# How does slashing dealerships cut automakers costs? **URL:** \ **Category:** Factual Questions\ **Created:** [May 15, 2009, 2:01pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522 "2009-05-15T14:01:58Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![Ludovic](https://avatars.discourse-cdn.com/v4/letter/l/7ab992/32.png) [@Ludovic](https://boards.straightdope.com/u/Ludovic)\ **Post date:** [May 15, 2009, 2:01pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/1 "2009-05-15T14:01:58Z")
Do the automakers provide a fixed subsidy per year for each dealership? Is there some overhead with interfacing with each individual dealership? If that’s the case I can’t see how that itself would save a whole bunch of money. Are the dealers able to return unsold product for credit? I guess since there are minimum stocking requirements to look like a nice dealership I guess that would be the determining factor, but the book industry is the only one I’m aware of where you can return unsold stock without penalty. In fact if the carmakers did not allow returns of unsold stock I’d think they’d want to keep or even increase the number of their dealers as the dealers would buy more stuff from them! ---
**Author:** ![dolphinboy](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dolphinboy/32/330_2.png) [@dolphinboy](https://boards.straightdope.com/u/dolphinboy)\ **Post date:** [May 15, 2009, 3:00pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/2 "2009-05-15T15:00:12Z")
How does slashing the number of auto dealerships reduce costs, or increase the profits, of car makers? Does it cost them twice as much to support 1000 dealers as 500 dealers? Don’t you want as many people selling your product as possible? I realize that having 3 different dealerships in one city, compared to just 1 dealership, causes greater competition and perhaps more discounting, but they must have built out their large dealer network for a reason… ---
**Author:** ![KneadToKnow](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/kneadtoknow/32/3999_2.png) [@KneadToKnow](https://boards.straightdope.com/u/KneadToKnow)\ **Post date:** [May 15, 2009, 3:02pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/3 "2009-05-15T15:02:28Z")
Reduce it to the smallest sample possible: instead of 1000 dealerships, it’s two salesmen. You fire one of them. What happens to your expenses? ---
**Author:** ![friedo](https://avatars.discourse-cdn.com/v4/letter/f/8edcca/32.png) [@friedo](https://boards.straightdope.com/u/friedo)\ **Post date:** [May 15, 2009, 3:04pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/4 "2009-05-15T15:04:59Z")
> [@KneadToKnow](#): > > Reduce it to the smallest sample possible: instead of 1000 dealerships, it’s two salesmen. You fire one of them. What happens to your expenses? I thought car dealerships were independent retail operations. They aren’t owned by the car companies. Or are they? ---
**Author:** ![dolphinboy](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dolphinboy/32/330_2.png) [@dolphinboy](https://boards.straightdope.com/u/dolphinboy)\ **Post date:** [May 15, 2009, 3:08pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/5 "2009-05-15T15:08:17Z")
That was my point. The auto makers don’t own these dealerships in most cases AFAIK. ---
**Author:** ![Fear\_Itself](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/fear_itself/32/19637_2.png) [@Fear\_Itself](https://boards.straightdope.com/u/Fear_Itself)\ **Post date:** [May 15, 2009, 3:09pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/6 "2009-05-15T15:09:38Z")
> [@KneadToKnow](#): > > Reduce it to the smallest sample possible: instead of 1000 dealerships, it’s two salesmen. You fire one of them. What happens to your expenses? But you have to balance that by asking what happens to your income. Unless there is disparity in sales between the two salesmen, your income will go down as well. ---
**Author:** ![KneadToKnow](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/kneadtoknow/32/3999_2.png) [@KneadToKnow](https://boards.straightdope.com/u/KneadToKnow)\ **Post date:** [May 15, 2009, 3:29pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/7 "2009-05-15T15:29:00Z")
> [@Fear\_Itself](#): > > But you have to balance that by asking what happens to your income. Unless there is disparity in sales between the two salesmen, your income will go down as well. True. But will it go down by half? I doubt it. ---
**Author:** ![Rumor\_Watkins](https://avatars.discourse-cdn.com/v4/letter/r/d9b06d/32.png) [@Rumor\_Watkins](https://boards.straightdope.com/u/Rumor_Watkins)\ **Post date:** [May 15, 2009, 3:32pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/8 "2009-05-15T15:32:16Z")
> [@Fear\_Itself](#): > > But you have to balance that by asking what happens to your income. Unless there is disparity in sales between the two salesmen, your income will go down as well. The belief is that the dealership market for the American brands is oversaturated - foreign automakers do comparably well in sales, and have 50% or more fewer dealerships If you want to look at a GM car, you’re not going to hand-wring if you don’t have the decision on which two dealerships to go to. Nowadays, the decision to buy a car is made more on a manufacturer basis, not a dealership basis. ---
