Thinning the herd
Domestic brands want to cut dealer count; dealers may be ready to join the mission
Photo credit: ANDY CARPENEAN
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It's hard enough competing with the Ford dealer down the street, Northcutt says. It's even worse competing with nearby Chevrolet dealers for the same small pool of customers, he adds. Still, Northcutt says he has no plans to give up his Chevy store.
Northcutt also is the only Toyota dealer in the area. That's not likely to change, even though Toyota is reaching farther into rural America to sell its Tundra full-sized pickup. "I have one Toyota store, and that's OK for me," Northcutt told Automotive News. "I don't need to add a service point. We're doing just fine."
Northcutt exemplifies a seemingly intractable problem for the Detroit 3 and their dealers.
The domestic automakers created sprawling retail networks decades ago. Strong state franchise laws - and politically powerful dealer lobbies - prevent the automakers from undoing those networks unilaterally, despite shrinking market shares. And given the companies' weakening balance sheets, it would cost them too much to buy out the dealers they consider superfluous.
Some Detroit 3 executives are trying to thin the herd by persuading smaller dealers to sell out to nearby rivals. The companies have made slow progress in the past decade, although many dealers dragged their feet.
Today, though, some dealers are embracing the consolidation movement. They argue that too many dealerships are chasing too few buyers, especially in smaller metropolitan and rural areas. They say the glut causes distribution hassles, ruinous internal competition, cost cutting and poorer customer service.
Period of adjustment
"Our (market) share has gone down a third since 1995 or so," says Mark Fields, president of the Americas for Ford Motor Co. "We're going to adjust as appropriate. But we're going to do it working with our dealer network."
Fields says Ford has too many dealers in some areas and too few in regions such as the Sun Belt. So the company plans to slash the number of its domestic-brand dealerships in 18 large metropolitan markets, especially in the Northeast and Midwest. Company officials say they will work with dealers to eliminate weak stores in targeted markets.
In many cases, Ford says, it will let a point expire when a dealer closes a store. That's a departure from the company's longtime strategy of finding new dealers for vacated points.
Overdealering "is a huge problem in our market," said Judiane Fournier-Young, who co-owns Young Ford in Charlotte, N.C., with her husband, David. "It was a problem created by Ford, not by the local dealers."
Young Ford competes with 20 other Ford dealerships within 40 miles, Fournier-Young says. Stores that sell other high-volume brands have only one or two competitors in the Charlotte area, she says.
Ford has allowed small-town points to move to the fringes of the metropolitan area, Fournier-Young says.
Alpha plan
It might appear that Ford, GM and the Chrysler group have pared their dealership count significantly in the past decade. But those cuts are mostly the result of the dissolution of brands such as Plymouth, Eagle, Geo and Oldsmobile. The pace has been more plodding for active franchises.
The Chrysler group's Alpha program seeks to combine Chrysler, Dodge and Jeep franchises under one dealership roof. By creating large stores in metropolitan markets, company executives say, dealers gain economies of scale that can improve their operations.
About 150 of the Chrysler group's 1,150 metropolitan dealerships sell all three brands. If a smaller dealer is unwilling to sell out to a larger one, the company's regional staffers try to negotiate a resolution.
"The dealers who can get all three franchises view (Alpha) as very positive," says Andy Palmen, chairman of the Dodge National Dealer Council and a Chrysler, Jeep and Dodge dealer in Kenosha, Wis. "The dealers who aren't in a position to get all three are more concerned about their franchise as a stand-alone."
Some automakers use passive-aggressive tactics to get dealers to walk away from their franchises, says Randy Fuller, a Ford-Jeep dealer in Show Low, Ariz. Fuller, who is selling his Ford store, describes "tremendous cost transference" from the factory to dealers that eats into profitability.
"The information-technology infrastructure is expensive," Fuller says. "The contest and incentives programs are an abomination. Waiting three months for Ford to dictate your profit from Blue Oval and holdback is no way to do business."
Legal restraints
Industry consultant Jim Ziegler, a champion of small dealers, agrees the Detroit 3 need to slim their networks.
"When they were ruling the market, it was the perfect balance," Ziegler says. "Now the little guys are dropping like flies - because they can't stay in the game technologically, or stay invested because of the reduced new-car margins."
If GM or Ford were to declare bankruptcy, Ziegler says, that could supersede the company's dealership franchise agreements. The factory could choose the stores it wanted to keep and void the contracts of those it sought to discard, he suggests.
But Dan Goldberg, a franchise lawyer in Boston who has represented several automakers, says such a dire scenario is unlikely. A bankruptcy judge would have to approve an automaker's effort to dissolve its dealership contracts, he says.
