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Monday, January 12, 2009

Thousands of Car Dealers Nationwide Prepare to Close

As posted by: Wall Street Journal

As part of the restructuring plans that General Motors Corp. and Chrysler LLC presented to the federal government, the automakers have pledged to speed up the process of shrinking their dealer bodies.

Neither Chrysler, which has 3,300 dealerships, nor Ford Motor Co., with its 3,790 stores, have shared their targets for dealership reductions.

But GM told Congress that it aims to reduce its dealer count by 26%, from 6,375 at the end of 2008 to 4,700 by 2012.

Industry experts say that alone will be difficult to accomplish -- but they also said it's still not enough.

Even if the automaker were to cut its dealer body to 4,700 without shrinking the rest of the business, experts said, GM's sales per dealership would remain much lower than those of competitors Toyota Motor Corp. and Honda Motor Co.

When Toyota and Honda dealerships have more sales per store than GM stores, that means they also have more profits to invest in facilities, customer service and perks, such as rental cars for customers who are having their vehicles serviced.

While Detroit's automakers do have many profitable, first-rate dealerships nationwide, thousands of stores are struggling with low sales and cannot afford to deliver the retail experience that could help woo customers back to Detroit's improving cars and trucks.

"Their argument is if we have fewer, more profitable dealers, they'll spend more on their facilities, they'll be able to strengthen their brand image," said Mark Johnson, automotive merger consultant in suburban Seattle.

To be competitive, Wachovia analyst Richard Kwas has said GM should reduce its dealer count to closer to 2,000.

Other experts have told the Free Press that Detroit's automakers need to reduce as many as 20% of their stores nationwide to get competitive.
Solutions in bankruptcy?

Given the complexities of shedding dealerships, several experts told the Free Press that it might not be possible to achieve the scope of closures and consolidations the automakers are seeking without a bankruptcy proceeding or a federally-facilitated bankruptcy-like proceeding, in which the automakers are allowed to void franchise contracts in order to achieve the changes they want.

Howard Polirer, director of industry relations at AutoTrader.com, said the early conditions of the federal loans made it appear that the federal government would require automakers to slash their dealership numbers, but it's unclear how they would do that absent bankruptcy-like procedures.

Until the Obama administration and new Congress take over later in the month, the conditions are not seen as very meaningful, he said.

"This is far from being resolved," Polirer said. "We all know, come Jan. 21, this whole process is going to be looked at much closer, probably much differently. The question is whether they can accomplish what they're looking to accomplish without the rules and regulations of a bankruptcy."
A complicated process

Johnson, the merger consultant from Seattle, said that shrinking the dealer body won't save automakers much money because it ultimately will be exorbitant to get the dealerships to close.

When GM announced in 2000 that it would close its Oldsmobile brand, it took four years and $1 billion to shutter 2,800 dealerships, largely because so many dealerships sued to protect their contracts.

More dealers are expected to fail or close up because of poor sales in the coming year than a typical year because of the weak economy.

Grant Thornton put out a report in October that said the rate of decline would accelerate into 2009.

"We see more unprofitable dealers closing their stores outright," Paul Melville, a Grant Thornton LLP partner, said as part of that report.

Despite that, dealers and industry experts said they don't believe there will be enough closures to solve the automakers' problem of having too many dealers competing with each other for too few sales.

"It's a sticky wicket," said Ron Tonkin, president and chief executive officer of the Ron Tonkin family of dealerships based in Portland, Ore., and the former president of the National Automobile Dealers Association. "Because of the state franchise laws, it is a very, very costly effort."
Offers to close up shop

Tonkin and other experts have estimated that the fastest, easiest way for automakers to shed dealerships they don't need is to pay them to close. However, that likely would cost several million dollars per store.

Tarik Daoud, former president of Al Long Ford in Warren, agreed in December to close the new-car sales franchise and instead operate a used-car sales showroom and service center instead. His decision was based on an offer from Ford.

"For the times and the economy, Ford came to me and made me a lucrative offer if I take a buyout," he said.

In the end, however, experts said they don't believe the federal government or taxpaying public will like the idea of federal loans being used to pay independent businesspeople to close their businesses.

Nor might members of Congress, many of whom probably didn't anticipate that dealerships in their districts might have to be closed in order to make Detroit's automakers healthy again.

read more about auto dealership closures at: Michigan Business News Blog