What is the rationale for closing dealerships?

Great Debates
1

Fight my ignorance. How are Chrysler and GM going to save money by closing dealerships? What cost is associated with having a network of salesmen? I always assumed they pretty much were zero-cost - they bought cars from the company and resold them to the public. So as far as the company would be concerned, dealerships are the customers. How can it make sense to eliminate your customers?

ETA: I realize this might be more like a GQ or even IMHO or MPSIMS. But seeing other threads on this issue leads me to believe it’ll turn into a debate.

2

Well, the dealers never really own the cars; the factory maintains ownership until they are sold. So an under-performing dealership represents a lot of money tied up.

Also, there is training, bookkeeping, benefits; all that “overhead” type stuff that drains away profits.

So I think it is understandable that a lousy dealership should be jettisoned…TRM

3

I am not sure how all that works and the details, but I do know that these dealerships are franchises of whatever the car maker is(GM, Chrysler). So they are not totally owned by whoever has their name on the billboard as there is a contract that goes with this. So there must be some type of cost cutting going on and I am sure they are only shutting down dealerships who havent been selling the cars they should be or possibly one’s that were going to shut down already in the near future.

Thats just what I have heard and gathered.

4

Are you sure? I know there’s a thing called the dealer’s price - it’s the amount the dealership paid for the car. I assumed it meant that the dealer had actually purchased the vehicle.

Again, I’ve always assumed these costs were covered by the dealership. If you own a Chrysler dealership and employ twenty people, they work for you not Chrysler. So if you don’t sell any cars this month, you’re the one who’s out of money when you sign their paychecks not Chrysler.

I figured the franchiose deal was that the company agreed to sell the dealer cars and not create any new franchises within the same area and the dealer agreed to buy the cars and sell them within that area. But are there some ongoing payments being made to the dealership? For example, if GM closes down Honest Nemo’s Car Emporium in May, what additional money will GM have in June as a result?

5

This is not true.
While the dealership might not own the cars (most don’t) it is a bank or perhaps the car maker’s finance arm that laid out the $$ for the cars. This is called flooring, or floor plan.
The dealer gets to receive cars and pays (generally) no interest for 90 days. After that flooring charges start to accrue. This is why car dealers like to turn cars quickly.

Why close dealers? It is said that 20% of your customers generate 80% of your revenue. Also 20% of your customer generate 80% of your problems (not the same 20%) From the car maker’s POV if they can jettison under preforming dealers they can cut staff and save a ton of money. Also if you have two dealers in one town that can realistically only support one good dealer you dump the weak sister and make the remaining dealer stronger.

6

Consider two dealerships: Little Nemo’s Car Emporium and Big Rick’s Auto Palace. Rick sells twenty cars a week; Nemo sells two cars a month. Which one should the car company close?

If Rick’s stays open, the company sells 1040 cars a year. If Nemo’s stays open, they sell 24 cars a year. So the answer of which dealership should be closed is obvious:Neither. Because that way they sell 1064 car a year.

7

To update Little Nemo’s example:

Consider two dealerships: Little Nemo’s Car Emporium and Big Rick’s Auto Palace. Rick sells twenty cars a week; Nemo sells two cars a month. The fixed expense associated with maintaining a relationship with a dealer costs the equivalent of three car sales per month. Which one should the car company close?

A: Obviously Little Nemo’s Car Emporium is a money loser and should be shut down.

8

I would suspect also that by closing some dealerships you are giving the remaining ones a higher volume - which you can then use as a justification to cut margins?

Less dealerships also = bigger service volumes = greater profit for dealer = reduced margins on cars.

This is in addition to the issues of cost of supporting dealerships.

Many manufacturers also play a part in A & P spening, and all the management issues that go with this. Cut the dealers, you are cutting much of this out.

9

That’s the topic of this thread. What are the fixed expenses associated with a car company maintaining a relationship with a dealer?

10

Based on my experience working with a dealer as a marketing consultant, although not in the US, here are some of the costs…

  1. A & P Spending, the manufacturer normally helps with this or gives some other form of discount - by reducing dealers they will be getting economies of scale
  2. Training (of mechanics etc)
  3. “managing” of dealership - normally the manufacturer spends time making sure that the dealership operates in line with company policy, this takes manpower.
  4. PR support
  5. I also suspect that it may be a margin issue - less dealers means the manufacturer can squeeze hte margin, to either give themselves more profit per car or reduce the overall price of cars.
11

Franchises hold a “lock” on a unique area. Those who aren’t using their area are hurting overall profits. You find this from McDonalds, to TV stations.

