Chrysler Cuts 789 Dealer Agreements; GM Slashes Dealerships FridayBy Michelle Krebs May 14, 2009
By Michelle Krebs
DETROIT -- Chrysler filed papers with the U.S. Bankruptcy Court in New York Thursday morning asking for permission to eliminate franchise agreements with 789 of its nearly 2,400 dealers.
U.S. Bankruptcy Judge Arthur Gonzalez must approve Chrysler's proposal and is likely to do so. Upon that ruling, the dealer rejections would take effect.
On Friday, General Motors is expected to notify 1,000 or more of its 6,200 dealers that their franchise agreements are being terminated as well even though GM has not filed for Chapter 11 reorganization as Chrysler has. However, GM is fully expected to file by June 1.
Both automakers have dealership networks, built over the years when the Big Three dominated the market, too large to support their lower sales volume and shrinking market share.
"We have a once-in-a-lifetime opportunity to right-size and realign the dealer body," said Jim Press, Chrysler vice chairman and president, in a conference call with media Thursday.
At Chrysler's peak, it had 3,200 dealers. Press said the dealer reduction is due to an unprecedented sales decline in the U.S. auto industry that "has had a significant impact on our sales and forced us to reduce production levels to better match the needs of the market" and so dealership reductions were required to be in line with lower production and sales.
For both GM and Chrysler, the intent is to reduce the number of dealerships, making the remaining ones stronger and more profitable. In theory, remaining dealerships will become more profitable thanks to higher transaction prices and greater sales volumes, allowing them to invest more in marketing and other aspects of the business. Operating over wider territories also provides them greater economies of scale that may allow them to offer better deals against the outside competition.
Going through the courts to eliminate dealers, which GM and Chrysler have been trying to do for years, skirts state franchise laws that favor the dealers over the automakers. Those laws have made it almost impossible for automakers to rid themselves of dealers who provide poor customer service or underperform in sales and profits.
In Chrysler's case, the automaker and remaining dealers benefit from the removal of intra-brand competition, allowing the automaker and its dealers to focus on external competition.
Who Got Cut?
Not surprisingly, a good chunk of the dealerships on Chrysler's to-go list are those that had only one or maybe two of the three Chrysler franchises, but not the entire three-pack of Chrysler, Dodge and Jeep. The automaker had been pushing the threesome under Project Genesis, which it says in court documents will cost $216 million over the next eight years. Chrysler currently has 62 percent of its dealers with the three brands; after the dealer rejection, more than 80 percent will have all three brands.
Chrysler performed a review that was "an objective and rigorous process that was both thoughtful and thorough," said Steven Landry, executive vice president, North American Sales and Marketing, Global Service and Parts.
Who owned the dealership mattered little. Chrysler's list of dealerships range from those in small towns to those in big cities and their suburbs, from longtime family-owned to publicly held dealerships chains, including AutoNation and Roger Penske.
For Chrysler buyers the closing of dealerships will change the competitive landscape. Currently, shoppers can essentially instigate "bidding wars" for their business, encouraging dealerships to undercut each others' prices in competition for each car sale. With fewer dealerships in each area, that will become much harder to do, and buyers will pay more as a result. Higher prices for Chrysler vehicles opens the door for outside competition.
Local communities who are losing dealerships will see a rise in unemployment, a decline in sales tax revenue and a drop in support for community non-profits as dealers often are heavy sponsors of those.
However, some of the sales tax may remain within the community because many car shoppers will change brands for the convenience of buying from a neighborhood dealership. The customers who choose to stay loyal to the Chrysler brand may find another dealership within their county, which still benefits the local economy.
"The sales tax isn't going away, but a lot of it may be shifted into a different community," said Edmunds.com CEO Jeremy Anwyl. "The act of closing dealerships is creating some winners and some losers, to be sure."
Positioning for a Chrysler-Fiat Alliance
Press denied that Fiat decided which dealers would go; he said it was Chrysler's decision and Fiat was kept apprised. In any event, the remaining 2,392 dealers will move forward under a Chrysler-Fiat alliance if t is completed. The 25 percent reduction represents 14 percent of Chrysler's volume.
"We are in the process of revitalizing Chrysler's business to succeed as a viable enterprise under new ownership in the future," Press added in his statement.
Chrysler said it plans to maintain "business as usual" with all of its dealers through the transition. The automaker intends to honor warranty and incentive payments during the period that rejected dealers remain active. To ease the burden on dealers whose agreements have not been assumed, Chrysler will work to assist in the redistribution of new vehicles and parts to the remaining dealer network.