same way, the lots are jammed full of potential second hand cars. Remember the cars simply last longer than they used to, here is the proof.

This results in lower profets for the manufacturer because of all of the plans they had to throw out there to move inventory. They litterally slashed their expected profits by doing the 0% interest gigs, thousands back in rebates, etc. The bubble simply had to burst and it did.

    Bookmark   May 26, 2009 at 8:22AM
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and look at the good side, it gives the new chinese companys pre made places to set up. hahahaha

    Bookmark   May 29, 2009 at 11:34PM
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