Spinning their wheels
The Detroit Three have slashed labour costs and dramatically improved their offerings. To make further gains, they have to address the excess supply of dealerships that's cutting into everyone's profits. But finding a workable solution isn't easy
GREG KEENAN
Globe and Mail
March 7, 2008 at 11:48 PM EDT
PHILADELPHIA — As David Kelleher peers out the window of his Philadelphia car dealership, he watches customers kick the tires on Dodge Caravans, Avengers and Durangos.
But they're not on his lot — they're next door at Family Dodge, owned by the Gentile family.
That's a problem for Mr. Kelleher. The Dodge models being sold by his neighbour are almost identical to the Chrysler Town and Country, Sebring and Aspen vehicles sitting on his own lot at David Chrysler Jeep.
The Chryslers and the Dodges next door are all made by Chrysler LLC, a situation that gets to the heart of why the auto maker is talking about scaling back its car, truck and SUV offerings and paring its dealership network.
"I don't think you could find a better snapshot of what [Chrysler is] talking about," he says, staring out his window along the Philadelphia Airport Automall. "They're selling the same damn cars."
Family Dodge and David Chrysler Jeep occupy prime spots in the second-oldest auto mall in the United States, but they are also outposts on the final frontier of restructuring for the Detroit Three and probably the most difficult legacy Chrysler, Ford Motor Co. and General Motors Corp. will tackle.
The companies are lowering their labour bills and unloading crippling health care costs in ground-breaking agreements with the United Auto Workers. Detroit Three quality and design have improved to the point where they're, at worst, competitive when measured against their offshore rivals, and in some cases better.
But the companies have far too many dealerships — especially in the biggest U.S. cities — which means their front-line ambassadors aren't making enough money to reinvest in their businesses or boost advertising spending to draw in customers.
While many dealers agree there are too many stores, few are volunteering to be the first to go, even if they're among the thousands stuck with brands that have been starved of the marketing and advertising attention necessary to compete with Honda Motor Co. Ltd. and Toyota Motor Corp. in the cutthroat U.S. market.
"The greatest opportunity or the greatest competitive disadvantage that the Detroit Three [have] is their retail network," Mike Jackson, chief executive officer of Autonation Inc., the largest U.S. dealership chain, said during a conference call last month. "They have an overcapacity situation that is causing a flight of capital and talent."
One statistic helps tell the tale — the Detroit Three's vehicles are sold at about 68 per cent of the 21,200 new car dealerships in the United States even though their share of the vehicle market itself has fallen to about 50 per cent.
Even calling them the Detroit Three is a misnomer, because between them they operate 14 divisions, which requires hundreds of millions of dollars in marketing and advertising support, much of it going to rival brands within the same company.
"You're competing against yourself, Mr. Kelleher said.
Jostling for elbow room
The overabundance of dealers and brands comes into sharp focus in the leafy suburbs of the fifth-largest U.S. city.
In suburban Chadds Ford, Pa., about 25 kilometres away from the Philadelphia Airport Automall, the Gentile family operates Family Chrysler Jeep, which happens to be just a few blocks away from Mr. Kelleher's other store, David Dodge. There's no connection to the recently retired Bank of Canada governor, but a Google search of that name turned up enough hits that Mr. Kelleher decided to label his Internet site Drivedavid.com. (His David Suzuki store is not named after the noted Canadian environmentalist.) This profusion of different franchises selling automobiles made by the same manufacturer is hardly unique to Chrysler.
Not far from where Family Chrysler Jeep and David Dodge go head-to-head in Chadds Ford is a string of auto dealerships along Baltimore Pike — an area once called the Golden Mile. On one side of the road, Springfield Ford Inc. sells Ford Explorers, while a couple of doors away on the other side, Ryan Lincoln-Mercury offers the Explorer's twin, the Mercury Mountaineer.
Nor is the cannibalization isolated to Philadelphia. More than half a continent away in Denver, Jerry Morris Broadway Dodge sits across the street from Go Chrysler South Broadway. It's a common scenario in many large U.S. cities.
These arrangements would make sense if there were distinct differences between Chrysler's minivan twins, or Ford's mid-sized cars, or the Chevrolet Malibu and the Saturn Aura sedans.
Chrysler vice-chairman and president Jim Press put his finger on the issue when he talked about the minivans at a town hall meeting with Philadelphia dealers, said Greg Gentile, a co-owner of the Family Auto stores and second-generation dealer whose family has been in the business in the area since 1956.
"He said 'I spent $100-million (U.S.) each advertising and launching them. If I only had one of them, I could have spent $150-million, you would have got a better launch and I would have saved $50-million,' " Mr. Gentile recalled. "He's not wrong."
While these issues are a problem for dealers, they are critical for the manufacturers.
