Dealer Deaths Could Help GM, Ford, Chrysler

The sorry state of the auto industry provides at least a sliver of good news for the struggling Detroit Three: Dismal auto sales will thin their dealer ranks at a rapid pace by encouraging voluntary consolidation and closings.

The National Automobile Dealers Association predicts 1,200 of the nation’s 20,000 dealerships will close this year, up from 900 in 2008, and about 80 percent will be domestic brands. Consultant Grant Thornton LLP predicts as many as 2,500 could fold. The accelerated attrition will hit domestic-brand dealers hardest because there are more of them and they represent some of the shakiest franchises whose sales have plummeted with the recession.

Though that’s bad news for thousands of employees who will lose their jobs, the domestic manufacturers could emerge from the current crisis with smaller, stronger dealer networks better able to compete with the likes of Toyota and Honda.

Unlike Starbucks, which owns its stores and can close underperforming locations at will, auto manufacturers don’t own their dealerships. They are independent businesses protected by franchise laws that are differ in each state. Unless a dealership is breaking the law or not paying its bills, there is little a manufacturer can do except encourage them to close or sell to another dealer. With all three domestic manufacturers bleeding red ink and fighting for survival, buying out dealers isn’t an option because the tab could be millions per store.

Having thousands of dealers was a plus when domestic brands controlled two-thirds or more of the U.S. market, but last year domestic brands accounted for 60 percent of the dealerships but only 48 percent of new-vehicle sales. The only way dealers can compete for the dwindling number of customers still inclined to buy domestic is through cut-throat price competition — with each other instead of Toyota or Honda. That’s a no-win situation that reduces their profits and makes the manufacturers look like they’re holding a perpetual fire sale, diminishing the resale value of their vehicles.

With far fewer dealers, Toyota and Honda sell the virtues of their products more than the price, and their dealers are more profitable because they sell more vehicles per store. In December, for example, Automotive News that Toyota dealers sold 96 new vehicles per store and Honda dealers 74, while Chevrolet dealers sold only 34 and Ford dealers 32. (Unfortunately, the publication’s chart is only available to subscribers.)

If the three Detroit manufacturers can survive the current slump — still a big “if” — at least they can take solace in the fact that the depressed market will also eliminate many of their weaker dealers.