Detroit's Big Three automakers have too many dealers for the number of cars they sell. Many of those dealers are hurting financially, and struggling dealers aren't in Detroit's best interest.
Automakers are now trying to thin their dealer ranks. Chrysler, for example, has cut the number of dealers by about 10 percent in the last four years, to about 3,700, and says it will eliminate hundreds more.
The news that the private equity firm Cerberus Capital Management is slated to acquire Chrysler has prompted some industry watchers to predict that many more dealers will be put on the chopping block.
On a recent afternoon, Bill Tapscott, the impeccably dressed general manager of Lithia Chrysler in Renton, Wash., showed off his new vehicles, including the Aspen, a seven- passenger luxury SUV. He has been selling Chrysler cars and trucks for nearly three decades.
His dealership is what Chrysler calls an alpha dealer. It sells the full line of the company's products: Chrysler, Dodge and Jeep all under one roof . This spacious, modern dealership is the wave of the future for Chrysler dealers. The automaker wants its dealers to have larger geographic territories, a broader customer base, and less competition with others selling the same brand. The aim: More sales and higher profits.
"Chrysler wants its dealers to be profitable," says David Cole of the independent Center for Automotive Research. Profitable dealers spend more on advertising, they invest in new facilities, and they provide the kind of atmosphere people are looking for as they shop for new cars, he says.
In short, says Cole, "dealers are the public face of an automaker." Those that make hefty profits project the image of a vibrant car company, selling autos you want to buy. Since dealers actually purchase their inventory from Chrysler, the faster dealers reorder, the better it is for Chrysler's bottom line. But right now there are too many cars sitting unsold on dealer lots.
Earlier this year the company announced plans to eliminate about 10 to 15 percent of its dealers over the next year or two. Chrysler spokesman Jason Vines says that plan has been endorsed by Cerberus and by the Chrysler dealers. But he acknowledges that dealer support is tempered.
"Everyone is favor of this. But like the old saying, 'Everyone wants to go to heaven but no one wants to die.' "
In other words, the dealers are interested in having fewer dealers so long as they aren't the one getting axed.
Vines adds that, for now, there are no plans to go beyond the previously announced cuts. But he concedes that could change.
"If other opportunities come about and it makes sense, sure we will do that," Vines says.
Indeed, some industry watchers, including Cole, suggest that Chrysler needs to eliminate 1,000 more dealers as part of its long-term strategy. Cole says the buyouts will be expensive. "It's probably going to cost hundreds of millions, maybe even a billion dollars to get the kind of dealer body they have to have."
Dealers have franchise agreements with Chrysler – and if Chrysler wants to terminate those arrangements, it will have to buy the dealers out. That's what General Motors did when it eliminated the Oldsmobile nameplate. GM won't say what that buyout cost, but some estimates put that figure at more than $800,000 per dealer.
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