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NINETY EIGHT REGENCY

Excess dealers costing billions

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Excess dealers costing billions

Surplus puts U.S. auto industry at disadvantage

June 17, 2007

BY SARAH A. WEBSTER

FREE PRESS BUSINESS WRITER

EDITOR'S NOTE: This report has been corrected since its initial publication. There are 15,710 independent dealerships that sell GM, Ford and Chrysler vehicles in the United States.

For 25 years, John Santilli has been an ambassador for Detroit, selling domestic cars and trucks off Amvets Memorial Highway, just south of Boston.

Business is tougher than it used to be. But the New England dealer doesn't just blame Japanese rivals like Toyota and Honda. These days, he also grouses about his fellow Dodge dealers.

At least 10 competing Dodge stores are within a half-hour drive of his store in Brockton, and last year they fought over nearly 4,000 fewer customers than the year before.

"There's waaaay too many dealers," the Massachusetts car dealer said. "Way too many."

Santilli's troubles illustrate what has become one of the most challenging and expensive problems facing Detroit's automakers: too many dealerships.

Once a vast network of mighty money-makers across America, Detroit's retail network has been wounded by years of falling sales. Thousands of stores are struggling and can't afford to deliver the retail experience that could help woo customers back to Detroit's improving cars and trucks.

The automakers do have many profitable, first-rate dealerships nationwide, and dealers for Detroit automakers tend to score well in customer surveys.

But excess dealerships -- amounting to at least 20% nationally -- weigh down the retail network as a whole, ultimately costing sales and adding up to $4 billion annually to the automakers' costs, industry analysts and many dealers say.

The competitive disadvantage is wide for dealers, too. The independent dealerships that sell GM, Ford and Chrysler vehicles in the United States -- 15,710 in all -- sell half as many vehicles per store, on average, as top Japanese rivals, who have fewer than 4,000 retail outlets in the United States.

"We all agree we have too many dealers, but nobody wants to raise their hand and say, 'I'll go,' " said John Daoud, president and chief executive officer of Al Long Ford, a Warren dealership founded by his grandfather. "It's hard to just walk away."

Leo Jerome, a longtime Michigan dealer who owns a Chrysler-Jeep store in Lansing, said there's no question Detroit automakers added too many stores over the years.

"If they could squeeze another one in, they did," he said.

Dealers and industry experts say that fixing this nagging problem has never been more crucial. Detroit's automakers are rolling out some of their best new cars and trucks ever, and they need strong stores, top to bottom, to help attract and impress customers.

Britt Beemer, chairman of America's Research Group, based in Charleston, S.C., said his research in at least 20 markets found that some dealerships turn off consumers.

"One out of three have serious appearance problems," said Beemer, whose firm studies consumer behavior around the world for giants like AT&T, J.C. Penney and General Electric.

Detroit's automakers say they're working to downsize their dealer networks, leaving strong, well-positioned stores across the board. But it's difficult for automakers to accomplish that quickly or affordably because they're hamstrung by state laws, individual dealer contracts and the gritty will of dealers who want to keep their businesses alive -- or don't want to sell out at prices automakers can afford.

Buying out enough dealers to make an impact could cost billions.

Mega-dealer Joe Serra, president of the Detroit Auto Dealers Association, said the automakers would be better off if they could streamline stores faster, but he is sympathetic to the challenges.

"I think they're doing what they can," he said. "It's really difficult, and I respect that."

In the meantime, struggling dealerships have less money for advertising, modern buildings, salespeople and customer amenities, such as loaner cars -- all of which can help boost sales.

"The extras go away," Beemer said. "Maybe they don't wash your car when you have an oil change anymore."

Dealership troubles

Santilli's situation in Boston demonstrates the real-world impact of this situation.

To get as many of the shrinking Dodge sales in the market as he could last year, Santilli sold his vehicles with big discounts. But with fewer sales and lower prices, Santilli's Dodge store lost money for the second year in a row. So he can't afford to revamp his outdated facilities and invest in employees and advertising he needs to grow.

In the end, his dealership pales against the new, multimillion-dollar Toyota store across the street.

And he's just one dealership.

Across America, Detroit-brand dealerships had about 800,000 fewer sales to divvy up in 2006 than in 2005. That translates into about $1.2 billion less in combined gross profits for stores, while costs are rising.

Meanwhile, Detroit's automakers spend billions of dollars annually supporting its overloaded dealership network.

That includes the cost of delivering vehicles to stores and offering a variety of administrative services, such as marketing assistance, parts-and-service support, auditing and other behind-the-scenes activities, such as basic communications. In fact, many automakers maintain a division of salaried workers who provide this support, often visiting dealerships in person.

Detroit's automakers are spending $436 more per vehicle to support their dealership networks than the industry average, according to CNW Marketing Research in Bandon, Ore. That translates into $3.9 billion for Detroit's automakers.

