Analyst says dealer cuts 'didn't make any sense'

[redwhiteandblue]

Automotive News

Analyst says dealer cuts 'didn't make any sense'

Neil Roland
Automotive News | November 2, 2009 - 12:01 am EST

https://home.autonews.com/clickshare...-lMVvRFsEI60-0


WASHINGTON -- General Motors Co.'s and Chrysler Group's dealer cuts will erode the companies' market share in small- and mid-sized markets, an automotive-industry researcher told federal auditors last week.

David Cole, chairman of the nonprofit Center for Automotive Research in Ann Arbor, Mich., said he was interviewed Tuesday, Oct. 27, by the special inspector general's office for the federal bailout.

Cole said he told auditors that the automakers are cutting into their strengths, which are in rural areas and modest-sized markets rather than large metropolitan areas.

“These cuts didn't make any sense to me,” said Cole, whose research specializes in auto manufacturers and suppliers rather than dealers. “By pulling out, GM and Chrysler are giving a beachhead to Ford and some of the imports.”

Cole added that he had no quarrel with the dealer reductions in metropolitan areas.

He wrote a letter to the Obama administration's auto task force this month making similar points and calling for a review of dealer cutbacks.

“The dealer is the face of the manufacturer to the average customer,” his Oct. 12 letter said. “I would suggest that the distribution network for these manufacturers be revisited by the automotive task force.”

Cole said he didn't know if the call from the inspector general's office, led by former prosecutor Neil Barofsky, was triggered by his letter to task force chief Ron Bloom.

Cole said he has no research expertise or experience with dealers, but that his personal interest in the issue was piqued and that he has spoken with a number of dealers and GM executives. He is the son of former GM President Ed Cole.

Kris Belisle, spokeswoman for the special inspector general for the Troubled Asset Relief Program, did not immediately respond to a request for comment, nor did task force spokeswoman Amy Brundage.

Necessary steps

GM and Chrysler have said the dealer cuts are necessary to reduce costs and align the size of the dealer network with reduced market demand.

Chrysler terminated 789 dealerships earlier this year as part of its bankruptcy. GM, which has also emerged from Chapter 11 protection, plans to shut 1,350. The reductions account for about a quarter of each company's networks. GM has restored about 70 franchises that had been slated for cancellation.

GM has estimated that its reductions will save $2 billion in direct support or subsidies for weaker dealers, and $415 million in gross fixed cost savings.

“These cost burdens are just not sustainable,” Michael Robinson, GM general counsel for North American Operations, told a congressional panel in July.

GM spokesman Greg Martin declined comment. Chrysler spokeswoman Linda Becker did not respond to a request for comment.

Barofsky, who was appointed by President Barack Obama and confirmed by the Senate, is examining dealer reductions by GM and Chrysler. His staff has already interviewed employees of the National Automobile Dealers Association and dealers at the Committee to Restore Dealer Rights, which represents rejected dealers.

[YupYupYup]

Cole has an interesting link with dealers, though...Let you all figure it out.

[AMERICA 123]

His points still stand on their own merits.

However,

Somewhat ironically it just may turn out that due to unforeseen reasons meaning an 'unexpectedly' negative economic environment the damage done will be partially to largely amolerated.

The Auto Task Force 's work - and I use that term loosely - will be judged later as one of America's greatest Governmental failures.

[1.21 giggawatts]

The dealer is the face of the manufacturer to the average customer

there's a big part of the answer.

[GMJoe]

GM is reviewing some of the cuts made on dealers that had adequate sales volume.

More than likely, a number of these dealers will be restored to the GM network.

[Bravada]

Cole said he has no research expertise or experience with dealers

Yes thank you

[fullsizefan]

I have noticed in my own area (rural upstate NY) that we have lost a handful of small town dealers.... one in Watkins Glen is now closed, and the one in Penn Yan is winding down (no new inventory). Another in Honeoye Falls is winding down next year. In the case of WG and PY, there are other domestic dealers in town, and no other GM dealers nearby. So, many local folks will not travel to a larger town to buy a GM car, and will be inclined to buy from a local dealer.