Goldberg argues that consumer preferences - not state franchise laws enacted years ago - should determine the number of dealerships.
"Where can you find an A&P supermarket today?" he asks. "Fifteen years ago, who heard of Home Depot? Dealers frequently have this view that things should never change."
Import brands have been more deliberate in building their U.S. retail networks. They argue that their distribution systems are more efficient than the Detroit 3's.
The Toyota brand has just 1,215 U.S. dealerships. It may add a few dozen stores in the next decade. Toyota, Lexus and Scion had 16.1 percent of the U.S. market in August but just 1,430 of the more than 40,000 U.S. dealer franchises.
"We are going to grow with our existing dealers," says Jim Press, president of Toyota Motor North America Inc. "We need to be in the right locations so the customers can get to the dealers. But we don't need dealers to be competing against each other."
Still, Toyota has about 75 dealerships in Southern California between Santa Barbara and the Mexican border. That total includes the massive Longo Toyota store in El Monte, which sold more than 24,000 new and used vehicles at retail last year.
Small towns, small sales
Then there is General Motors, which has about 4,900 rural dealerships and 2,500 stores in major metropolitan areas. Those groups of stores split GM's total U.S. sales down the middle.
"We have a very strong presence in small, rural markets," said Joe Chrzanowski, GM's executive director of dealer network planning and investments. "Those dealers are important. We want them there as long as they want to be there. They are selling in places where our competition isn't."
At the same time, Chrzanowski says GM wants fewer dealerships in both rural and metropolitan areas.
"What you'd like to do is get three or four dealers in a room and tell them to work it out," he says. "But none of them will raise their hand and say that they want to sell. That's our dilemma. Although everyone complains about too many dealers and not enough (sales), everyone still wants their store."
GM's channel strategy seeks to combine Buick, Pontiac and GMC franchises under one dealership roof in metro areas. It has a similar, if smaller, plan for its luxury Cadillac, Saab and Hummer brands.
GM has 1,521 dealerships that sell Buick, Pontiac and GMC vehicles. They account for 60 percent of those brands' sales volume. In major metropolitan areas, the three brands average 815 new-vehicle sales a year.
If GM's consolidation plan works, it will eliminate 900 dealerships that sell single marques.
But there are big obstacles to persuading metropolitan dealers to sell, Chrzanowski concedes. Many have been in the same location for years, and their fixed costs are low, he says.
"We have dealerships in downtown locations where the population has moved away," Chrzanowski says. "Their volume is dropping every day, but the property has been paid for and there's low overhead. The dealer can afford to stay in business, and there's nothing we can do to force him out."
The only automaker that wants to increase its dealer body significantly is Hyundai Motor America. The Korean automaker has 695 U.S. dealerships, up from 483 a decade ago.
Hyundai says it needs 900 dealers to achieve its growth objectives. The company now sells fewer than half a million vehicles a year here but seeks 1 million sales by 2010.
Ed Carmack, Hyundai's director of dealer development, says the automaker must have enough dealers to provide good customer service, but not so many that they compete against each other.
"We need to add dealers in California. But we need to add dealers everywhere, and not just in the metros," Carmack says. "It's more about customer convenience than ambition."
Rise of the megadealer
Publicly owned dealership groups and private megadealers are responsible for most dealership consolidation, says Earl Hesterberg, president of Group 1 Automotive Inc.
"If you look at the big metros and the coastal and Sun Belt areas, there has been substantial penetration by the big dealer groups," says Hesterberg, a former Ford executive. "Atlanta is all public groups.
"In Phoenix, you have (V.T. Inc.), which is not public but acts like one, and you have (UnitedAuto Group) and AutoNation," Hesterberg says. "Dallas has lots of public dealerships, but the luxury channels are all private."
Tom Addis, chairman of the Ford National Dealer Council, says natural attrition is the best way to reconcile the size of a dealership body with an automaker's lower market share.
"If a dealer wanted to not be a dealer anymore, and he didn't have a succession plan in place; and Wal-Mart wanted to buy his building, or a shopping center wanted to build there, that would be a great way to have it work out," says Addis, dealer principal at Lake City Ford-Lincoln Mercury in Coeur d'Alene, Idaho. "Nobody gets hurt, and everybody's happy."
In communities where Ford may have replaced a point automatically in the past, Addis says, the company now will look carefully.
"I would assume they'd say, 'Are the existing dealers in this market area getting the job done?' Addis says. "If they're getting the job done, we don't need to reappoint another dealer."
Mary Connelly and Donna Harris contributed to this report
You may e-mail Mark Rechtin at mrechtin@crain.com
You may e-mail Amy Wilson at awilson@crain.com
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