Car Dealership Oversaturation Revisited

Forbes covered the topic this week (link requires subscription), confirming a problem mentioned in this previous BizzyBlog post (The Car Dealer-State Government Racket”), but with more numbers and research:

Having too many showrooms is bad for car dealers and the brands they sell. So why don’t carmakers do something about it?

….. Detroit is going through a wrenching contraction. The Big Three’s share of the U.S. market, 74% a decade ago, is down to 54%. Hence the cutting of tens of thousands of workers. But the vast, overpopulated dealer network is scarcely budging. The main sticking point is a collection of state and federal laws that make it difficult for car companies to terminate a dealer franchise.

General Motors still has 7,100 dealerships (some with multiple franchises, for example, Buick-Pontiac-GMC). That count is down from 8,434 ten years ago. Ford Motor has 4,400 dealers and Chrysler Group 3,900.

Contrast Toyota, with 1,215 franchises. These sell an average 1,613 new vehicles a year apiece. Chevrolet has 4,111 franchises selling an average 643 vehicles. Ford showrooms sell 696, and Dodge stores (Chrysler’s largest division) sell only 408. The situation is disastrous for the smaller brands: Buick franchises sell only 102 new cars a year, Jeep franchises 170.

Manufacturers can only watch as their dealers carve one another up by advertising giveaway prices. Worse, at least for the manufacturer, is that a lot of these dealers own competing franchises. A Buick dealer, that is, may also have a Toyota dealership down the road. Naturally, they shift their best salespeople and capital to the most profitable brands, leaving their Buick or Ford store looking shabby and staffed by inept or green sales agents.

Why don’t the weak dealers just fold on their own? Two reasons. They can still make money on service and on selling used cars. And the dealership provides jobs for the owner’s friends and relatives.

….. Carmakers can’t just shut down marginal dealers. Under state franchise laws car companies must show good cause to terminate a dealer’s franchise agreement. A federal law gives a terminated dealer the right to sue for “bad faith” by the car company. Try telling a jury that putting two dozen workers on the unemployment line was done in good faith.

These laws aren’t going to change. Dealers have traditionally been prominent businessmen with political clout in state legislative chambers. (Ever wonder why you can’t buy a car online?)

….. As long as the automakers have their checkbooks out–doling out billions of dollars to entice unionized workers to leave–why don’t they pay off some of their dealers to close up shop, too? Ford is quietly offering some dealers as much as $300,000 to encourage mergers that would streamline its network, a sum one dealer called “chicken feed,” according to Automotive News. It cost GM $583 million to compensate its 699 Oldsmobile dealers after it decided in 2000 to phase out the brand. That’s $840,000 per.

….. Don’t bet that anything like this will happen overnight. When a company eliminates a job, labor costs go down. When a company loses a dealer, its overhead costs stay the same and–at least in the short term–it loses a few hundred car sales.

The article goes on to say that Mercedes Benz endured the financial pain of paying off marginal dealers and a temporary dip in sales when it bought out about 20% of the dealers in the early 1990s. But with a stronger remaining contingent of dealers, the brand’s unit sales more than tripled from 1991 to 2000.

But Ford’s, GM’s, and Chrysler’s dealership count needs to be reduced by a lot more than 20%. Do the companies even have the capital to commit to this? Will Wall Street demonstrate any kind of patience with the inevitable but hopefully only temporary sales drop when the dealer roster is trimmed? Even worse, can the companies afford a temporary sales decline in the midst of employee buyouts and other serious capital drains?

It took about 50 years for the old Big Three to create this mess, but they probably have less than a decade, and maybe as little as 5 years, to solve it or go by the wayside.