These are lost opportunities for GM, in my mind. Yes, these dealers may have been small, but you see a lot of their dealer plate frames in town. Anecdotal evidence, yes. But a lot of Silverados and such are being bought by local farmers, and these guys are not going to drive to Canandaigua or Rochester to get their trucks fixed, and will likely buy a Ford or Dodge locally the next time around.

[BigThreeForever]

At last, some common sense from an analyst.

[69Firebird400]

Cole said he has no research expertise or experience with dealers,

Since I'm apparently just as qualified as David Cole to comment on this (perhaps moreso, since my dad was a new-car salesman for several years around the time I was born, and has operated his own used-car dealership for over 30 years after that), I can pretty easily see what the logic was behind the cuts.

Yes, the metro area overlaps didn't make sense and those closures probably had to happen - Cole seems to agree with that. Overall dealership profitability has been poor over several years because of the cutthroat big dealers who compete for the same customers, so having fewer dealers serving the same area theoretically means more sales to the survivors. GM has made that point many times, and it expects the survivors to increase their sales significantly.

On the rural dealerships, while they will mean a loss of volume (and geographic coverage), it's not like there was no cost to GM to have those dealers where they were. There are marketing and distribution costs for every dealer, and many of those costs are fixed whether the dealer sells 90 cars per year or 500. That's the money that GM and Chrysler see themselves saving through the cuts.

I'm sure there were many dealers that should not have been cut in rural areas, but I'd argue that any who sold minimal volume (< 8 or 10 cars per month), sold far more used cars than new cars, or who were single brand franchises (and those were unlikely to remain sustainable with less than a full lineup. Could a standalone Buick dealer survive on three models (two of which are competitive)? Could a standalone Pontiac dealer survive? Obviously not at this point. Standalone GMC? Truck sales are way down.

Take out the situations above and I'm curious how many of the cut dealers are still on the list.

[jasaero]

Wouldn't small and mid-sized generally rural areas also tend to be pretty Red areas of the country in the GOP vs Dem red and blue maps?? That couldn't have nothing to do with this! Not a chance!

Sorry for the sarcasm.

[1999 White C5 Coupe]

In July - the Chevrolet dealership closed where I have done business for years. The had been in business since 1924 as a Chevrolet franchise and were a viable business. The employees told me in advance of the closing because I was on first-name basis with many of them. The dealership was converted into a KIA dealership. So sad.

Yesterday, I received a computer-generated form letter from Chevrolet in the mail informing me that the dealership had closed. The letter encouraged me to look for a new dealership using a supplied web site.

GM has abandoned many of its loyal, long-term customers by closing numerous viable franchises and eliminating brands such as Oldsmobile, Saturn, and Pontiac. GM can't even notify its customers of closed dealerships in a timely manner.

Tell me how GM is going to increase sales and market share?

[K-1]

Originally Posted by redwhiteandblue

GM has estimated that its reductions will save $2 billion in direct support or subsidies for weaker dealers, and $415 million in gross fixed cost savings.

That's all that matters. Cutting the fat also trims $2.5bil in expenses. The remaining dealers pick up the slack and become even stronger, which means better facilities, better personnel, and better customer service. There is plenty of "sense" in that.

[motorman]

the big thing is that now the dealer does not have to cut the sale price as much because he has less competition for the sale so he will make more $$$$ profit per deal.

[skylark68]

I agree that closing rural and mid-sized city dealerships is a brainless move. Overlap in large cities is one thing (not sure why Chevy needs 3 dealerships on one short stretch of freeway), but shutting a Chevrolet or GMC dealership in small town USA is ridiculous.

[Slack]

Hey, the government broke the dealer networks. What to do...? Oh! Let's let the government have a look at it and try to fix it. I fail to see the logic in fixing bad government intervention with more government intervention.