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Thursday, March 4, 2010

Rewriting the Rules

There have been numerous recent quotes from industry experts that some might find contradictory. The issue: How many dealers are needed to maximize OEM profits?
Let’s put this in historical perspective. Back in the day, OEMs felt that boosting the number of dealers and loading them up with inventory would provide maximum market penetration, volume, and OEM profits based on economies of scale. “Inventory pressure sells cars” was the OEM mantra, especially in the case of the Detroit manufacturers.
As they pushed to establish more and more sales points, the OEMs also instituted a strategy to transfer as many of their own distribution and marketing costs on to those dealers, making each a profit center before they sold a single new vehicle. Any dealer who has ever perused the dealership’s monthly parts statement will have a strong opinion on this issue. Savvy dealers learned to survive over-dealering by fighting to keep expenses as low as possible. They maximized the use of facilities, minimized slow-moving inventory, adopted other franchises, and focused on pre-owned vehicles, parts, and service.
OEMs charged and over-charged their dealers for every little thing, including the cost of the Dealer Communication System. They charged for special parts inventory and tools for each new model, marketing costs, brochure racks, bathroom labels, and collateral materials. It is hard to imagine a dealer representing a net cost to the OEM. Add in parts sold to maintain and repair units in operation, and each sales and service point was certainly a profit center.
Then came the Senate hearings, with testimony from then-President Jim Press of Chrysler and then-Chief Executive Fritz Henderson of General Motors. The pair complained about the overwhelming burden they were carrying in having to maintain “excess” dealers. Most knowledgeable people assumed they were simply saying what they thought the Congressional panel and the Auto Task Force wanted to hear.
Shortly thereafter, the pendulum began to swing in the other direction. Quotes from Mark LaNeve, a recently resigned GM sales executive, indicated a concern for “orphan owners.” He espoused the pain of consumers who no longer had a local dealer to go to for sales and service. Even subsequent comments from Press indicated he probably really didn’t mean what he had said during the hearings.
Then President Barack Obama added to the chaos when he signed a bill he had initially opposed, establishing an arbitration process to allow dealers to apply for reinstatement.
Many terminated dealers are so filled with angst they want nothing to do with reinstatement by the OEM that rejected them.
A dealer friend said to me recently, “Reinstatement? Hell, I’m sending them a thank-you note.” This, in reference to having had Dodge yanked from one of his stores and Chrysler -Jeep pulled from another. These operations had received Five-Star awards and were solidly profitable, with ample cash positions and independent floor planning. He had purchased these franchises in recent years, and his investments were rendered worthless almost overnight. There are many similar stories.
Even recent comments by Ed Whitacre, the new GM CEO, indicate he might welcome the opportunity for arbitration boards to reinstate as many as 1,000 dealers. There seems to be particular interest in keeping some Cadillac dealers, whose ranks had been dramatically thinned. Some states were left with as few as two Cadillac dealers.
It must make logical sense to Whitacre that if dealers are essentially "free," the additional sales points will provide extra opportunities for consumers to buy GM products. After all, how many Ford stores will a Chevy owner drive by to do business with a Chevrolet dealership?
At the same time, Chrysler has been complaining about the arbitration mandate and has even offered up veiled threats of legal action to prevent it. Ford is working on strategies to thin out dealers in metro areas, but making no move to reduce the number of rural dealers.
Now I read that Roger Penske, CEO of United Auto Group, is calling for more Detroit Three dealerships to go. I recently toured Penske’s luxury high line facility in Scottsdale, Ariz. It appeared to me that the objective of this operation was not necessarily to make money, but to create the ultimate auto facility, expenses and profits be damned. It makes sense that someone who has made such an investment would want to have fewer competitors.
Most dealers do not have the resources to build such an edifice, despite the push from the OEMs to do so. Even if they did, most dealers exercise some restraint to keep themselves out of a position where record sales years are required just to break even, a situation Detroit has found itself in recently.
Interestingly, today’s consumers seem to care much less about expensive showy facilities than they once did. Their PC and cell phone are becoming their showroom of choice. This practice is being driven by generations who have never known life without cable TV, cell phones, computers, and video games. There are still traditional buyers out there, but it is increasingly difficult to tell who they are when — and if — they come to the showroom.
Treat the internet buyer like a traditional buyer, and there is no way to earn their business. Worse, an accounting of a perceived bad consumer experience will quickly spread through the myriad of online social networking sites, and the dealer’s reputation with true internet buyers will quickly suffer.
The rules of the business are being re-written. I have more questions than answers. But given the rapidly developing trends and conflicting views of the business by the highest level executives in the business, it’s no wonder a lot of us are confused.


David Ruggles is a former dealer-owner and consultant with nearly 40 years’ experience in the auto industry. He has conducted an annual seminar on auto dealership issues and processes in Japan since 1993, and helped develop specialty software focused on pre-owned leasing. A contributing columnist for Wards Dealer Business and Auto Finance News. A member of the International Motor Press Association. He can be reached at ruggles@msn.com.