GM and Chrysler dealer closings - a different perspective

[kaisen]

Many of you know my background in the auto industry, both with dealers and manufacturers. I have run a few large dealerships in the Minneapolis area and have many friends and associates in dealerships across the country.

It hit me when I read through the 789 dealers recently axed by Chrysler. Roughly twenty names of friends who own these were on the list. Some were multi-franchised so losing one brand isn't closing the entire store. A couple of the stand-alone full-line Chrysler stores will be devastated.

Many see the closings as pruning a tree. Get rid of the dead or dying for the health of the remaining. It seems most Pelicans see it this way. In most cases I agree. GM will announce over 1000 more today.

I wonder, though, whether we fully grasp the impact this has.

What will happen to the buildings? The average franchised dealership is a 30,000 square foot facility on 5.5 acres worth roughly $6 million (although it varies wildly depending on location). The property taxes are huge. I was part of a $5M project in Burnsville, MN where the taxes were well over $100K per year. These are not big-box spaces that are reconfigurable for a different retail use. If they aren't used for autos, powersports, boats, or RVs they will likely be dozed. But who will build another commercial retail building on that site anytime soon? I think the banks will own a lot of vacant dealerships.

What will happen to the employees? The average franchised dealership employs about 60 people split between sales, service, parts, management, and administration. Technicians have invested their careers in specialized training for their brands. When you know Jeeps inside and out, its not like you can go to Toyota and be efficient. And it's not like Toyota is hiring either. There are simply too many salespeople, but they'll find other jobs outside the car biz. Managers will take huge paycuts switching industries. Admin functions are very specialized to the car biz, so many will have trouble making the adjustment. There will be tens of thousands of people wondering what to do for careers.

What happens to the newspapers? The average franchised dealership spends $350,000 per year on adverising, mostly in local newspapers. Those papers are already struggling. As 25% of their dealer customers disappear, so does that revenue. It may be a death blow.

What happens to service customers? In many cases, these were small-town dealers. When they close, the next closest dealer may be far away. There are many people who choose what car they buy based on local service. Maybe they bought a Dodge in town because the nearest Honda dealership was 40 miles away. Now the nearest Dodge dealer is also that far. Also, the remaining dealers will be happy to absorb the service business, but are they capable of providing the same level of service when their workload is increased? Do they have enough bays? Loaner vehicles?

What happens to the cars? Where do you cram all the excess inventory. It's not like the remaining dealers can handle more cars. Many of them are too full now. And they don't need the additional expense of carrying more inventory (most carry about $4 million in new cars).

There are more questions ..... none with good answers.

Oh, and before you say "just sell used cars" think of the overhead of a huge facility, and more importantly, that many local ordinances will not allow those dealerships to do business without the franchise.

Necessary, but painful.

[widebody911]

Simply put, the automotive bubble has burst.

[kaisen]

Originally Posted by widebody911

Simply put, the automotive bubble has burst.

It's not like the housing bubble. It might be true that it is over for the big three US automakers, but the industry will rebound. Cars are not as durable as houses. We will need more to replace the millions of cars we 'retire' each year. Will it be 16 million new units again soon? Maybe sooner than you'd think. But 12 million is still a lot of units. And studies show that demand is pent up. The average car on the road is 9 years old, which is unprecedented. Experts are predicting that 2011 will be a big year for auto production.

[URY914]

I don't see how some of these dealers stay in business. Dealerships are like gas stations, there is one on every corner.

You're right, the car business in busted just like housing did.

[URY914]

The dealership network is overgrown. Too many dealers selling to too few buyers. These guys can't wait around until 2011.

[the]

Dealerships are not one of the chosen ones. They don't have a voting block that they can deliver, so they don't get access to any of the trillions.

[Z-man]

Interesting perspective, kaisen.

Here is something I considered which is related to the topic at hand, and you alluded to it in your last post:

Right now, it seems folks are holding onto their cars a bit longer. A couple of reasons for this:
1. The economy. (Maybe I don't need to replace my BMW 7-series every other year -- maybe I can wait 3-4 years...)
2. The cars are built better - even the domestics! (Yeah, the big-3 may be a couple of years behind the Japanese in terms of durability and reliability, but they have increased quality across the board significantly.
3. Unknown future. Those still on 'solid' financial grounds are not sure if they will remain there in the near future.

