GM blazes a trail for dealer-factory relations
Reprints
Print
Respond
Throughout its nearly century-long history, General Motors' franchise system has pioneered dealer-factory practices that the entire industry came to embrace. GM says its franchise system remains one of the company's strengths, even as the system evolves - and shrinks.
Some dealers, mindful of GM's elimination of Oldsmobile earlier in the decade, say they are skeptical of the company's program to combine Pontiac, Buick and GMC sales in the same dealerships. They worry that GM's channel strategy could mean their unwilling extinction.
But GM executives insist that voluntary efforts to reduce the dealer body are necessary responses to intense industry competition.
Early days
Even before GM's incorporation in 1908, automakers sold their cars through franchised dealers. Buick had dealers in place when William Durant took control of the company in 1904.
At first, car companies tried to sell their own products - by mail order, on consignment, by traveling salesmen, even through department stores. But those efforts failed, said Mark Valerio, GM's director of dealer network planning and investments for the northeast United States.
"The very early automakers found they couldn't do too many things at once," Valerio told Automotive News. "The need to raise capital was paramount."
Dealers raised capital for their factories by taking deposits from buyers. Dealerships also could handle trade-ins.
In 1910, GM had 976 dealerships selling Pontiac, Buick, Oldsmobile, Cadillac or GMC vehicles. The company added Chevrolet in 1912.
GM established its captive finance company, General Motors Acceptance Corp., in 1919. GMAC was intended to help dealers raise investment capital. But when Alfred Sloan became GM's president in 1923, he expanded GMAC's portfolio to include consumer financing.
"We believed that with rising incomes and the expectation of a continuance of that rise, it was reasonable to assume that consumers would lift their sights to higher levels of quality," Sloan wrote in his 1963 autobiography, My Years with General Motors. "Installment selling, we thought, would stimulate this trend."
It did. GM sold 545,590 vehicles in the United States in 1923. Four years later, it reached 1,231,738 unit sales, overtaking Ford Motor Co. GM took the sales lead for good in 1931.
Riding the rails
Sloan made close communication with dealers a priority. During the 1920s and early 1930s, Valerio said, "Every second week, he'd board a railroad car in New York, where his office was. He'd not only travel to Detroit but to dealerships, sometimes up to seven a day."
Sloan peppered dealers with questions about local market conditions. He also sought their candid assessments of GM's vehicles and its leaders.
To strengthen GM's franchise system, Sloan revamped the company's distribution model, says Bill Stacy, GM's special projects director of dealer network planning and investments.
Starting in 1925, Stacy says, Sloan focused on vehicle sales at GM dealerships. He de-emphasized sales of the company's cars and trucks by distributor-wholesalers and by subdealers, who got vehicles from dealerships or distributors and resold them.
"We had dealers we recognized as franchise dealers," Stacy says. "But we insisted their subdealers also become franchised."
'Every purse and purpose'
Sloan promoted the idea that GM would offer vehicles "for every purse and purpose." That notion was the foundation of GM's brand ladder, from the mass-market Chevrolet line to the luxury Cadillac marque. The idea was that GM buyers would climb the ladder, but remain loyal to the company, as their affluence rose.
The GM brands had distinct identities and products, Stacy says. "Each brand would cover a clearly defined price segment of the market," he says. The structure of the GM dealer body reflected that brand differentiation.
Unlike Ford, GM disdained forcing its dealers to take vehicles they didn't want. In his book, Sloan describes a "flat order" he gave in 1924: "This order directed all division managers to curtail production schedules immediately. … By cutting production schedules drastically, we were able to reduce dealer stocks to manageable proportions in a few months' time, but not without considerable hardship to the employees of the corporation who were laid off."
Sloan made a priority of helping dealers raise investment capital. To that end, GM developed the model carryover allowance. The company would cut dealerships a check for whatever new-vehicle inventory they had on hand at the beginning of a new model year. The carryover rebate became part of the GM franchise agreement in 1930.
In 1927, Sloan set up Motors Accounting Co., which provided GM dealers a standardized accounting system. It enabled dealers to identify their profit centers, to keep track of inventory, to pinpoint financial problems and to control expenses, Stacy says.
"It's the dealer operating report still used today," he says. "This would give GM a better understanding for developing marketing and production, because we could see what dealers have in inventory."
As another communications tool, Sloan established the GM national dealer council in 1934. He tapped 48 dealers to meet with GM executives three times a year. Today more than 600 GM dealers sit on national, regional and local advisory and product councils and boards.
