Car dealer Jamie Auffenberg knew he would get a letter from Chrysler Thursday. He just didn't know what it would say.
When he opened the U.S package Thursday morning, he found a letter saying Chrysler is terminating the franchise for his Chrysler/Jeep store in O'Fallon, Ill. His brother Chris operates four Chrysler-branded stores in Missouri and was told that two would close.
"I didn't see this coming," Auffenberg says. Even after talking to Chrysler later in the day, he still wasn't sure why his store, or his brother's, were cut. He says recent tax trouble, for which he was cleared, was not cited.
Many car dealers, independent businesses with franchise agreements with the automakers, are family-run stores staying in the same bloodlines for generations.
As Chrysler announced its closings Thursday, several families were dealt blows. Kim Hendren in Pineville, Mo., was told his stores would stay open. His son Mark Hendren was told his Neosho, Mo., store would close.
"It's kind of overwhelming to get a letter that says goodbye," says Alan Wilson, a Chrysler/Jeep dealer in Jackson, Miss. Wilson is keeping his franchise, but his brother Doug, who operates the Dodge dealership on the same property, is facing closure. Wilson says his brother is dealing with "the emotional stuff and the pragmatic stuff. ... It's obviously very difficult."
On Thursday, Chrysler announced it is cutting off 789 of its nearly 3,200 dealers by June 9. Dealers across the nation said they were saddened by the news.
"It's a sad day for America when, with the stroke of a pen, dealers that have been in the community hiring local employees and paying taxes are suddenly wiped out," says Howard Kuperman, owner of a Jeep store in Port Jervis, N.Y., who was told it would close.
Chrysler, which is operating on government loans and filed for bankruptcy reorganization this month, says it decided which dealers to cut based on sales, customer satisfaction rates, how much capital they have on hand and whether the dealer sells all three company brands under one roof.
"This is a difficult day for us, and not a day anybody could be prepared for," says Jim Press, Chrysler's president and vice chairman. "There are no winners. There are no losers."
After struggling for years to trim its dealer network, Press says, the automaker is taking advantage of the fact that being in bankruptcy court frees it from state franchise protection laws. "The bankruptcy process does allow us a once-in-a-lifetime chance to accomplish a right-sized, realigned dealer body," he says.
The auto industry overall supports one in 10 U.S. jobs, according to the Alliance of Automobile Manufacturers. Dealers alone employ more than 1.1 million and generate nearly 20% of retail sales in most states. The National Automobile Dealers Association estimates Chrysler's closures affect more than 40,000 jobs.
"We believe that these draconian dealer cuts are not only misguided but counterproductive," NADA said in a statement. "Fewer dealers mean less revenue for the automakers. Dealers are the manufacturer's customer. They buy the cars and parts and even the signs in front of their dealerships."
The economic slowdown has hit the auto industry like a brick. Sales have been below the 10 million annualized rate all year. Just two years ago, they were topping 16.5 million. But even when times were good, the domestic automakers were trying to trim their dealer ranks. Toyota, Honda and Nissan have far fewer dealers than the Detroit 3, meaning there is less competition among them for customers.
A study done by Grant Thornton found a typical Toyota dealer sold 1,628 vehicles in 2007; Ford stores averaged 236. The average for all new car dealers: 322.
Chrysler says many of the stores on its cut list sold fewer than 100 vehicles a year.
"They clearly have too many dealers in the system," says Pat O'Keefe, a turnaround expert at O'Keefe & Associates. "They don't need as many dealers as they have, and they won't for some period of time."
Even AutoNation, the country's largest chain of car dealerships, was affected. Five of AutoNation's 234 stores will close: two in Florida, one each in Colorado, Alabama and Texas.
But they represent just 1% of AutoNation's revenue, the company said. CEO Mike Jackson says he's fine with the consolidation and that it's overdue. "Domestic market share went from 60% to 40% in the last decade, but the rationalization of the dealer network has not kept pace with this," he says. "They were already behind."
Domestic automakers have tried buying out dealerships or encouraging them to consolidate, but now they're out of time and money, Jackson says. He says Chrysler should use the power of bankruptcy court to get rid of the franchise agreements.
"The track record has shown over the past decade that it's extremely difficult to deal with," Jackson says. "It's an intractable problem."