**Author:** ![Kent\_Clark](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/kent_clark/32/105_2.png) [@Kent\_Clark](https://boards.straightdope.com/u/Kent_Clark)\ **Post date:** [May 15, 2009, 4:22pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/9 "2009-05-15T16:22:56Z")
I heard a stat yesterday )sorry, no cite) that the typical Chrysler dealer sells about 300 new cars per year, while the typical Toyota dealer sells about 1,200. Car dealers buy their inventory from the manufacturer. The manufacturer provides financing for the dealer. With fewer dealerships, the remaining dealers will sell more cars, which means faster inventory turnaround, which means the manufactuer doesn’t have as much money tied up in financing unsold inventory. Fewer dealers means fewer seminars for salespeople and mechanics, more efficient deliveries to remaining dealers, fewer accounts for regional managers to take care (or fewer regional managers). Finally, fewer dealers mean more sales for the remaining dealers, which means more profit, which means remaining dealers can plow more back into shiny new buildings, more high-tech service equipment, etc., which should attract more customers, which means more sales and so on. If I understand correctly, Chrysler will NOT buy back the dealers’ inventory. They’ll have to sell it off any way they can. Which does suck for them. ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [May 15, 2009, 4:24pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/10 "2009-05-15T16:24:32Z")
> [@kunilou](#): > > I heard a stat yesterday )sorry, no cite) that the typical Chrysler dealer sells about 300 new cars per year, while the typical Toyota dealer sells about 1,200. I’m pretty sure both those figures are way low. I’ve never seen a (new car) dealership that wasn’t moving at least 10 cars a day. ---
**Author:** ![Ludovic](https://avatars.discourse-cdn.com/v4/letter/l/7ab992/32.png) [@Ludovic](https://boards.straightdope.com/u/Ludovic)\ **Post date:** [May 15, 2009, 4:31pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/11 "2009-05-15T16:31:09Z")
Thanks, I wasn’t aware that they did provide financing for the stock (nor that they wouldnt buy back unsold inventory, which really does suck.) It makes sense to not have your money tied up in non-moving inventory. ---
**Author:** ![yabob](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/yabob/32/2821_2.png) [@yabob](https://boards.straightdope.com/u/yabob)\ **Post date:** [May 15, 2009, 4:34pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/12 "2009-05-15T16:34:29Z")
Note that dealers also don’t actually BUY their inventory outright. The cars are financed by the dealer through what is called a “floor plan”. Another problem the dealers will have is continuing to maintain credit with their floor plan lenders for their inventory of cars they can’t sell. [http://www.chron.com/disp/story.mpl/business/steffy/6404209.html](http://www.chron.com/disp/story.mpl/business/steffy/6404209.html) ---
**Author:** ![Bijou\_Drains](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/bijou_drains/32/2814_2.png) [@Bijou\_Drains](https://boards.straightdope.com/u/Bijou_Drains)\ **Post date:** [May 15, 2009, 4:36pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/13 "2009-05-15T16:36:36Z")
Yes, because of the floor plan they want to sell cars on the lot first. If you special order a car that is better for them since it is never really on their lot. ---
**Author:** ![gazpacho](https://avatars.discourse-cdn.com/v4/letter/g/6f9a4e/32.png) [@gazpacho](https://boards.straightdope.com/u/gazpacho)\ **Post date:** [May 15, 2009, 4:38pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/14 "2009-05-15T16:38:00Z")
[http://webcenters.netscape.compuserve.com/pf/story.jsp?floc=DC-headline&sc=1335&idq=/ff/story/0001/20090514/1453697054.htm](http://webcenters.netscape.compuserve.com/pf/story.jsp?floc=DC-headline&sc=1335&idq=/ff/story/0001/20090514/1453697054.htm) > [@](#): > > The company, in a motion filed with the U.S. Bankruptcy Court in New York, said it wants to shed 789 dealerships by June 9. Many of the dealers’ sales are too low, the automaker said, with just over 50 percent of dealers accounting for about 90 percent of the company’s U.S. sales. > [@](#): > > Chrysler executives said the company is trying to preserve its best-performing dealers and eliminate ones with the weakest sales. More than half of the dealerships being eliminated sell less than 100 vehicles per year, they said, and account for 14 percent of U.S. sales. > [@](#): > > Chrysler said in its filing that dealers are not competitive enough with foreign brands. Chrysler sold an average of 303 vehicles per dealer in 2008, according to its filing. By contrast, Honda Motor Co. sold about 1,200 vehicles per dealer, while Toyota Motor Corp. sold nearly 1,300 per dealer. ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [May 15, 2009, 4:39pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/15 "2009-05-15T16:39:18Z")
