A number of readers have asked a simple, obvious question: why do the dealers cost Chrysler so much money that they want to shut them down? I don't have a complete answer to it, but here's what I understand:
- Inventory: Chrysler often has to take back unsold inventory. A lot of dealers selling a little inventory is costly, because you have to ship a minimum number of cars to each dealer
- Financing: Chrysler helps many dealers float their purchases (though to be fair, those dealers also tap their own credit for things like advertising, expanding the company's effective spending)
- Brand costs: Shabby, run-down dealerships don't improve the image of the firm, and if they are the only game in town, drive users to other cars.
There's a related question, though: what good are dealers? They're protected by franchise law, to be sure, but they do fill a big market niche. Why are there dealer networks in the first place?
- The franchise model provides high levels of customer service. McDonalds doesn't franchise because it can't get access to capital; it franchises because the owner of a franchise will always care more than a hired manager about things like clean bathrooms and health regulations. That helps keep the brand reputation high.
- Dealers tap their personal credit for expenses. Chrysler finances a lot, obviously, but this broadens their base.
- Dealers tap into the local community. A car is a big purchase. People are more likely to buy a product from Chrysler because they know the guy who owns the Chrysler dealer than because they know the guy who manages the local corporate-owned store.
- Dealers provide service and move used cars. In the internet age, new cars are practically a commodity purchase; most consumers know about what htey should pay. Used cars, on the other hand, are idiosyncratic. But Chrysler doesn't benefit if a consumer buys a used Chrysler lemon--that breeds consumers who won't touch a new Chrysler, and drives down the price of new Chryslers by hurting their retail value. It's useful to have dealers who have their own incentives to keep people happy with the brand.
- Auto production has a very high minimum efficient scale. The plants apparently don't break even until they're producing at 80-90%. This means that the Dell model doesn't work--plants can't just scale back production until they have cars to build. Nor does the Proctor and Gamble model work--Chrysler has to make money on every unit, but the purchase is too big for customers to be easily willing to take a less-than-perfect match. That, in turn, means that the dealers are really useful, because they do the difficult job of matching consumers to cars by adjusting price, options, and financing.
Dealers provide service and move used cars. In the internet age, new cars are practically a commodity purchase; most consumers know about what htey should pay. Used cars, on the other hand, are idiosyncratic. But Chrysler doesn't benefit if a consumer buys a used Chrysler lemon--that breeds consumers who won't touch a new Chrysler, and drives down the price of new Chryslers by hurting their retail value. It's useful to have dealers who have their own incentives to keep people happy with the brand.
In principle, this makes sense. In practice, the image of car salespeople in general, and used car salespeople in particular, suggests that the dealership model hasn't done wonders in this area. Maybe used car sales really do keep people happier with the brand than they would be otherwise, but it doesn't seem to me making them particularly happy with the concept.
(And, of course, a company whose profits mostly come from new cars doesn't want used cars to be too attractive. The secondary market supports their pricing structure, but the primary market is where their money comes from directly. From their perspective, buying used should always be second-choice.)
Perhaps having auto dealers who have much more room to act sleazy while selling used cars helps make used cars a less-preferred choice?
There's an interesting corollary to this that's somewhat unique to US Brands (so far): multi-brand dealerships dilute the brand and undermine a lot of the benefits listed here.
It's unusual (but not unheard of) to find an Audi dealer who also sells VW's, or a BMW dealer who also sells Mini, or a Honda dealer selling Kia or even Acura. Contrast that with a GM dealer - they will normally sell two or three (or more) GM brands. I don't know if there's such a thing as a dealer who only sells Mercury's anymore. Etc.
The net effect of this is an erosion of some of that "TLC" that Megan discusses here. When you're at a Toyota dealership, you're not going to get any conflicting information about the car that you're considering. Nobody is going to tell you "well, if you don't like the Chevy, perhaps you'll like what Pontiac has done with the same platform?"
You get a feeling of exclusivity. You get a feeling that the dealer is passionate about the brand, in much the same way that the McDonald franchisee is passionate about keeping *his* place clean - because Ronald would have it no other way...
There's a pretty significant, if cruel, marketing lesson here...
The article in this morning's Philadelphia Inquirer actually implies a move in the opposite direction: that they are shutting down single-brand dealers.
I'm not surprised. Not thrilled, but not surprised.
A Jeep dealership that only sells Jeeps is going to resonate more than a dealer that will sell you a Liberty, a 300, a Sebring, or a Caravan...
I don't think there are any more stand alone Lincoln/Mercury dealers anymore. Most were either bought out or were merged with the local Ford dealer(s).
Quibble: BMW owns Mini
That's why I wrote it that way. Honda owns Kia and Acura, too. Porsche owns Audi and VW. Toyota owns Lexus, etc.
Non-US brands tend to go out of their way not to cross-sell far more than US brands do. They really try to keep that feeling of exclusivity. They even try to limit how common their platforms are, although they are clearly starting to bow to that pressure more and more. The new Venza, for example, is basically a Camry wagon. Many Acura's are just Honda's under the skin.
At some point that strategy seems to backfire. People like exclusivity. They don't want to think that they're paying a premium for mediocre...
Hyundai owns Kia, not Honda.
Megan,
RobM1981 knows that BMW owns Mini. Look at his other examples: VW owns Audi, Honda owns Acura. He's saying that dealers of foreign makes don't tend to sell multiple brands from the same manufacturer.
