Recession and Mergers & Acquisitions and Auto Dealers and Economy and Retail and Real Estate & Retail

Car makers turn up pressure for bigger, but fewer, stores

May 5, 2008

Domestic automakers were already scheming about new ways to chop dealers--cutting costs to service them--as their market share drained to Toyota and other foreign competitors.

Now, an economy standing on the brakes could drive another round of dealer consolidations that might not be a good deal for family-owned peddlers of metal.

It doesn't matter how you work the numbers--never mind how profitable a dealer is or how high its customer-satisfaction scores. Struggling automakers like Chrysler not only want to reduce costs of servicing a dealer network that's larger than it needs to be, but also plan to shrink their product portfolios.

That means the automaker's single-brand dealers, such as Kevin Beltz's Shadeland Dodge, may be forced to buy, or sell to, a multiple-brand Chrysler dealer if they want a viable product offering years down the road.

Trouble is, Beltz would like to buy the Chrysler-Jeep dealer down the street--Eastgate, which in turn wouldn't mind buying the Dodge dealership Beltz's father, Gene, opened in 1970.

"Unless [Chrysler officials] open their wallets, what's the incentive? 'Take one for the team'?" Beltz asked.

He's not alone. There's also, for example, Don Palmer's Dodge dealership along East 96th Street. It's only a 9-iron shot away from Tom O'Brien Chrysler Jeep, across the street.

Palmer isn't in as much of a pickle, though, since he also has a full-line Chrysler dealership on Pike Plaza Road, plus a Hyundai dealership nearby.

He doesn't seem too worked up about it, figuring Chrysler "might help facilitate" a solution for his and about 200 other single-brand Chrysler stores.

Chrysler hasn't announced a timetable for consolidating dealerships. More important, perhaps, neither has it wheeled out loads of cash to help coax consolidation.

"We will do it in a collaborative way with our dealers," Chrysler President Jim Press said at an industry conference in February.

However Chrysler tries to align its dealer base with the realities of shrinking market share, it's clear consolidation is a shared goal of the struggling Detroit Three.

Last June, Ford Motor Co. bought out Sharp Ford owner Mike Shore for an undisclosed price, closing the south-side family dealership with roots that go back 90 years.

General Motors, though not currently on a dealer buyout binge, in recent years put pressure on dealers to combine Buick, GMC and Pontiac lines. Among those feeling the pressure was former Buick dealer Eric Dickerson, who in 2006 sold his franchise in Broad Ripple to the Ed Martin Automotive Group in Carmel and closed the Indianapolis store.

More recently, another longtime local car dealer inside the Interstate 465 loop, Bud Wolf Chevrolet, closed down at 5350 N. Keystone Ave., citing property taxes and sour consumer perceptions of vehicles by U.S. automakers.

Generally, automakers would like to see fewer but larger dealerships that can move higher volumes to blunt overhead costs. The bigger, better-capitalized dealerships often can afford to upgrade their facilities with amenities to lure customers and portray the manufacturer in a better light.

The few, the proud

Case in point is Pearson Ford, in Zionsville.

This is one of the fewer-but-bigger-and-better dealerships Ford Motor Co. would like to replicate nationwide. Owner John Pearson just shelled out $7 million and added 22 jobs on an upgrade that includes Performance Collision Center, a massive replacement for what used to be Pearson's body shop.

Located behind his dealership and clad in ornamental brick that screams high-end office building, the facility repairs not only domestic brands but BMWs and Minis.

In place of his old body shop is "Quick Lane," a Ford brand of quick repair shops that fixes all brands of vehicles with everything from tires to alignments to batteries to oil changes. Roughly 40 percent of the business is non-Ford vehicles, something to which a Kia van and a late-model BMW did attest during a recent visit.

"You'd be surprised how many people don't realize this is a part of a Ford dealership. In fact, here comes a Chevrolet," said Al Giombetti, Ford Motor Co.'s executive director of service and parts, pointing to an inbound Impala while on a recent visit to Pearson's campus, with a contingent of Ford suits in tow.

Quick Lane is the fastest-growing business at Ford, Giombetti said, with sales up 12 percent in a recent period.

It's not just the revenue from selling more than 3 million tires a year, along with Ford parts such as Motorcraft batteries and air filters. This new revenue stream can help sustain dealer revenue during downturns in the industry and, by driving traffic, win over converts from other car brands.

"As people come in, we introduce them to the Ford experience," said John Pearson, who also managed to squeeze in a service facility for bigger trucks along with tastefully integrating a "buy here, pay here" storefront into his campus to capture the credit-challenged.

Big investments by dealers also demonstrate to the public the confidence they have in Ford, Giombetti said. That's not a bad thing, as domestic automakers continue to shrink and close plants to meet falling market share. They also struggle under legacy union pension and health benefits that don't saddle Japanese and Korean carmakers.

Need to shrink

Helping cultivate more super-dealers like Pearson is one thing, but automakers also need to part with vast numbers of marginal dealers, industry watchers say.

Not only should domestic automakers reduce their dealer numbers, but they should do so radically, according to Steve Girsky, a former Morgan Stanley analyst, former adviser to General Motors and most recently head of New York private equity fund Centerbridge Industrial Partners.

Girsky made jaws drop last year when he opined that the Detroit Three try to shed dealer ranks 60 percent to 70 percent. That would bring them in line with sales-per-dealer levels of the best Japanese carmakers, he told a J.D. Power Roundtable before the National Automobile Dealers Association convention.

"It's very hard for a Detroit Three dealer to compete, with half the throughput of a Japanese dealer," he told the crowd.

In Indiana, there are now 532 new-car dealers, down 44 from the 576 in 2002, according to the National Automobile Dealers Association.

Indiana dealers aren't feeling a concerted effort by automakers to pressure them to consolidate, as in some other markets, "but we know the trend is there," said Marty Murphy, executive vice president of the Automobile Dealers Association of Indiana.

But most of the "forward-looking" single-brand dealers "are looking at [consolidation] themselves," he said.

That could get a more serious look if the economy continues to sputter.

"Anytime your cash flow slows down, it makes you look at your options," Murphy said.

Some of the consolidation issues facing dealers of domestic automakers stem from the decades-old practice of using different brands to essentially sell the same vehicle.

Behold, for example, the Buick Enclave, GMC Acadia and Saturn Outlook--essentially the same bones with varying amounts of sheet metal and options, and different price tags.

By contrast, "the imports don't do that and never really have," Murphy said.

Chrysler, which hired away former Toyota executive Press, said it wants to eliminate product overlap. That could take the form of Chrysler selling, say, one line of minivans rather than two under different brands.

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