To get its dealerships back on track, GM, Ford and Chrysler must downsize 20% to 70% of their dealerships, some experts say.

Steven Girsky, one of the industry's most respected analysts and a former adviser to GM Chief Executive Officer Rick Wagoner, told a group of dealers in Las Vegas in February that U.S. automakers needed to get busy thinning the ranks, "The faster, the better."

Challenges ahead

But this might be the most difficult downsizing yet for Detroit's automakers.

In communities across America, dealers are often formidable pillars, donors to charities, schools, Little Leagues, police and fire departments and local politicians.

"If automakers turn sour on them, they can sour the business," said Jerome, the Lansing dealer.

In every state, dealers also are backed by powerful franchise laws that leave automakers with virtually no power to simply close stores.

Despite their financial troubles, many of the independent dealers who own a franchise t sell U.S. makes are holding onto them, surviving on used car sales and service operations.

Some are hoping Detroit's next upswing is coming. Some are frustrated they can't get automakers to buy out their business at what they consider a fair price. For others, hanging on to the family business is personal.

In the meantime, the competitive disadvantage grows.

Dealers who sell Ford, Chevrolet and Chrysler average fewer than 600 sales per store each year. Those selling Toyota, Honda or Nissan: more than 1,200.

In some markets, Detroit's dealerships average just one-third to one-fourth as many vehicle sales as the Japanese biggest dealerships, according to data obtained by the Free Press. That includes crucial markets such as Atlanta and Chicago, plus big swaths of the nation's two largest auto markets, Florida and California.

"There's 91 Chevrolet dealerships in greater Chicago-land," said Dick Garber, a Saginaw-based dealer who owns nine auto franchises in Michigan, Illinois and Florida. "The market is really, really tough."

Revamp needed

The automaker willing to take on the challenges of a major downsizing of dealerships could be rewarded, experts say. A few automakers, such as Mercedes and Mazda, have already even proved the benefits.

"It's an opportunity," said Art Spinella, president of CNW Marketing Research.

With that end in mind, Cerberus Capital Management, the private equity firm that is in the process of buying Chrysler, is actively evaluating a comprehensive restructuring of the dealership network, people familiar with the deliberations say.

"I think Cerberus will spend some money to put these dealers together," a Dodge dealer in the Midwest told the Free Press. He did not want to be identified because the conversations were private.

During the past decade, Detroit's automakers have spent billions closing factories and buying out workers to adjust for lower sales. But experts believe they have never effectively restructured the face of their business, where new cars and trucks are sold to consumers.

"It's a mess. It's an absolute mess," Spinella said. If the automakers were able to, he said, "they'd probably be cutting dealers as fast as they could."

But they can't.

"It's in the control of the dealers," said Joseph Chrzanowski, GM's executive director of dealer network planning and investments. "They control the market."

Given that complication, Detroit's automakers said they are working as fast as they can.

"It is market by market, deal by deal," said Michael Yatsko, Chrysler's director of dealer operations.

Detroit's automakers shed 322 franchises, or 2% of their stores, last year. At this pace, it would take Detroit's automakers about two decades to achieve the same retail efficiency as the three largest Japanese automakers -- even longer if they can't stabilize their retail sales.

But the average dealership is worth more than $2 million, so it could cost GM, Ford and Chrysler $13 billion in all to eliminate 40% of their stores and boost sales per store close to the levels of top Japanese brands.

Cisco Codina, Ford's group vice president for North American marketing, sales and service, said Ford is not interested in spending its money that way: "We're not going to do that."

Dealer discounts

Dealers, meanwhile, are frustrated.

They tell the Free Press that U.S. automakers have set a self-destructive cycle in place.

Instead of a strategic network of dealerships working together to beat the competition, Detroit automakers have allowed a system to evolve where dealers fight their sibling stores over fewer sales on price. This destroys profits and makes the whole network of stores too weak to successfully compete against rivals.

Quentin Helton, an Internet sales manager at Landers Ford in Memphis, Tenn., explained that dealers have no choice but to slash prices, given the number of Ford dealers and the number of shrinking sales.

"If one Ford dealer says we're going to sell a $20,000 vehicle for $13,900, you have to match that," Helton said. "If not, there are 12 other choices."

About 15 miles away, at Crossroads Ford, dealer Jimmie Walker agreed.

"We, as Ford dealers, we mainly compete against Ford dealers," he said. "We really don't challenge Chevy, Nissan. ... We go out and compete against each other on price. It's not a good thing, but that's what we do."

In market after market, with brand after brand, dealers tell the same story.

At first blush, this price competition might seem good for customers, but experts say it's really not.