The thing is in today’s business world it isn’t enough to make a profit, you have to make THE MOST profit possible. If I buy a million dollars worth of goods and sell it for 1.5 million, I made a profit. Most people see that as good, which it is. But the financial officers at a company say, could you have sold 2 million. If so then your company ISN’T as profitable as it should be. If you can show you should’ve sold 2 million but you only sold 1.5 million, your company is viewed as “not profitable” even though in reality it made a profit.

Now why does that matter, after all money is money right? Well not really. You see the real way to get money to better the company is through stock. People who invest LOOK AT THIS. They often look at things like quick formulas to determain who to invest in. If I see a company that could’ve made 2 million but only made 1.5 million, it says to me, that company isn’t on the ball, and I go elsewhere.

Keep this in mind.

Now I look at dealers, they may make money, but are they making the MOST. If dealer A is making 10% profit and dealer B is making 15% profit, dealer B seems to be a better business man. So they say let’s fire dealer A and combine his operations. This business model assumes dealer B will use his better skill and increase sales in the territory formerly held by dealer A.

See it’s not that either dealer was losing money, they just aren’t making the MOST they could.

But let’s say that doesn’t hold up. Here’s another reason.

Further dealers are independent. If I see a dealer and he’s HOT and knows his stuff I want him to sell MY cars.

So well use our example from above. Dealer A = 10% profit and Dealer B = 15% profit.

I want this guy who can sell cars to sell my line of cars. Right now I go to him and say "If you choose ‘Acme Cars’ as a franchise, you can expect to make a profit of 12.5% (an average of 15% and 10%) and I show him the paper work to back it up.

So let’s say I just get rid of dealer A. NOW I got to this hot seller I want to sell my “Acme Car” line and say "You can expect to have a profit of 15%). See WOW I just increased my sales angle by 5%.

This may be enough for him to sell my “Acme” line and not a Toyota or GM line of cars.

12

But this model only works in there is an investment involved. Otherwise the correct model is the Amway model - the more salesmen the better even if they’re marginal because the cost of each salesman is negligible so any sale they make is profit.

This turns your example upside down. A car company with a small cadre of 10,000 elite salesmen might sell 1.5 million. But if they had signed on another 100,000 poor salesmen, those additional guys might have managed to sell another 500,000. Sure the average quality of your salesmen would plummet but your overall sales would increase.

13

Bengangmo, I’ve read your post and those of others saying that the company is putting money into the dealerships. Which does justify a cost/benefit analysis.

But I still wonder about the closings. Surely, Chrysler and GM have had these figures all along. Have these dealers been losing money all these years? If so, why weren’t they already being closed?

14

What I want to know is when all this will all translate into incredibly ridiculously low prices. There’s going to be somebody somewhere practically givng away the last of their lime green SUVs, right?

15

One possibility that does make sense is that this is a result of reduced production. The car companies are shutting down assembly lines and making fewer cars. So with fewer cars to sell, they don’t have enough to go around and they’re prioritizing which dealers will get them.

16

I saw a thing (on 60 Minutes?) about a dealer who has always been in the top 1% of sales and had to lay off 50 people and is shutting down. How does this translate to “good business” for the company?

17

My understanding of how GM previously operated depended on very large sales numbers with a low margin on each car. With other manufactures stealing their market share this model breaks down. They end up with excess vehicles on dealers lots forcing them to offer incentives that tighten the margin even more and sell fleet vehicles. Selling to fleets generally kills resale value making the brand less valuable.
My guess is that through restructuring GM is trying to cut overhead to the point where they can sell less cars with a higher margin. With less cars to go around some dealerships are going to have to go away. GM would be foolish not to use this opportunity to get rid of dead weight dealerships

18

A few years ago, the economy wasn’t in the toilet. Most US businesses have seen their profits drop, and as I understand it, car dealerships have been hit especially hard. So most of these dealerships were probably profitable five years ago, but can’t keep up in the current economic situation.

19

Most people (even after repeated explanations) don’t understand that investment and margins control business decisions.

That is to say that costs and alternatives are key considerations. It’s easy to make sales, and the dealership may have made a lot of money on them. However, GM might have lost a fortune overall, if each car was being sold at a loss to it. Likewise, cutting some dealerships may enable them to use fewer (and more efficient) plants and suppliers, thus drastically reducing their investment while increasing service levels.

20

I could be wrong, but I always assumed auto dealerships are independent franchises, like fast-food-chain restaurants – meaning each dealership is owned by a private businessman, not by the corporation, and the overhead is solely the owner’s problem.