The three companies all have programs under way to realign their U.S. dealer networks, but the idea that a profitable network is vital to a manufacturer's success is a recent development, noted John Casesa, managing director of consulting firm Casesa Shapiro LLC and a long-time auto industry analyst on Wall Street.
"To achieve success at the factory level, you have to have an efficient, effective, profitable distribution system," Mr. Casesa said.
"Even if you have a great product, if the dealership network doesn't have the profitability to invest in marketing and advertising and people, then people don't hear about that great product."
In Mr. Kelleher's case, a glossy booklet sits on his conference room table with an artist's rendering of what his Chrysler Jeep store near the airport would look like under the Genesis program outlined by Mr. Press to dealers last month. The ultimate goal of Genesis is to put all three of the company's brands under one roof, eliminating the stand-alone dealerships.
A renovation of more than $2-million would create a showcase with 25-foot ceilings, versus his current 18-foot height, a café, an improved children's play area and four separate "parlours" for Chrysler vehicles, Jeep vehicles, Dodge trucks and Dodge cars.
He points to a typical buyer who might be deciding between a Jeep Grand Cherokee sport utility vehicle from his dealership and a Toyota Highlander at a state-of-the-art Toyota store nearby.
"I'm a good dealer, my pricing's good, my Grand Cherokee's good, but you might fall in love with [Toyota] just because it's the appearance of success," says the 41-year-old, who took over the Chrysler Jeep store in January, 2007, and boosted new vehicle sales to 828 last year from the 288 sold by the previous owners.
But the ambitious upgrade makes no financial sense unless his neighbours get out of Dodge and Mr. Kelleher can pick up the extra revenue the combination would generate.
A deal on that front is tied to his retirement, which is probably five years away, said Mr. Gentile, who acknowledged that he has told Mr. Kelleher that he will have first shot at a buyout.
"There may come a time when we do that deal, but not right now because I'm too young," Mr. Gentile said. He's 60 and so is his partner and they figure they have at least five more good years.
Too much choice?
The auto makers built up their stables of nameplates over decades, and while they have culled some, it still takes a lot of cash to maintain the brands that remain.
"Supporting many brands is always expensive," said Julie Hennessy, a professor of marketing at the Kellogg School of Management at Northwestern University in Chicago. "Many distinct brands with different meanings is still expensive, but can be profitable. Many indistinct brands with unclear meanings becomes just plain unprofitable."
To be successful today requires a major Internet presence and meticulous attention to customer service, said Vince Sheehy, president of Sheehy Auto Stores, which was ranked as the 47th-largest U.S. dealer group in 2006 by Automotive News and operates 15 stores in Virginia, Maryland and the Washington area.
"We work very hard on taking a sales customer and making sure that we get 60 per cent to 70 per cent of those customers coming back to our service department," Mr. Sheehy said.
One of the ways his dealerships do that is through its VIP club, which rewards loyal customers with free lifetime oil and filter changes and discounts on their next vehicle purchases. Although they operate 14 different nameplates between them, the Detroit Three began making moves earlier this decade to trim their brands and in doing so to push dealership consolidation.
Two long-standing names in the auto business got the axe earlier this decade when Chrysler killed off Plymouth and GM scrapped Oldsmobile. That move cost GM about $1-billion and created numerous lawsuits from dealers.
Ford received a similar lesson in the costs of ending a brand when it eliminated Mercury in Canada in the late 1990s and promptly ran into a class-action suit that was finally settled out of court.
Those experiences appear to have made Detroit skittish about wholesale buyouts of dealers similar to the billions they have spent reducing the ranks of assembly line workers at their factories.
Spending billions more on a massive cull of dealers to slice the network down to appropriate size is not in the cards when each of the companies is losing money, sales are slumping and the U.S. economy is on the verge of a recession, if not actually in one.
The consolidation will happen naturally over time and might be accelerated by U.S. real estate woes, Mr. Casesa said. "The problem with that is that while the market is sorting this out, the brands suffer greatly and for some extended period of time you can have too many dealers of a particular brand in the market."
Ford is studying metropolitan markets and working with dealers to try to determine what number is appropriate so that all its stores can make sustained profits, Ford spokesman Jim Cain said, and will help financially if it makes sense. "We don't drive the process, we facilitate it," he said.
It will probably take a carrot-and-stick approach to encourage the consolidation, Mr. Casesa said. The carrot is the financial help and "the sticks could include rationalizing the product plan as Chrysler is doing or just making it more difficult for certain dealers in certain markets to get the support they need."
Back in Philadelphia, Mr. Kelleher figures Chrysler can help thin out the ranks, but some dealers have to realize it's time to make an exit.
"If you've been operating at a loss for 16-18 months," he said, "what are you doing? There's guys that aren't engaging the market any more. We're doing you a favour, let's just sit down amicably and figure out how to do this."
