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Thursday, May 14, 2009

Dealers: The Industry's Lifeline

Retailers are still the Detroit 3’s most valuable asset. Forget over dealering. It’s a dead-end debate. It’s almost impossible to find two people who agree on what is the right number of dealers in any given market. The market itself determines the correct number.
And it should be up to the individual dealer, as an independent business owner, to decide if and when it’s time to get out of the business. Nevertheless, an extraordinary amount of media attention has been focused recently on the number of auto dealers that sell the brands of the Detroit 3 (GM, Ford and Chrysler). There’s nothing wrong with that – except when assertions are made and studies are cited that are flat inaccurate. Consider this. The Detroit Free Press cited a CNW Marketing Research study, which has not been made public, that claims the cost of “excess dealers” to the Detroit 3 is nearly $4 billion. Now that’s a number that gets your attention. But is it right?
It certainly doesn’t appear to be. For example, the first item that’s listed as an additional expense to the manufacturer is “the cost of delivery of the vehicle to the dealership.” Dealers everywhere must have shaken their heads in disbelief when they read that, and everyone else who knows this business must have done the same thing. I’ve been a dealer for more than 30 years. I’ve paid the delivery costs for every vehicle delivered to my dealership. Every vehicle. So has every other dealer in this country. And we’re not talking about a small amount; the average freight charge per vehicle these days is around $700.
Let’s take a look at some of the other costs that the dealer pays:
  • Delivery of parts
  • Communications
  • Training
  • Special tools and diagnostic equipment
  • Land, showrooms, service bays, dealer lots, etc.
  • Advertising. Dealers contribute hundreds of millions of dollars each year toward advertising controlled by the manufacturer.

I could go on and on. Dealers, for example, often use a manufacturer’s captive finance company for floor plan loans and retail customer credit; both are profitable enterprises for the manufacturer. And let’s not forget that it is the dealer who buys the vehicles from the manufacturer in the first place. Without the revenue that dealers provide to the manufacturer, the factories’ assembly lines would fall silent. This is why manufacturers describe their dealer networks as their most valuable asset. Each dealer location that a manufacturer loses could also result in a loss of market share. That’s what happened to General Motors when it eliminated Oldsmobile and more than 2,700 Olds dealers.
So, the real question is whether the Detroit 3 will drastically lose market share if they drastically reduce the number of their dealers. Dealers are the entrepreneurs, the risk-takers. They provide good jobs to 1.3 million Americans, the kind of jobs that can’t be outsourced overseas. They are at the forefront of child passenger safety and are active in almost every charitable endeavor. The value that they bring to their manufacturers and to their communities is priceless. And some dealer families have been at it for more than 100 years.
The current automotive retail distribution network in the United States is the most efficient the world has ever seen. It provides competition and convenience, which benefit millions of car buyers every year. Given the fact that the dealer pays for just about everything he or she gets from the manufacturer, it’s easy to see why the cost to the manufacturer for its retail dealer network is minimal. In fact, research at GM found that a dealership only needs to sell 10 new vehicles a year to pay for the cost of supporting that dealership.
Profitability counts. The National Automobile Dealers Association represents more than 93 percent of the dealers in the country, both domestic and import. Anti-trust laws impose restrictions on trade associations advocating actions that would reduce competition, so it is inappropriate for NADA to take sides in the debate over dealer numbers.
What’s important is to take the long view. The industry is inevitably and notoriously cyclical; the manufacturer that’s up today can be down tomorrow. In other words, the marketplace is constantly changing. It’s not just the number of dealerships that counts; it’s whether a dealership is profitable. And that’s where our focus is: making dealers more profitable, so they can survive the good and bad times and be in a stronger position to service the customer that much better.

The preceding commentary by GM Dealer and 2007 National Automotive Dealers Association Chairman Dale Willey is available on the here on the NADA web site and was also published in Automotive News on July 30, 2007.