Dealership Consolidation: Heartbreak Hotel

Problems facing ailing US car industry today grow from a 100-year old business model. As the US market stagnates and offshore builders gain market share, there is less money left in the retail car business. This means it is time for the franchise system to perform its second most important function.

The principal utility of the franchise system is its potential for explosive franchisor growth using other people's money. The franchised dealership distribution model seemed like a good idea in the early days of the auto industry. But that phase is over. Quite a while ago, the manufacturers began thinking of ways to eliminate franchised dealers and install factory owned distribution channels.

The second main function is to insulate the manufacturers and financial interests from industry downturns. For North American car dealerships, that phase is just beginning.

But for other functions some sort of retail environment will survive: people don't buy cars from catalogs, and trade-ins must be disposed of and moved down market.

Downsizing

Domestic carmakers are struggling with declining market share in fragile economic times. Without major concessions from union labor, Ford is in trouble and Chrysler as we know it is history. These companies need to get rid of many hundreds of dealers. Now.

While rumors of General Motor's death are highly exaggerated, GM also has entire brands to consolidate.

The auto industry is surrounded by layers of defenses designed to absorb losses in a crisis. Those defenses are being deployed; spin-offs and bankruptcies of supplier firms, sales of acquired assets, and dumping of unsold product on dealers.

Manufacturers love to remind buyers that dealers are independent local businesses. Everywhere I've been, "independent" means expendable, there to add or contract capacity with business fluxuations.

Chrysler has about 3700 stateside dealerships, Ford around 4200, and GM approximately 6900 dealers, compared to Toyota's less than 1500 dealers.

Of approximately 22,000 new car dealers in United States, 8,000 will be gone in 10 years. Most of these will be in big city markets where multiple dealers compete in a confined geographic area.

Surplus dealerships cost Detroit big money. Extra car delivery costs, training, administrative expenses, bonuses and marketing bucks total something like $4 billion yearly.

Detroit's not so big two and a half dropped 462 dealerships in 2006. This wasn't fast enough. Dealers, many third generation family operations, resist being arbitrarily eliminated. The pace of deletions in 2007 looks to be about twice that fast. Franchise laws protect dealerships in most jurisdictions.

Even Toyota has stopped adding dealers.

Ford has lagged in efforts at franchise reduction.

Le Resistance

America's auto dealers employ over one million registered voters. Their trade groups are among Capitol Hill's most effective lobby groups. Dealers have been supporters of the George W. Bush administration, they have friends in Washington.

The rise of powerful national dealership chains has altered the power balance between Detroit and the hinterland. However, these corporate groups have joined the call for elimination of weaker independent retailers.

When the consolidation is over, the national chains will be the beneficiaries. Department store car lots, selling every brand under one roof, are the future.

Many dealerships, hurt by rising floorplan costs due to rising interest rates and heavy inventories, are for sale. Real estate gains often represent a lifetime of labor and investment for retiring dealer principals.

The dealers resolved to survive are resorting to a variety of alternate means to turn a profit. For consumers evaluating a dealership the questions are: are they profitable, and how do they earn that profit?