However, I somewhat disagree. In the DC area, it's extremely common to find dealers of foreign makes who sell many different makes. One difference is that they locate their different makes in different "dealerships" and buildings, but they're all owned by the same dealer. It's a way of spreading out risk of one brand doing better or worse.
He's right that a dealer that sells both Audi and VW or Honda and Acura might not want them next to each other in the same building (or customers might ask, "So, what exactly am I getting for all my extra money?"), but it's actually really common that dealers sell all sorts of brands, from all sorts of companies or within one. Plenty here sell mixes of domestic, German, Japanese, Korean, etc. Sometimes across the street from each other, sometimes located in different suburbs.
Sorry, John... I wrote my reply before reading yours. :)
Maybe there are laws that prevent this, but instead of shutting down dealerships, maybe they should change some of the rules about buybacks and financing.
I am struck by how critical advertising and presence are to a companies success. Even a top-selling household name product will start losing sales if it stops advertising. Cutting the advertising budget and eliminating dealerships just seems like a recipe for disaster. I foresee plummeting sales in Chrysler's future, amplified by reduced advertising and visibility.
What they should be doing is figuring out how to give the dealers a financial stake in Chrysler's success (or more of one).
One of the important functions of the dealer - from the auto maker's standpoint - is to upsell. That means talking customers into extra cost options they may not have considered. That increases profits for the maker and the dealer.
Extra cost options are vital to profitability, because people do not buy cars that often. Thus, every sale represents a one time shot at profit for at least 3 years. In most cases, the term of ownership is longer than 3 years, so that chance at profit might not come again for 5 to 10 years.
Of course, dealers also provide the maker with the chance to upsell the buyer into a much more expensive model. You go into a Toyota dealer looking for a Corolla and end up buying a loaded Camry or Highlander.
From a buyer's perspective, dealers provide information about particular cars and show you the various options (in the hope of upselling). Contrary to what this article says, most people do not know exactly what they want and what they should pay. Many, many people are NOt adept at using the web to figure this stuff out. Just about 1 year ago I showed 2 people how t use the web to get a good price on a car. They had no idea. Both are senior administrators at a large large university - geared to engineering no less. That came to be because my wife works there and I got her a new car. When these other two guys asked her what she paid, they were astounded and called me. If not for that fluke, they would have been wandering around various dealerships.
Further, people like to look at, feel, and test drive what will be a very expensive purchase, generally financed over a period of years. People do not rent an apartment without seeing it. They certainly don't buy a house or boat without seeing it. They don't even buy a sofa without looking at it and sitting in it.
Not to mention maintenance on proprietary equipment.
Let them peddle bicycles.
I think the other big reason is that too many dealers chasing too few customers leads to the problem of internal competition, which you don't want. You don't want the Pontiac dealer competing with the Chevy dealer, or two Dodge dealers competing with each other, to sell the same car to the same person, you want them trying to take sales from Honda and BMW. It was fine when the Big Three had 90% of the market, but now that they're at 50%, it's not nearly so much fun.
I don't buy dealers "tapping personal credit" for advertising and other expenses. Dealers pay some of the costs of local advertising, but it isn't a question of credit.
I don't buy the used Chrysler lemon theory. A used lemon is going to stay on the marketplace until it dies, pissing off customers. If Chrysler dealer doesn't buy back the lemon, some other dealer will and the car stays in the market. Dealers don't buy and destroy lemons.
The last paragraph jumped around. Yes, manufacturers like to run at full capacity. That in itself doesn't have anything to do with dealers. Dell is able to build every computer to order and doesn't need dealers. Dealers don't customize computers - HTML does. Why can't car companies do that?
A couple of points...
1. Dealers have been instrumental in getting legal protection from state governments to prevent direct to consumer sales of automobiles. Why shouldn't Amazon be able to sell cars?
2. The Dell model would/could work if internet sales were allowed.
3. As an offset - and bit of a nuance to Megan's point on capacity utilization one benefit to the manufacturer of the dealer is the ability to avoid customization. The dealer does all he can to sell a car in inventory - he wants the sale now - not in weeks or months when the made-to-order car is finally delivered. This allows longer runs of standard variants - so a long list of "options" can make a car appealing - but the reality is that you can't find precisely the version you want - the luxury interior without the sun-roof. That ends up in the consumer taking and paying for an option he would never choose if he was custom ordering.
So I think one possible outcome that the auto companies are hoping for as the purge marginal dealers is to end up with a slightly different system - and ultimately one that allows them to sell directly - first through a strong regional dealer who provides delivery and service to the consumer. Down the road I would think many in Detroit would love to convert the remaining dealers to "distribution centers"
Megan, Regards high fixed costs: The US companies have high fixed costs in part due to UAW labor agreements. Paying employees supplemental unemployment compensation means that shutting down a plant does not save as much in labor costs as it does in parts costs.
90%: I'm not sure that's correct. 90% of what? I do not think most plants need to run 3 shifts in order to be profitable. Yet 3 shifts is about what you'd need to run to hit 100% capacity of physical plant.
I've been reading a lot about that matter, and that's the best article I have read so far. Yes because now I understand more the point of closing dealers. I know it's hard for the country, but we will have to work hard to start over again.
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There are also service support costs for the car company. The service division has to make sure dealer techs stay trained on repairs and software and hardware for doing repairs. Field service engineers employed by the car company have to go out and trouble shoot cars that are hard to diagnose. The more talented the techs in the dealer the less the field service engineers need to visit dealers. A bigger dealer will have more techs and that increases the chance that the diagnoses will be done by the dealer techs and not by company field service engineers.