Ok, so it is a fact that new car sales are down. But when the economy picks up, what is going to happen? I suspect that you will see a resurgance of the auto industry. Perhaps not as soon as 2011, but in 5-10 years, car companies will be selling new cars and making more profits. Why?
1. In a few years, the average age of a car on the road will be 15+ years. At that point, folks will have gotten beyond the depreciation value of the car. IE: their cars will owe them nothing. Then, it will be financially appropriate (from a frugal perspective) for folks to purchase new cars.
2. Less competition. Chrysler and GM are on very thin ice. I suspect that one of those two automakers may fold partically before all this is sorted out. Kia and Hyundai are probably close to the same situation, in terms of the US market. Those car makers and dealerships which remain will have the opportunity to make some money.
3. The auto industry will change - how? Don't know. But with the perception that cars are bad for the environment, car makers are being forced to develop new technologies. While I don't necessarily agree with the whole Al Gore "doom and gloom" camp, whenever an industry is forced to push the limits and develop new technology, that is a good thing. I suspect that in a few years, the fuel cell technology will mature and become a viable means of propelling a car. Hybrids may or may not last long, but if they do, they will be vastly different than what we have around today.
Another change for the auto industry will be revamped product lines. There is too much inner-brand competition. Ex: Honda Fit vs. Honda Civic coupe. Ford Escape vs. Ford Edge. Toyota Corolla vs. Matrix. Mercedes ML vs. GLK vs. GL. As product lines narrow, there will be less processing costs. Or, car makers will find ways to maximize sharing of components between product lines. All these are good things.

So while the car industry is currently in dire straits, I suspect that the future of the car is a bright one indeed...

Just my $0.42,
-Z-man.

[jyl]

My expectation/speculation -
- I think the auto industry hits bottom in 1H09 and then SAAR rises in 2010 and 2011. I'm thinking 12MM in 2010 and higher in 2011. Production follows with a 1-2 qtr lag. We're selling well under replacement levels and as kaisen notes, the avg light vehicle in the fleet is nearly a decade old. Financing, while not great, is not the limiting factor; there is less demand for car loans than there is supply. We may get a scrappage law eventually. GM and Chrysler will come out of this will dramatically reduced debt loads, lower labor and retirement costs, and more focused brands - maybe they'll have decent cars. Ford will get the same labor/retirement savings, although their debt will still be high. Their cars are already better than decent. The suppliers have been furiously cutting costs to be breakeven at 9-10MM SAAR, judging from 1Q reports some of them have reached that point. Some may have to file BK to get there. Similarly dealers, at least the public ones, have been sharply lowering their B/E points. When SAAR rises, I think the resized industry will make money again, and significantly more than people currently expect. I use the word "rise" not "recover", why SAAR should get back to 16MM in the next 5+ years is unclear to me.

To kaisen or others in the industry, I'd be interested in your views.

[ckissick]

My father's Chrysler/Jeep dealership in Redwood City is being shut down. He still has VW, which is relatively strong right now, and Nissan. They also have Chevy, which could be a problem. They will continue to service Chrysler and sell parts.

The strange thing is, Chrysler is shutting down all three dealerships on the San Francisco Peninsula. There will not be a Chrysler or Jeep dealer between Marin County and San Jose. That's too big an area with a large population.

[Zef]

Originally Posted by ckissick

My father's Chrysler/Jeep dealership in Redwood City is being shut down. He still has VW, which is relatively strong right now, and Nissan. They also have Chevy, which could be a problem. They will continue to service Chrysler and sell parts.

The strange thing is, Chrysler is shutting down all three dealerships on the San Francisco Peninsula. There will not be a Chrysler or Jeep dealer between Marin County and San Jose. That's too big an area with a large population.

Not when nobody are buying these crap cars.

[Zeke]

kaisen, your points are good. The trickle down effect is certain to be the bane of those dealer's local economy. I ask this: aren't most of the dealers listed losing money and would eventually go away anyway?

And, just to be sure, this closing of dealers is to consolidate business to more successful dealers, right? Some of those dealers might be losing money right now, too. I seems to me that the list could have been sort of arbitrary in nature, but I don't know.

What would have been better?

[Zeke]

Originally Posted by Zef

Not when nobody are buying these crap cars.

Isn't that a little harsh? The 300M has been a good car for them along with the Ram trucks. I mean ignorant comments like that get us nowhere.

Americans want big cars. The manufacturers have to make the little cheap cars for 2 reasons, the federal government mandates and to have a variety of prices in the line up. If we had left them alone to develop what they do best, things might not have turned out as they have. They certainly would not have been worse.

Events of '08 hit them hard, but do we want to lose our automobile manufacturing ability? I don't think so.

Now we need to see what can be done, not just throw stones.

[tcar]

Do the companies partly own the dealerships? I know they are (mostly) franchises.

What is the upside to the companies to close dealerships; what's the savings?


As an aside, in this metro area, Chevy and Toyota sell roughly the same number of cars.

There are over 20 Chevy dealers (this morning) compared to 7 Toyota dealers.

[Zeke]

Originally Posted by tcar

As an aside, in this metro area, Chevy and Toyota sell roughly the same number of cars.

There are over 20 Chevy dealers (this morning) compared to 7 Toyota dealers.

