Originally posted by: mcmilljb
Originally posted by: railer
So, why exactly are GM and Chrysler cutting these dealerships?
Is it because they want to see less competition between their own dealers, and thus expect to see better (higher) pricing as a result of that?
I'm not fully understanding how these dealerships cost GM or Chrysler money....it seems like unprofitable dealerships would simply lose money until they eventually folded.
I understand that perhaps one large dealership may be more efficient than 3 or 4 smaller dealerships, but how does that help the bottom line of GM or Chrysler?
Think of it this way. If you and I are selling retail goods (which means we buy something from someone else to resale), and we're competing against each other to sell those goods. Now imagine we're in a small sales area, similar to how you can have multiple car dealers in the same region. Well we both have the same overall costs to sell those goods, but we are limited to a certain amount of sales in that area (think population and price of the goods). Well we can't lower our prices too much because we both need to make a healthy profit margin otherwise we have to shut down. Now if you remove one of us, well the overall costs are the same for the remaining dealer, but you now get the other's profit margin as well. Plus you get other benefits. Less employees to pay at your place, buy less advertising. You can lower the price on hard to sell products because you're still going to get more sales than you would if you were competing with someone nearby. GM and Chrysler are much better off if they have less dealers who can move their cars faster. Prices will not go higher just because of less competition among similar dealers, but you do have the ability to actually cut some prices that weren't possible before.
That's close.
Fewer dealers equals more sales at reduced margins (result: increased profitability from new car sales). It actually frees up capital for more advertising against those devils - Toyota, Honda and Nissan.
Increased profitability from new car sales reduces pressure to jack up costs from back-end operations ('fees', service, parts, body and used cars sales - which over the last 20 years has grown to become the 'money-maker' in franchise dealers).
The explosion of GM franchises fundamentally changed the car business. 'Old School' franchises maintained an honor system whereby they would not market in another franchisee's area through newspaper, radio, network TV and cable mediums.
New owners and franchisees did not 'honor' this system. As a matter of fact aggressive cut-throat regional marketing became the norm. It's nothing to produce a 30 minute infomercial and distribute it to every cable system in a 2-3 hour radius.
Backed by targeted print and radio advertising aggressive franchises would pummel their weaker brethren 90 miles away.
And the franchise owners know this - Generous Motors distributes monthly rankings on dealership 'efficiency'.
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