GM's dealer body expanded with the growth of the company. In 1935, GM had 13,600 dealerships, Valerio said. By 1955, it had about 17,000 stores.
But rapid growth after World War II came at a cost. As vehicle supplies caught up with pent-up consumer demand in the early 1950s, automakers pressured their dealers to take more vehicles.
Dealers also complained about the practice at many car companies, including GM, of forcing renewal of franchises every year or two. That was the manufacturers' heavy-handed way of keeping them in line, dealers argued. They said it hampered long-term planning at their stores.
The dealers took their complaints to Congress, which held headline-grabbing hearings starting in 1955 on dealer-factory relations.
Amid this turmoil, Sloan made one more major contribution to GM's franchise system before he retired in 1956: the modern franchise agreement.
Sloan gave dealers the choice of a one-year or five-year agreement, Stacy says. GM was the first automaker to offer such a long-term contract, he adds.
Theodore Fichtner bought a Chevrolet dealership in Bridger, Mont., in 1952. His son Leonard, a Chevrolet dealer in Laurel, Mont., recalls the effect of the new franchise agreement on his father's business.
"You weren't worrying on an annual basis that you'd have to renew your contract," Fichtner says. "You could go to work and take care of your customers."
By 1962, Stacy says, almost all GM dealers opted for a five-year agreement. That's still the case today, he says. And the GM franchise agreement has provided a model that other automakers have adopted.
Spiffs and megadealers
GM joined the incentive wars in a big way in the early 1980s. Dealer Leonard Fichtner recalls an early program that offered customers a $500 rebate on truck purchases.
"It was great," Fichtner says. "We sold a bunch of them."
John Rogin, a Buick dealer in Livonia, Mich., bought his first dealership in another Detroit suburb in 1985. That year, he says, GM offered an interest-rate incentive program.
"Sales went off the chart," Rogin says. "We literally cleared the decks."
Despite such success, many GM dealers in the 1980s engaged in dualing - adding another brand, generally an import make, to their dealership. That practice helped give rise to today's megadealers, Stacy says.
The GM franchise agreement does not prevent dualing, Stacy says. But the company requires a strict separation of sales and service areas between GM and non-GM brands.
To respond to the dualing phenomenon, GM developed its channel strategy between 1989 and 1991. The strategy is based on dealerships that offer several GM brands.
GM has about 1,500 dealerships that sell Buick, Pontiac and GMC vehicles, a Pontiac spokesman says. That's up from about 800 stores last October. The three-brand dealerships generate about 60 percent of total Buick-Pontiac-GMC retail sales revenue.
A more limited GM channel strategy in some U.S. markets seeks to combine luxury Cadillac, Saab and Hummer franchises in the same dealerships.
Factory-store flap
In the late 1990s, GM developed a plan to buy and operate more than 700 dealerships. The company wanted to assure adequate representation in high-cost markets, Stacy says. GM also wanted to use the stores to test innovative retail practices such as online sales, he adds.
But GM dealers immediately complained that the factory stores would represent unfair competition. They feared GM would favor its own dealerships in allocating vehicles.
Gordon Stewart, president of Stewart Management Group in Harper Woods, Mich., called the plan "the low point" of his experience as a GM dealer, which dates back to 1979.
The factory stores "could operate at a lower cost," he says. "It could end the franchise system and cost a lot of money on the purchase and operation side of the business for GM."
Under dealer pressure, then-GM Chairman Jack Smith dropped the plan. At the National Automobile Dealers Association convention in 2000, Smith assured GM dealers that the company would continue to market its vehicles through them.
That announcement, Stewart says, was the high point of his relations with GM. Stacy says Smith's decision enhanced dealer satisfaction. GM owns no dealerships today.
Present and future
GM had 7,123 U.S. dealerships at the start of 2006, according to the annual Automotive News census of dealerships. GM executives argue that the channel strategy will create fewer but more efficient stores, offering a broad range of products without wasteful duplication among brands.
GM Vice Chairman Bob Lutz set tongues wagging last year when he referred to Buick and Pontiac as "damaged brands." Some dealers feared that was a signal that GM planned to have the two brands join Oldsmobile on the scrap heap.
But Lutz quickly smoothed over the controversy. And many GM dealers say their relations with the factory have improved in recent years.
"They don't pull some tricks, like jamming inventory, like some manufacturers do," dealer Stewart says. "They do everything they say they'll do.
"We criticize them for some internal business or product decisions. But they're really very good partners."
You may e-mail Jamie LaReau at jlareau@crain.com
You can reach Jamie LaReau at jlareau@crain.com. -- Follow Jamie on 