I'm sure that's due to legacy. Chevy dealers are older on the average with many going back several wars. Maybe it's time to thin the herd, but I'm wondering if there was a better way.

That would be for kaisen to comment.

[Porsche-O-Phile]

Originally Posted by widebody911

Simply put, the automotive bubble has burst.

+1

Yes, it's unfortunate that all the ancillary/related businesses will take a hit, but the fact of the matter is most of these businesses were not sustainable in the first place and as such, should be allowed to take those hits.

We created an a bunch of "economic growth" that was artificially propped up by the (frankly idiotic) belief that we need 5 cars out there for every man, woman and child in America. A lot of this "growth" was spurred by the (mistaken) belief that the average person does (or should) buy a new car (tens of thousands of dollars) every 2-3 years.

It was an industry built on sand. The "sand" is this idiotic assumption that normal people do this, can afford to do this and will continue to do this in perpetuity.

It further has been exacerbated by the (again, mistaken) belief that normal people will go to dealers for service and willingly spend out-of-pocket hundreds or thousands of dollars for oil changes, fluid top-offs, tire rotations and "inspections" of stuff (not repairs) on their new $40,000+ vehicles.

Dealerships got away with this stuff for years due to an apathetic and stupid public that was awash in funny money. They got complacent and got addicted to it. Now the gravy train has derailed and we're back to an era of what I call "economic honesty". In other words, people actually look at what they can REALLY afford (hard currency in hand, not what they're told their McMansions are worth and what they can borrow against it in the form of HELOCs). For the average family, this is probably in the hundreds of dollars, maybe a few thousand dollars annually for TOTAL household vehicle costs (i.e. loan payments, repairs, gas, parts, registrations, insurance, etc.) Not tens of thousands of dollars as people have been mistakenly led to believe, and got used to the notion of.

Nobody in the auto industry or any of the related industries (insurance, parts, service, sales, etc.) has bothered to ask the OBVIOUS question regarding sustainability for the last 10 or 15 years - the question about WTF we were collectively thinking to ASSume that everyone could (and would) afford this forever.

Like housing, it's an industry that got addicted to Stupid. Now it's paying the price. And the price will be steep. At least when it's all over, we'll have something that's sustainable and commiserate with what people can REALLY afford and what REAL demand informs - not made-up, fake, artificial demand.

[onewhippedpuppy]

Kaisen, you make good points, all of them. But what's the alternative? These are dealerships that struggling automakers have determined are NOT MAKING THEM MONEY. That's the absolute bottom line. Unless you believe that the dealers deserve some sort of bailout (I don't) then it's just business. Many of the same arguments can also be applied to other struggling industries, though perhaps on a smaller scale.

Painful as it may be, it had to be done. Is it productive to have multiple dealerships within a few miles of each other competing for business? I believe there are 5 GM dealers within the Wichita metro area. If you count nearby small towns, there's several more. We have one Nissan, one Honda, and one Toyota dealer.

[David McLaughlin]

I believe there is good among the bad. It will be hard for those affected directly and in directly. I agree with many that posted before about too many dealerships in a small area. I can't believe Toyota and Honda don't have the same problem. When I was selling Hondas, there were at least 5 dealers within a 40 minute drive. That can't be good for business. I also agree that the government should back away from the auto industry. They have done enough damage. Let the car companies to what they do and if they succeed, good if not then too bad.

[dd74]

There are still Chrysler products on the road. If I'm driving a Ram, and my local dealership has been shut down, am I expected to travel 50-100 miles for an oil change?

Two Chrysler dealerships I know of closed locally; one in Glendale, the other in Van Nuys. I know of no other Chrysler dealership in L.A. except in Santa Monica - and that's a long haul from the San Fernando Valley.

It's one thing that Chrysler is on the skids, and another that the dealerships are closing down. But it seems no one has considered the consumer who is stuck in the middle of this very unappealing mess.

[Netspeed]

Originally Posted by dd74

There are still Chrysler products on the road. If I'm driving a Ram, and my local dealership has been shut down, am I expected to travel 50-100 miles for an oil change?

Two Chrysler dealerships I know of closed locally; one in Glendale, the other in Van Nuys. I know of no other Chrysler dealership in L.A. except in Santa Monica - and that's a long haul from the San Fernando Valley.

It's one thing that Chrysler is on the skids, and another that the dealerships are closing down. But it seems no one has considered the consumer who is stuck in the middle of this very unappealing mess.

So they did close Star Chrysler? I used to work across the street at the Chevy dealer. One of my friends is at the Chevy dealer in Burbank and he's awaiting his fate today.

[dd74]

Originally Posted by Netspeed

So they did close Star Chrysler? I used to work across the street at the Chevy dealer. One of my friends is at the Chevy dealer in Burbank and he's awaiting his fate today.

Yes. Star Chrysler has been closed. I think it was in the LA Times today.