Area auto dealers say closings offer little savings
Customers of two North Dakota car dealers that are losing Chrysler and General Motors auto franchises wonder how it's going to save manufacturers money.
It's a question that both Larry Krein, owner of Lloyd's Motors in Jamestown, and Jeff Lemna, general manger of Offutt Motors in Lisbon, say they hear often.
"I struggle answering that question, to be honest with you," Lemna said. "It's not like they have to come out here and beg us for payment on cars. We pay for our training. All the equipment - that's not free. We pay for that."
"There's no expense on the manufacturer's part," said Krein, whose father, Lloyd Krein, launched the family car dealership in 1965. "We buy the tools, we buy the training, we buy the majority of the advertising."
Both GM and Chrysler have announced plans to dramatically reduce their networks of thousands of dealers, saying that the moves are needed to cut costs to restructure.
Dealers argue that they make money for the companies and terminating nearly 2,000 franchises between the two automakers could result in the shuttering of many of the businesses and eliminating thousands of jobs.
GM and Chrysler don't own the dealerships that sell their cars and trucks. The dealerships are franchises owned by independent companies or business people who sign a contract with an automaker to market their vehicles.
The dealers pay for the vehicles upfront with a loan from either an automaker financing arm or an independent bank.
Closing small, rural auto dealerships - something Sen. Byron Dorgan, D-N.D., and Sen. Amy Klobuchar, D-Minn., have asked automakers to justify - is not about cutting cost, it's about improving price, said Glenn Mercer, an independent automotive consultant from Cleveland, Ohio.
"Price impact can be major, both short-term and long-term," Mercer said.
Short-term example: A small town has two Chrysler dealers. A customer bargains between the two, resulting in a $500 price reduction.
Imagine one dealer is closed and now customers have to drive 100 miles to the next closest competing dealer for a comparison. That's a real hassle, Mercer said.
"Most people won't bother to do this, so the local dealer and Chrysler end up getting the $500 higher price," he said.
Long-term example: Two dealers are scraping by with too little business to sustain both.
As a result, neither dealer can afford to upgrade the business, train their people as much as perhaps they should, pay them well, and, as a result, the brand erodes.
Now, one dealer closes. The remaining business does more volume, makes more money, fixes up the store, and trains its sales staff.
"The two things together mean the dealer and Chrysler get a much better price - hundreds of dollars in most cases," says Mercer, calling it a fairly realistic scenario in the real world.
"But no one wants to talk about that," he said. "It's always easier to tell the customer you are trying to cut cost, rather than trying to raise price."
In recent years, Jamestown has had individual Jeep, Dodge and Chrysler dealerships, Krein said.
"It's been no secret that Chrysler and the rest of the manufacturers would like to have just one dealership in a town this size," he said.
But Chrysler Corp. has never offered financial help for the Chrysler dealer to buy out the Dodge dealer or vice versa, Krein said.
Jamestown's Jeep dealer recently sold out to the Dodge dealer, resulting in it having two Chrysler Corp. auto lines, he said.
Lloyd's Motors was left with the two remaining Chrysler models still in production, minivans and the Chrysler 300, said Krein.
"The government has stepped in and said that there are too many dealerships and the first ones to go will be the ones that have just a single line," Krein said. " And it doesn't matter if it's in Houston, Texas, or Jamestown, N.D., if you have just the one line from Chrysler, you're history."
Krein found out in May that Chrysler was filing bankruptcy and ending its franchise agreement with his dealership.
Lloyd's will continue selling Toyota autos, its primary product line, Krein said.
'Hard pill to swallow'
Offutt Motors also learned in May that its contract with General Motors to sell Buick, Chevrolet and Pontiac vehicles will not be renewed in 2010, Lemna said. The dealership employs five people, he said.
For small towns like Lisbon, closing down a business "is a hard pill to swallow," he said.
His assumption, Lemna said, is that GM may save money by needing fewer sales people to call on and service dealers.
"I'm assuming that their vision is bigger stores that can offer more under one roof, maybe. I'm guessing that's part of their argument," he said.
Car manufacturers want to see better sales numbers, Krein said.
"That's what Chrysler, General Motors and the rest of them want to strive to do," he said. "They want to have fewer dealers that sell more cars."