New Deal in the Works for Chrysler Dealers?

Is Cerberus Capital Management LP putting together a plan to cut as many as 1,000 dealerships in the next two years?

Not likely, says a senior-level spokesman for Chrysler LLC, responding to a report in The Wall Street Journal last week.

“Get rid of 1,000 dealers in two years? There's no way we could do it with current franchise laws,” he says. “That number was pulled out of the air.”

Nevertheless, Chrysler's single-point stores spread across its three brands — Chrysler, Dodge and Jeep — totaled approximately 1,000 as of March.

For about five years, Chrysler, as part of its Alpha project, has been consolidating the three brands into one dealership where it makes sense, usually in metro markets. Of Chrysler's 3,740 dealerships, 1,934 include all three brands.

According to one source, when then-CEO Tom LaSorda first met with Cerberus' management team, he indicated Chrysler needed to pare its dealership numbers by as many as 750.

Whatever the number, Chrysler dealers want to play an active role in deciding their fate, rather than watching from the sideline.

Smart dealers understand there is an overdealering problem, Wes Lutz, owner of Extreme Dodge in Jackson, MI, says. “We absolutely need to be part of the solution.”

Dealers have floated several plans to senior management that range from equity positions to Cerberus footing as much as 50% of the cost to buy out dealers.

At its initial meeting with Cerberus officials last summer, the national dealer council first broached the idea of dealers holding an equity position in the new company. According to a dealer familiar with the exhcange, Cerberus CEO Steven Feinberg agreed to look into the possibility.

Any initiative to reduce its dealer count will be predicated on a revamped product strategy that could be in place by the end of the year.

One product-selling plan is that cars would be sold under the Chrysler name; pickups and commercial trucks under the Dodge name; and SUVs under the Jeep brand.

Such a plan would eliminate overlapping models, such as the Chrysler Sebring and Dodge Avenger cars, or Chrysler Town & Country and Dodge Grand Caravan minivans.

Dealers selling only one brand would be affected the most, as there would be fewer models to sell.

Trimming the number of models from its brands and then watching its single-point dealerships slowly die as a result is “inhumane,” says one dealer.

Some dealers are suggesting that, once the product strategy is in place, Cerberus put together a group of dealers in each of its eight market areas, or business centers as Chrysler calls them.

Each group would be set up so half of its dealers would be likely buyers and the other half likely sellers. Based on the product plans, dealers would know which category they fall into.

Each group would develop a formula on which to base a dealership's value in its specific market area. Possibly, this number would be a set dollar figure for each vehicle sold, which could be based on an average of vehicles sold the past three or four years.

Next, Cerberus could offer to pay 50% of the purchase price to those dealers it deems as likely sellers. The purchasing dealer would pay the other 50%. To sweeten the deal for the acquiring dealer, Chrysler Financial would offer pre-approved lines of credit so the dealer would not have come up with the cash all at once.

Lutz believes Cerberus should place a time limit on its offer — anywhere from 90 to 120 days. If the dealer fails to sign a letter of intent in the set time period, he can find other alternatives or attempt to slug it out and survive.

“Putting a time frame on it will push dealers to move quickly,” Lutz says.

Several dealers privately tell Ward's they like the plan and find it intriguing.

“None of this is new,” the Chrysler spokesman says. “We've been very successful the last several years reducing our dealership count.”

But he admits having dealers play such a large role is “novel.”

Instead of having Cerberus fund 50% of the purchase costs, another plan calls for Chrysler putting a $100 surcharge on each invoice that would go to buying out other dealerships.

According to one scenario provided by a Chrysler source, dealers could fund the acquisitions by themselves. In exchange, dealers get equity in Chrysler, giving them a stake in the business.

However the reductions happen, dealers tell Ward's they expect the pieces to fall into place quickly.

Lutz says he is excited about the possibilities.

“What other manufacturer has this opportunity?” he asks. “Cerberus can create a whole new playing field and shift the paradigm of the dealer/OEM relationship.”