Detroit wants to thin the herd of dealers

GRAPEVINE, Texas -- Tom Durant knows tough times. The auto industry fell into shambles in 1992 just as he gambled on buying a near-dead Chevrolet dealership in downtown Fort Worth. He renamed it and moved it 20 miles to this fast-growing suburb.

"Things got better, and we built this business up. We'll find a way to survive this time, too," vows Durant, whose dealership, Classic Chevrolet, sold just over 4,500 cars and trucks last year to retain its title as the USA's biggest Chevy seller for the third consecutive year, despite a 13% drop in sales.

Now, as General Motors gm and Chrysler operate on $17.4 billion in government loans, dealers such as Durant are fighting more than the economy to stay in business. Both automakers are making dealers an integral part of their recovery plans as they prepare progress reports for the government that are due next Tuesday. The reports must satisfy federal officials in order for the car companies to get more loans, which they say they'll need to survive.

GM wants to shed 1,675 of its more than 6,000 dealers by the end of 2012. Some will disappear because there are too many bunched together in a particular city for all to stay in business at a time of declining sales. Others would close if GM cuts its brand lineup to concentrate on what the automaker says are "four core brands." Those are Chevrolet, Cadillac, Buick and GMC. GM is considering selling Hummer and Saab. GM North America President Troy Clarke said in an interview at the Detroit auto show last month that Pontiac would "become a boutique brand, like Corvette." He declined to explain. Asked about Saturn's future, he shrugged his shoulders.

Chrysler, by contrast, is pressuring its dealers to take more inventory, even though sales were down 55% in January alone and dealers — just like buyers — are having trouble borrowing money to buy cars. Dealers also are being asked to shoulder costs previously borne by Chrysler.

Ford Motor f, the other member of the Detroit 3, is a little better off. It hasn't taken government loans — yet — despite an increasingly precarious cash situation. But it, like the others, has aggressively tried to cut dealers over the past couple of years to reflect how foreign brands have eaten into market share.

Auto sales last year were a paltry 13.2 million, the worst since 1992 and down 18% from 2007. This year, forecasts are 10 million to 10.5 million. The reality: Too many dealers; too few sales.

"The whole goal is to be here a year from now," says Mike Jackson, CEO of AutoNation, an the country's largest dealer chain.

The industry will see a net loss of 900 new car dealers this year, the biggest thinning of the ranks in nearly three decades, predicts the National Automobile Dealers Association. That's on top of a net loss of 760 dealers last year.

The numbers alone "don't describe the pain," said the NADA's immediate past president, Annette Sykora, who has Ford and Chrysler dealerships in the small West Texas towns of Slaton and Levelland. Speaking to dealers at the group's convention in New Orleans last month, she added, "Some dealers mortgaged their own homes to try to stay in business and still had to close."

Counting all brands, foreign and domestic, there are about 20,000 new car dealerships in the USA. Consultant Grant Thornton recently estimated the optimal number at about 16,000. At that level, dealers on average should be able to sell as many cars this year as they did 10 years ago — about 750 each.

GM, Ford and Chrysler dealers will bear the brunt of the closings because of the Detroit 3's market share losses. From a high of 8 out of 10 new cars sold in 1984, their market share today hovers around 50%. Weak dealers aren't profitable, aren't able to keep their facilities as clean and modern as competitors' and generally hurt the image of the brands they sell.

State franchise laws generally make it difficult and expensive for an automaker to close or buy out a dealer. So automakers have been letting the recession do the dirty work.

Industry and dealers in the same boat

Gross profit margins on new cars made by the Detroit 3 have fallen as low as 3%, half the level of the past, says Carl Sewell, who owns GM, Lexus and Infiniti dealerships in Texas. "We simply can't keep doing business that way," he says.

Dealers would get a lift if the auto industry started to recover. But it's not happening. Industry sales fell 37.1% in January compared with a year ago, the worst monthly showing since December 1981. The Detroit 3 each took a worse drubbing.

Plummeting sales and the credit crisis precipitated the government bailout loans. GM and Chrysler shared $17.4 billion in loans in December after they warned they were close to running out of cash. Dealers, because they are independent businesses and not direct operations of the automakers, don't share the federal money. On the other hand, if one or more of the Detroit 3 went under, their businesses would go down as well.

"It's as bad as I ever hope to see it," says San Antonio dealer Ernesto Ancira Jr., who owns 10 dealerships in Texas, including GM and Chrysler brands. "I'm not sure dealers could survive anything worse than we're seeing now."

Here's where automakers stand with dealers.

