The last several months Ford Motor Co. officials have been dropping hints, some stronger than others, that the auto maker is moving forward with plans to “right size” its dealership network – in other words, cutting stores.

The latest reports indicate Ford is attempting to reduce its dealership body by as many as 600 stores over the next three years to coincide with significant cuts in production and its white-collar workforce.

The question, is will eliminating 600 dealerships be enough for Ford to get to where it wants its dealer body to be? A closer look at the numbers appears to indicate no – at least not without some product homeruns.

Since 2000, Ford’s market share for its Ford and Lincoln Mercury brands has declined from 22.8% to 16.6% through September of this year. (In a year when U.S. light-vehicle sales total 16.5 million units, each percentage point represents 165,000 vehicles or, for Ford, 825,000 units.)

Meanwhile, the total dealership count for those brands has declined by less than 400 to 4,323 during the same six-year period.

The problem is declining “throughput” for the brand – a word that Tom Addis, owner of Lake City Ford in Coeur d'Alene, ID, and current chairman of the Ford National Dealer Council, says is the newest buzzword for Ford dealers.

“If you’re a Ford dealer and not talking about throughput, you’re behind the times,” he says.

Throughput is the number of units a dealership is selling, and it is no secret that dealerships selling domestic brands average far fewer units sold per store than do import brands such as Toyota and Honda, which have relatively lean dealership networks.

The current talk about streamlining dealer networks is simply about “keeping your distribution points competitive with the big guys,” says Earl Hesterberg, president and CEO of Group 1 Automotive, a chain with nearly 100 dealerships. He is a former Ford executive.

Ward’s estimates the average Ford and Lincoln Mercury dealership will have sold 616 new vehicles in 2006 – down from approximately 840 units in 2000.

That is less than half the 1,700 vehicles the average Toyota store will sell this year. Meanwhile, Honda dealers sell an average of 1,200 units annually.

Fast forward to 2009 – after Ford has implemented all the production cuts it announced in August and factoring in a 600 reduction in Ford dealerships –the average Ford store will sell only 671 new vehicles – if a Ward’s projected 2.6 million units sold for Ford that year holds true.

“Not nearly enough,” says one dealer.

Details of how Ford plans to convince large numbers of dealers to exit the market are sketchy. According to Addis, Ford executives were vague about that during a dealer council meeting in Dearborn on Oct. 2.

“They haven’t really talked to us about numbers,” he says. “It is really being held close to the vest. There are highly placed people at corporate who don’t know much more than we know.”

Although Addis understands the need to streamline the dealer network, he says, “Nobody is going to close a dealership unless the dealer wants to do it.”

When Ford first announced plans to trim back its dealership network (which currently includes approximately 4,323 Ford and Lincoln-Mercury outlets), the auto maker was hesitant to say cash buyouts would be offered to dealers willing to close shop. Now, however, the tune seems to be changing among executives with close ties to the dealer network.

Dealers report hearing rumors of cash buyouts of $300,000 being offered to dealers to sell. But many industry observers – and dealers – say it likely will take much more money if Ford expects to convince dealers to sell their family businesses.

“That seems to be the question of the day,” says Al Giombetti, Ford executive vice president and president of Lincoln Mercury, when asked about cash offers to dealers.

Says one dealer: “That won’t even pay to terminate my Reynolds and Reynolds (information-technology services) contract.”

Forbes magazine recently estimated it would cost Ford almost $2 billion ($2,000 per vehicle sold annually) to close 1,400 dealerships, a number that would increase the average store annual throughput to 1,000 vehicles.

Several dealers say it will take anywhere from $2 million to $4 million to buy out most Ford dealerships once the real estate and vendor contracts are added to the equation.

But for Ford, there is little quantifiable return on investment for paying out millions of dollars to tighten up its dealer network. That is one reason it has been so hesitant to aggressively right size its network, a retired Ford executive tells Ward’s.

Scott McNamara says he and other Ford dealers in out-state smaller towns are watching keenly how Ford might manage buyouts of under-performing dealers in crowded metro markets such as Detroit and Chicago.

“Ford will have to incentivize some of those buyouts because most Ford dealers aren’t in any mood to sell out,” McNamara says, who was 25 years old in 1992 when he took over a struggling Roscommon Ford-Mercury store in northern Michigan. He has added dealerships in the nearby Grayling and Gladwin.

Like many entrepreneurial dealers, McNamara is not interested in selling out so Ford can trim its dealer ranks. Instead, he is looking to add to his dealership portfolio.

“I’m always keeping my mind open for any sellers, but they’re few and far between,” he says.

So far, most dealers are receptive to the plan to trim their ranks, Giombetti says. Ultimately, the plan was designed to optimize dealer profitability by eliminating redundant dealers in certain regions that cannibalize sales from their neighbors.

“The idea is to first figure out the metropolitan areas, which is where we’re going to be concentrating on, and we’re going to need our dealers’ help for that,” Giombetti says.

“I talk to a lot of dealers every day, and dealers as a whole think it’s the right thing to do, probably overdue. But no one wants to be the one that says, ‘Hey, I want to go.’ So that’s something we’ll work our way through.”

A dealer consultant says Ford is acting as a broker for its dealers, but several deals have been held up as the auto maker tries to create and find the right situations. Many dealers are willing to sell but are waiting for Ford to put the deals together. That has been a slow process, the consultant tells Ward’s.

