Store Count Hits Sweet Spot

DETROIT — After bankruptcies, congressional hearings, arbitrations, reconsiderations and reinstatements, the dealership counts finally seem right for General Motors Co. and Chrysler Group LLC.

That's the opinion of Randy Berlin and John Frith, executives at Urban Science, a consultancy that advises auto makers on retailing matters, including dealership numbers and market locations.

The dealership count as it stands now hits the “sweet spot,” allowing survivors to stay profitable in an 11.4 million sales year, says Berlin, the firm's director-global practice, referring to 2010's estimated vehicle deliveries in the U.S.

“The overall network is healthier and the remaining dealers have better throughput (sales per store),” says Frith, vice president-retail channel solutions.

When the consolidation efforts began in the summer of 2009, GM had about 6,000 dealerships. It initially planned to cut about 2,275. Upon reconsideration, the auto maker subsequently reinstated 702 dealers and 23 more following arbitration hearings. The final GM dealership tally stands at about 4,500.

Chrysler yanked franchises from 789 dealers but, unlike GM, did it effective immediately and resisted calls to reconsider. Another 197 Chrysler brand dealerships closed strictly for economic reasons.

Chrysler won 73 arbitration cases; dealers prevailed in 32. The Chrysler dealership count now is 2,311.

“Chrysler and GM took different approaches to the dealership consolidation,” Berlin says. “Chrysler's stance was more stringent, but it had to be because of the situation Chrysler was in. It really had to consolidate.”

“Rightsizing” the retail networks was necessary to match the number of stores to sales, Frith says.

But the two auto makers and their smaller dealership networks now must make the right moves in the marketplace, he says. “They need to be careful that fewer dealerships don't mean fewer sales.”

In the aftermath of arbitration, “reinstated dealers will focus first on recapturing customers that may have been redirected to other dealerships,” says Katherine Kress, Urban Science's vice president-customer marketing solutions. “Increasing sales is more important than ever before for those dealers.”

Berlin foresees less tolerance and a “smaller margin of error” for poor performers among the survivors.

The total national dealership count now is 18,223. That is after a relatively modest reduction of 258 stores this year and a record-breaking 1,603 last year, when reductions were in full swing. Ten years ago, there were nearly 25,000 dealerships.

The worst seems over, but “we're not through it all yet,” Frith says, citing the arbitration aftermath and natural fluxes in the marketplace that can result in dealer reductions in one area and added sales points elsewhere.

He also anticipates Ford Motor Co. will reduce its dealership network with the impending elimination of the Mercury brand. There are 270 standalone Lincoln Mercury stores. “Those likely will not survive as just Lincoln dealerships,” Berlin says.

Although Ford's reductions aren't as dramatic as its two domestic counterparts, 210 Ford brand stores have closed in the last 18 months, according to Urban Science.

Some auto makers have added dealership points in the U.S. this year.

They include Hyundai Motor America Inc. and sister-firm Kia Motors America Inc. (27), BMW of North America LLC (10) and Volkswagen of America Inc. and it luxury division Audi of America Inc. (6).

Even if auto sales return to previous levels of 16 million and 17 million units a year, Berlin doubts domestic auto makers will respond by opening slews of new dealership points.

“I can't imagine that happening.”