•General Motors. GM had 6,375 dealers at the start of 2009, down 401 in a year. The goal: 4,700 by the end of 2012. As one of the conditions for its loan, GM promised the government it would drastically slim its business. Hummer and Saab brands are for sale. Saturn could go, too, and Pontiac is to shrink. GM may decide what to do with them this month, said Mark LaNeve, a GM vice president.

That leaves even healthy dealers in limbo.

Sure-bet divisions such as Cadillac, being preserved under GM's reorganization, can become risky bets for dealers if there's too much competition in a city. While having four Cadillac dealers would be about right in the financially healthy and wealthy Washington, D.C., area, there are nearly a dozen around foundering Detroit.

Sewell, who became a dealer 27 years ago when his father died and left him a single Cadillac dealership in an affluent Dallas neighborhood, has to compete with 12 other Cadillac stores in his metro area.

Who will give up their GM affiliations is "really a dealer-by-dealer thing. They know their relative position," says GM CEO Rick Wagoner.

Weak dealers make the biggest bull's-eyes.

"If you're struggling, you're going to be looked at," says Jimmy Gray Jr. of Jimmy Gray Chevrolet in Southaven, Miss. Over the long term, there will be "fewer, more profitable dealers."

•Chrysler. The weakest of the Detroit 3 managed to shed 287 dealers last year to leave it with 3,287 at the start of 2009. It was using a program called Project Genesis, aimed at eliminating overlapping vehicles in Chrysler's lineup and pressuring Chrysler, Dodge and Jeep dealers to consolidate the brands under one roof. This year the program was iced because Chrysler had a bigger need: survival.

Chrysler executives are touring the country trying to get dealers to agree to share the pain by adjusting inventory levels to have as much stock on hand as last year, even though retail sales have shrunk. They are asking dealers to take on costs previously paid by the automaker. Chrysler President Jim Press says he wants dealers to have "skin in the game" and be willing to share costs.

Chrysler cut dealer training this year, isn't providing cars with the customary full tank of fuel and is cutting back on what it pays dealers for warranty repair work.

Press says Chrysler is counting on dealer cost-sharing as part of its case for more federal loans.

"They can save us all some money and preserve their future. They are willing to do that," he says.

The basic message to dealers is, "We need the Hail Mary of Hail Marys," says Chuck Eddy, of Bob and Chuck Eddy Chrysler, Dodge and Jeep in Youngstown, Ohio.

Press made a convincing case, says Wesley Lutz, who runs Extreme Dodge in Jackson County, Mich. Even though he already has a 100-day supply of cars and trucks in inventory — 60 is considered healthy — Lutz says he is going to order more, as Press wishes. He hopes business is helped by a deep discount sale that Chrysler is running.

•Ford Motor. Ford continues to reduce dealers in metro areas but doesn't have to be as aggressive about it because it didn't accept a government loan. If it had, Ford would have to stick with a formal plan to show that it will become viable, which could include slashing the dealer count. Ford started the year with 3,787 dealers, down 269. CEO Alan Mulally is pinning his hopes on a second-half rally. Ford just tapped its remaining credit line from private sources. If that's not enough, it will have to turn to the government.

•Foreign brands. Most import brands have proportionally fewer dealers and aren't in the same shape as Detroit. Toyota tm, for instance, has about 1,400 dealers, fewer than half as many as Chrysler or Ford, but it outsold both of those automakers last year. On average, a Ford Motor dealer sold roughly 500 vehicles last year, while each of Toyota's averaged more than 1,600.

Actual per-store numbers vary widely, of course. Ford numbers include Ford, Mercury, Lincoln and Volvo brands, and Toyota numbers include Toyota, Scion and Lexus brands.

Nevertheless, a typical Toyota dealer is likely to sell more cars and trucks and be more profitable.

There's more at stake in the dealer cuts than jobs and profits for Detroit automakers. Dealers pump money into their communities, often sponsoring sports teams and contributing to local charities. Nationwide, dealers employ about 1.1 million people.

Looking at the bright side

As difficult as life is for dealers right now, many retain their optimism. Durant is among them.

"When the economy comes back, sales will jump," he says. "In fact, we see this as an opportunity for us to grow while others are stumbling."

In December, Durant paid $16 million for a failed Chevrolet dealership in Plant City, Fla., a Tampa suburb. He considers it a bargain. The operation already is one of the top sellers in Florida. In late January he agreed to buy another closed Chevy dealership in Houston for $13 million. In good times, he says, it would have been worth $50 million or more.

Ken Thompson, Durant's fleet sales expert who also has been Chevy's top individual salesman in the country over the past quarter of a century, remains hopeful as well. He says dealers have one good thing going for them:

"Somebody always needs a car."