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Deal or No Dealership Why is Chrysler closing 789 car dealerships?

By Christopher BeamPosted Wednesday, May 20, 2009, at 6:20 PM ET

Chrysler Logo. Chrysler disclosed in a bankruptcy filing last week that it plans to close 789 dealerships—about one-quarter of its total. General Motors, meanwhile, told the owners of 1,100 dealerships that it will drop them from its network. How does shuttering dealerships help car companies?

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It saves them money. Car companies don't actually own dealerships—instead, they have contractual agreements that dictate factors like location, display space, signage, and service options. Nevertheless, Chrysler and GM and other auto manufacturers must maintain a large, costly field force of trainers (to train technicians to fix cars), salespeople (to persuade dealers to buy more cars), and auditors (to verify claims for reimbursement). The more dealerships, the more go-betweens a car company needs to employ and the more money it has to shell out.

Shuttering dealerships could also result in less intra-brand price competition. Car buyers will typically visit at least two different dealerships in order to compare prices before making a purchase. By playing dealers against one another, buyers lop an estimated 2 percent off revenues. But if there are fewer dealers, customers can't haggle as easily, and car companies make more money. There's a tradeoff, of course—fewer dealerships means customers have to drive farther. But at the moment, there are so many dealerships that the benefits of reducing price competition outweigh the harm of having fewer locations.

Another benefit: Shutting down dealerships weeds out weaker branches to help stronger dealerships stay viable. It also makes sense from a branding perspective, because when a dealership starts to fail, dealers resort to tactics that make the car company look bad. Think free hot dogs, "push, pull, or drag" sales, and giant inflatable gorillas on the roof. (Luxury car companies like Lexus explicitly forbid dealers from using the words price or sale in their ads.)

Finally, pre-emptive closings help car companies from getting saddled with tremendous amounts of debt. Let's say a GM dealer is just getting started: He'll buy hundreds of cars from GM with money borrowed from GMAC, the financing arm of GM. If the dealership collapses suddenly, GMAC may not get a lot of the money it's owed. So it makes sense for GM to shutter a dealership before it goes too far into the red.

When the auto industry first started expanding in the early 20^th century, it made sense to have dealerships in every community. Much of the population was rural, and cars broke all the time, making proximity to the original vendor necessary. These days, with a more urban population and better auto engineering, it's not necessary to have so many dealerships. At the same time, people are willing to drive farther to buy or tune up their cars. As a result, more dealerships don't correlate with more sales. Toyota sells more cars than Chrysler with fewer than one-third of the number of franchises. (The average Toyota dealer sold 1,589 vehicles in 2008; the average Chrysler dealer sold 124.)

Got a question about today's news? Ask the Explainer.

Explainer thanks Glenn Mercer of the International Motor Vehicle Program and auto industry consultant David Stivers.

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Christopher Beam is a Slate political reporter. Follow him on Twitter.

Photograph of car price tag on Slate's home page by Justin Sullivan/Getty Images.

COMMENTS

Thank you.

I have been asking for months, ever since the auto company crisis started, why the car companies would want to close dealerships. As dealerships aren't owned by the auto company, I didn't see how having fewer places sell their product would make more money. I sell books and I want as many book stores selling my books as possible. However, I don't have much cost associated with each store, but the auto companies apparently do.

Of course, I think they could change the terms of the franchise agreement to put the cost of a dealership on the dealer and strictly control the advertising and promotions. Many franchise companies do this without difficulty. A friend owns some Papa Murphy stores and, if he wants employees trained by Papa Murphy central, he must pay corporate for doing so. All advertising must be approved in advance by corporate. All changes to the menu must be approved in advance. All equipment must be approved, etc., etc., etc. Why can't Chrysler do that? Might be easier to weed out low-volume dealers by making the cost of keeping the dealership going higher. A dealer might be the only dealer for 200 miles and can well charge for the additional cost, while another would simply end the relationship.

-- MacAdvisor
(To reply, click here)

What surprises me about the auto dealerships is that none followed or copied the idea of no-haggle pricing that Saturn used. I've read that it is one of the most popular innovations in the auto industry in the past 25 years. Customers love it so why not do it? I've purchased two Saturn cars and I love the fact that I paid the exact same amount for the car as someone in another state would. Nor does it matter what gender I am, race, religion, age or skill at haggling. I paid the same price I had calculated previously on the website. And the Saturn salesman didn't give me that stale old line of "Let me ask my manager if I can go lower, be right back!" (which another dealer tried on me.)

This idea of two dealerships for the same company competing against each other always struck me as strange. If only they followed the Saturn example they might not be in as big a hole as they are.

-- doughdee222
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Some dealers did follow the Saturn model (remember, they are independent businesses. The manufacturers can't tell them what to do about selling)

It turned out that most people apparently liked to haggle. You don't see too many dealers with the no-haggle policy anymore. What people say and what people do are two different things.

And even Saturn had some haggle opportunity with the trade ins.

-- VEH
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