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Big three’s other woe: too many dealerships

Big three’s other woe: too many dealerships

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NORTH HOLLYWOOD, Calif. - Detroit's Big Three will try to address their biggest competitive problem when they open contract talks with the United Auto Workers this summer. But as that drama nears, they are also starting to move more aggressively to tackle a second, potentially costly albatross stemming from the days when Detroit dominated the U.S. market: a surfeit of dealers.

Ford Motor Co. is aiming this year to trim about 200 dealers from its U.S. retail network of 4,200, and a similar number annually over the next several years, a company official said.

At the same time, the future owner of Chrysler Group, Cerberus Capital Management LP, has begun meeting with dealers and exploring ways of reducing their numbers, people familiar with the matter said. The company has 3,700 dealers and wants to eventually cut that to about 3,200, in part by combining Dodge, Chrysler and Jeep locations into three-brand "alpha" dealers, a company spokesman said.

General Motors Corp., which now has a total of 6,945 dealers for its eight brands, has been slowly reducing its dealer count over the past several years, mainly by urging separate Buick, Pontiac and GMC dealers to combine operations under one roof. At the end of last year, it had 7,000 dealers, down from 7,700 in 2002.

By contrast, Toyota Motor Corp. has about 1,400 dealers.

In Boston, Memphis, Miami, Los Angeles and other big markets where import brands sell well, the Detroit brands typically limp along with a few strong dealers and many others that are losing money and can't afford to advertise enough, hire and keep top sales people or spend money to give their showrooms the comforts and modern look found in stores selling foreign-name vehicles.

Michael Jackson, chief executive of the dealership chain AutoNation Inc., estimates that what he calls a "lack of retail muscle" lowers Detroit's sales to individual customers by 15 percent or more. "They have no idea what level of business they are leaving on the table," Jackson said.

But automakers can't simply force dealers to close for not selling enough cars, thanks to state franchise laws written to protect local businesses. Buying out dealerships is expensive, too. Even small stores are often valued at $1 million or more.

Back when three of every four cars sold in America were made in Detroit, it made sense for Ford, GM and Chrysler to have a dealer on practically every corner. But after years of ceding market share to foreign nameplates, all three now have more showrooms than they need.

While some Ford, GM and Chrysler dealers have continued to grow and prosper, many others - often small, single-location or family-owned dealerships - have seen their new-car sales dwindle.

The problem, called overdealering in the industry, plays out each month along a quarter-mile stretch of Lankershim Boulevard in this suburb of Los Angeles. At 4437 Lankershim, Mayberry Lincoln-Mercury is a no-frills operation. Its modest showroom is just big enough to display three vehicles. The waiting area for customers consists of four green chairs and a 15-inch Sony television. The dealership runs no advertising, relying solely on repeat and word-of-mouth business. On average, it sells 20 to 25 new cars a month, according to Mike Mayberry, one of three brothers who run the family-owned dealership.

Just down the street, Toyota of North Hollywood is housed in a sprawling white complex with red and white flags flying along its eaves. In front, two dozen new cars are parked beneath palm trees, helium balloons tethered to the side mirrors. Hundreds more vehicles are stored in a four-story parking structure. In the showroom, cherry paneling accents the walls, small sharks glide around a huge tropical-fish tank and customers sit before a 60-inch flat-screen television set. Truck sales have expanded so much that they are now handled in a separate showroom across the street.

Each month, the dealership spends $250,000 on advertising, according to the dealership. In May, it sold 560 cars and trucks. This month it is on track to sell more than 700.

In Southern California, Ford faces one of the most acute examples of overdealering. Last year, it had about 75 dealers in the market, and on average each sold about 950 vehicles to individual or retail customers, for a total of just over 70,000 for the year, people familiar with Ford's operations in the region said. Toyota has fewer dealers, only 52, but each sold more than 4,000 vehicles, for a total of about 210,000 retail sales, these people said.

"The number of dealers out here just doesn't compute," said Mark Rikess, an auto retailing consultant in Burbank, Calif.

Ford is beginning to address the problem. Several weeks ago it closed down a Ford outlet in Los Angeles and a Lincoln-Mercury store in Hollywood; both were company-owned dealerships. In the San Francisco Bay Area this month, it announced the merger of a Ford dealership with a Lincoln-Mercury store in Newark, and another Ford-Lincoln-Mercury merger in Vallejo.

Last year, Galpin Ford, the world's largest Ford store, and another big dealer in the San Fernando Valley bought out a small store that both had been competing against.

But progress is slow, and often even money-losing dealers decline to throw in the towel. "It's a game of chicken," said Rikess, the consultant. "They all figure they'll hang on and wait for the other guy to go out of business."

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