Ford has to be careful because it wants to keep its “all-stars,” says the training consultant to several Ford dealers.

Another issue for Ford is its commitment to maintain and expand its minority dealer base even as it attempts to reduce overall dealer count.

The auto maker set off a minor firestorm in Minneapolis earlier this year when it acquired Cities Ford (formerly Walser Ford) from Jack Walser and Peter Hasselquist, and sold it to Tri “Don” Pham who has been one of Ford’s star “dealer development” graduates.

Other dealers complained, saying Ford should have shuttered the dealership.

Addis says regional offices likely will handle the consolidation effort.

Ford has not said officially which markets it is targeting, but it is believed that at least 18 will be affected. The trick for Ford is to make sure the reductions occur in areas where its dealers are heavily concentrated, all the while protecting its rural dealers, a resource some at Ford believe is critical in the fight against import brands.

Regardless of how aggressive Ford actually gets in streamlining its dealer body, stark market conditions may do most of the work. The question becomes not how many dealers Ford cuts in the next few years, but how many can survive.

William Bradshaw, chairman of the National Automobile Dealers Assn. says auto makers should let the market work itself out.

Michell Van Vorst, executive director for the Ford Dealers Alliance, agrees, but says that, if Ford is going to continue with its plans, it needs to go about it the right way.

“I just hope – but doubt – Ford will be more generous with their closing settlements,” she says. “After all, it was Ford who put them in, and it’s not the dealers’ fault that Ford built products they couldn’t sell at a decent price.”

Still, she believes Ford should let attrition run its course rather than trying to force store closings.

Kevin Collins, president-Bill Collins Ford in Louisville, KY, and vice chairman-Ford National Dealer Council, is a proponent of cutting the dealer network.

Says Collins: “Personally I feel that if Toyota (Motor Corp.), for comparison has 1,400 dealers selling an average of 1,200 new vehicles per year, and Ford has 4,000 dealers selling an average of 600 per year, maybe that is a case for a resized dealer distribution system.

“Clearly, some large metros have too many dealers for the current and near future sales share results.”

Declining volume leads to decreasing profitability. Ford dealership profitability was down nearly 10% the year’s first half, and is the lowest it has ever been, according to Ford.

The Ford Dealer Alliance, a New Jersey-based group representing nearly 1,700 dealerships, estimates 36% of Ford’s dealers are unprofitable.

Hesterberg says the problem snowballs. As volume decreases, dealers have less revenue to spread out to handle their costs. “And there is little those dealers can do to keep their costs down,” he says.

Add to the declining volume, Ford is cutting dealer discounts on ’07 models by up to 3%, according to some dealers, in an attempt to bring sticker prices more in line with actual transaction prices.

In an interview with Ward’s last year, now-retired Ford executive Jim Padilla said dealers can rely on other dealership departments such as used-car sales and fixed operations to help them through the difficult times.

But fewer new-car sales ultimately means there are less cars to finance, less to service, less parts to sell and a less desirable used-vehicle inventory coming in from trade-ins. It may take several years for a dealer to feel the full effect. However, many already are feeling the crunch after almost two full years of declining sales and profitability.

Approximately 73 dealerships have closed this year, and Van Vorst says there are four dealerships on the East Coast close to declaring bankruptcy.

Publicly owned groups are beginning to cut their losses with some domestic brands, says Michael Jackson, chairman and CEO of AutoNation Inc., the nation’s largest dealer group.

“Auto retail is increasingly unprofitable for domestic brands in the overdealered markets,” he says. “The publicly owned (chains) are combining stores as much as possible among the domestic brands, or selling them or shutting them down in some instances.”

“It’s a downward spiral effect right from the OEM to the showroom floor,” Los Angeles-based dealership consultant Mark Rikess, says, who notes Ford dealers are hurting themselves even more because many of them are hiring entry-level sales people.

“They’re looking for people who do not need a lot of money in an attempt to cut costs,” Rikess says. “So now, on the showroom, you have inexperienced sales people trying to sell soft products. And that creates significant disconnect with the customer.”

Rikess believes Ford dealers would be better off eliminating management positions and putting that money toward stronger sales people.

Dealers that have multiple franchises are starting to manage their brands as true portfolios and are balancing their assets, he says. For example, good managers are more likely to be transferred out of the Ford or Lincoln Mercury stores and into outlets selling more profitable brands.

Ford’s best-selling dealer Galpin Ford of North Hills, CA, recently opened Galpin Honda in the nearby San Fernando Valley.

Galpin owner Bert Boeckmann told the Los Angeles Times, “Inasmuch as Ford doesn’t give us any of the right stuff, especially more fuel-efficient cars, we decided to add a Honda store and have transferred four sales managers from Galpin Ford over there.”

In the end, reducing the number of dealers will not be enough. Ford needs some big product hits soon.

The one bright spot is the new Edge cross/utility vehicle, slated for showrooms in November. Ford officials call it the most important launch this year and hope to sell 100,000 units annually. Already, dealers have taken 20,000 orders for the CUV.

Van Vorst tries to remain optimistic.

“Things can change overnight,” she says. “Remember the 1980s and how big a hit the new Taurus was.”

– With Byron Pope and Mac Gordon

cbanks@wardsauto.com