> [@](#): > > Chrysler said in its filing that dealers are not competitive enough with foreign brands. Chrysler sold an average of 303 vehicles per dealer in 2008, according to its filing. By contrast, Honda Motor Co. sold about 1,200 vehicles per dealer, while Toyota Motor Corp. sold nearly 1,300 per dealer. Jesus. I guess their profit margins really are as thin as they claim. ---
**Author:** ![SmackFu](https://avatars.discourse-cdn.com/v4/letter/s/53a042/32.png) [@SmackFu](https://boards.straightdope.com/u/SmackFu)\ **Post date:** [May 15, 2009, 4:39pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/16 "2009-05-15T16:39:57Z")
> [@Really\_Not\_All\_That\_Bright](#): > > I’m pretty sure both those figures are way low. I’ve never seen a (new car) dealership that wasn’t moving at least 10 cars a day. Toyota had 1445 dealerships in 2007. I’d assume that number is fairly stable. In April 2009, they sold 126,540 cars in the US, or an average of 87 cars per dealership for the month. That’s around 3 per day, if it was distributed equally over the week, which is is clearly not. (A year ago, it was quite a bit higher, about 150 per dealership per month, or 5 per day.) ---
**Author:** ![yabob](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/yabob/32/2821_2.png) [@yabob](https://boards.straightdope.com/u/yabob)\ **Post date:** [May 15, 2009, 4:48pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/17 "2009-05-15T16:48:50Z")
> [@Really\_Not\_All\_That\_Bright](#): > > Jesus. I guess their profit margins really are as thin as they claim. BTW, remember that because of the floor plan, it’s a mistake to figure a dealer’s profit margin based on the invoice price of the vehicle. They don’t put up anywhere near that amount of money. Their actual profit margin should be figured against the money they actually put up, ie. the interest they paid on the floor plan, with their profit being the price you paid minus both the vehicle price and the paid interest. A modest seeming couple of percent profit over invoice will actually be much larger, unless the vehicle sat on their lot for a long time. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [May 15, 2009, 5:29pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/18 "2009-05-15T17:29:27Z")
I would think more cars sold per dealer means that the dealers can afford a smaller markup, which means either more sales or a higher wholesale price. > [@yabob](#): > > BTW, remember that because of the floor plan, it’s a mistake to figure a dealer’s profit margin based on the invoice price of the vehicle. They don’t put up anywhere near that amount of money. Their actual profit margin should be figured against the money they actually put up, ie. the interest they paid on the floor plan, with their profit being the price you paid minus both the vehicle price and the paid interest. A modest seeming couple of percent profit over invoice will actually be much larger, unless the vehicle sat on their lot for a long time. Why? Don’t they actually have to pay the rest when they sell the car? ---
**Author:** ![Rumor\_Watkins](https://avatars.discourse-cdn.com/v4/letter/r/d9b06d/32.png) [@Rumor\_Watkins](https://boards.straightdope.com/u/Rumor_Watkins)\ **Post date:** [May 15, 2009, 5:34pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/19 "2009-05-15T17:34:48Z")
> [@Fotheringay-Phipps](#): > > I would think more cars sold per dealer means that the dealers can afford a smaller markup, which means either more sales or a higher wholesale price. > > Why? Don’t they actually have to pay the rest when they sell the car? No, that’s how leverage works I have $100 dollars. I get a loan from a bank for $100 dollars plus 1% interest I buy an item for $200 I sell you the item for $221 I repay the bank plus the loan for $101 I have left $120 I made 20% on my $100 I have $200 dollars I buy an item for $200 I sell you an item for $221 I have $221 I made 10.5% on my $200 ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [May 15, 2009, 5:42pm UTC](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522/20 "2009-05-15T17:42:41Z")
That’s only true because in your example you stipulated the ability to borrow money at 1% for an investment opportunity that returns 10.5%. Any time you can borrow money at a lower rate than you can earn, you have the leverage you describe. Conversely if your borrowing costs are higher than your earning potential, the leverage works in the opposite direction. (Or it could be neutral, if the rates are the same.) So unless we have actual numbers for auto dealerships, there’s no reason to assume that their borrowing ability increases their profit margin. [Next page](https://boards.straightdope.com/t/how-does-slashing-dealerships-cut-automakers-costs/496522.md?page=2)