Heavy discounting devalues the brands and models that consumers buy, Miller said. So when that customer tries to resell a vehicle a few years later, all the discounting that happened in the interim has depreciated the vehicle faster than expected. As a result, that customer will usually think twice before they buy that same brand again.

Action needed

Dealers say Detroit automakers, in the midst of extensive restructurings of their factories and workforces, need to put the same kind of energy into fixing the front end of the business.

Frank Ursomarso, a mega-dealer based in Delaware who owns both foreign and import stores, said the primary reason Detroit automakers are losing sales is because they have too many dealers.

"It's not unions; it's not pensions," he said. "It's their failure to understand the franchise part of the business."

That's where customers ultimately make the final decision about what to drive.

Jan Krygier, 49, of Phoenix tried to find the Dodge Caliber she wanted at three dealerships. She was so frustrated by the service and lack of inventory at any one dealership that she almost gave up. A fourth store finally came through, and she loves her car.

"I had never purchased an American car before, and was thinking the reception might be a little different," Krygier said. "I thought, 'You're not making it easy for me to buy American.' "

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Reward the most profitable dealers (for the given region) with the latest and greatest services, and let the weaker ones die out.

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Reward the most profitable dealers (for the given region) with the latest and greatest services, and let the weaker ones die out.

Every mom & pop would be out of business within months....

...something that respects franchise laws and gets the owners out with their shirts on should be a priority.

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How about buyouts? Still drastic, but short-term favorable to the dealers rather than the corporation.

Heh... "corportation".

Edited by aaaantoine
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Every mom & pop would be out of business within months....

...something that respects franchise laws and gets the owners out with their shirts on should be a priority.

This was a very good article. I agree on the formidable problems lying in front of Detroit and its dealers...

Hey Enzl... Be part of the solution - Sell your franchises! GM could only benefit! Be benevolent! Help out your struggling sister dealers :smilewide:

I'm joking... but I can dream can't I?!?

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This was a very good article. I agree on the formidable problems lying in front of Detroit and its dealers...

Hey Enzl... Be part of the solution - Sell your franchises! GM could only benefit! Be benevolent! Help out your struggling sister dealers :smilewide:

I'm joking... but I can dream can't I?!?

I missed the 'I'm joking' portion of your post....Now, what am I going to do with all the "for Sale" signs I bought from Home Depot? :AH-HA_wink:

I'll bring your suggestion up at the next Board Meeting. :)

Unfortunately, we're the guys putting the screws to the little shops....most of the successful franchises in our area are part of a much larger group.

I think the day of the Mom&Pop are over--for all franchisees, regardless of brand.

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An excellent article. This is only part of the perfect storm of challenges hitting Detroit. How to deal with a bloated dealer body in shrinking market share. It is easy to see how this benefits the import stores: newer stores, fewer stores, newer contracts which give the ability to be flexible, more profitable stores....it just goes on and on.

The problem with the "mom & pop" operations is that many of them are onto the second generation. The original dealer principle built the dealer with his/her own hands and grew with the business, plus they also grew in a time when selling for the Big 3 was a lot less challenging. Now, the second generation is largely in charge: they are rich, spoiled and even those who were forced to work in the business at a lower level really never saw reality when they were there. Now that they are in charge, they think they know it all, even though none of them have worked for anything other than a dealer. Their perspective is warped, to be kind.

Over at the import stores, most of them are newer and are still running with the original dealer principle in charge. Also, it is much easier to be successsful in an expanding market than a shrinking one - and a lot of them were put there by Big 3 dealers who were at the time awash in cash and looking for a cheap investment.

That brings me to another problem: conflict of interest. I have a big problem with dealers who own more than one brand. Divided loyalties. There is no doubt in my mind that more efforts would be afforded if a dealer only had a cheque coming from one brand. How can the manufacturer disseminate information, knowing full well that a goodly portion of their dealers consort openly with the enemy?

There is no reason a "mom & pop" operation can't be successful (I should know, I ran two of my own video stores for 11 years, bankrupting 7 stores in the process including two "chain" stores), but the challenge for those type of operations is they need to have the ability to know their own limitations, be willing to swallow their pride and seek out the talent to allow them to grow to the next level. Unfortunately, that is a trait many of them do not have.

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There is no reason a "mom & pop" operation can't be successful (I should know, I ran two of my own video stores for 11 years, bankrupting 7 stores in the process including two "chain" stores), but the challenge for those type of operations is they need to have the ability to know their own limitations, be willing to swallow their pride and seek out the talent to allow them to grow to the next level. Unfortunately, that is a trait many of them do not have.

I was only referring to auto-retailing....I have also been fortunate enought to work for a few 'Mom&Pop' situations outside of the auto realm in my lifetime....all were successful. The car biz is too rich for the small guys anymore, between RE costs, advertising choices and the manufacturers step-stair incentive programs.
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