Angry Dealers Fight Closings

By David Kiley

If Colleen McDonald was trying to make a dramatic point in Judge Arthur Gonzalez' Bankruptcy Court in Manhattan on May 29, she succeeded. The owner of Livonia Chrysler-Jeep and Century Dodge, both in Michigan, McDonald testified against Chrysler's plan to remove franchises from nearly 800 of its dealers, including her. Chrysler, she said, had "begged" her and other dealers to buy more cars in recent months to clear out the company's bloated storage lots, as a way to help avert bankruptcy.. "Now, we find that bankruptcy allows them to do this to us," said McDonald, who told Judge Gonzalez: "I feel like I've been raped and left for dead."

Dealers that have long sold Chryslers—as well as GM brands—are hurting. Not only were sales awful in 2008, and continue to be so in 2009, but now Chapter 11 bankruptcy restructuring will allow Chrysler, and soon General Motors (GM), to walk away from franchise agreements they have with dealers like McDonald.

GM, which is expected to file for Chapter 11 protection on June 1, has already identified some 1,100 dealers it says it must cut. While GM said earlier this month that those dealers will face elimination by the end of next year, a Chapter 11 filing would allow the company to move faster than that. Chapter 11 proceedings trump state franchise laws that normally protect dealers from automakers acting hastily.

Fiat in the Chrysler Mix

Take the case of Nicholas Parks, who owns a Dodge dealership in Alvin, Tex. Across the street from Parks' store is Ron Carter Autoland Chrysler-Jeep. Each dealer has been trying to buy out the other since 2001, but neither would budge. Parks' store is more modern. But Carter has several dealerships around Alvin, and spends, according to Parks, four to five times more on advertising for all of his dealerships, giving him a bigger brand name around the small community just south of Houston. Now, under Chrysler's current reorganization plans, the automaker will grant Parks' Dodge franchise to Carter, to sell all three brands—and later Fiat—under one roof.

Part of Chrysler's restructuring involves Italian automaker Fiat acquiring a big stake in Chrysler and developing vehicles with it. The Fiat brand is widely expected to replace the Chrysler brand as the companies move forward. "Last year, we bought far more vehicles from Chrysler than we needed to help them out—and because they asked us to—and now we have to sell them for whatever we can get, at a loss," says Parks. The interest costs on carrying the excess Chrysler vehicles last year swelled from $15,000 per month to $50,000. Parks has joined with other dealers in hiring lawyers to represent them in the bankruptcy case, although most experts say that the dealers have scant legal hope of gaining much in such a forum.

Chrysler officials say their decisions on which dealers to cut are based on hard-data analysis. Indeed, of the 789 dealers being axed, half sold fewer than 100 vehicles last year. Dealers such as Parks fell far short of the quota expected by Chrysler, which says it is eliminating outlets that have in recent years underperformed the level of sales that dealers knew they were supposed to reach.

Overachievers Are Rewarded

When one dealer is cut and its franchise given to another, says Chrysler, the surviving dealer is the one that has been overachieving sales targets. Additionally, some of the surviving dealers have committed to building new dedicated showrooms for Chrysler-Jeep-Dodge. This scenario is playing out all over the country as GM and Chrysler pare dealer networks to a more realistic size that befits their declining market shares.

GM's market share hovers between 18% and 22%, and this will sink further when the company cuts Pontiac, Saab, Hummer, and Saturn. GM's dealer network is sized for a company with a 40% market share—roughly what the company enjoyed in the 1970s. Chrysler's market share is around 10% and may shrink even further. To sustain its current number of dealers, Chrysler would need a market share of some 25% to 30%.

"You have a situation where Chrysler dealers are competing against Chrysler dealers in the same markets for the same customers, and the same goes for Chevy dealer vs. Chevy dealer," says Earl Hesterberg, CEO of Group 1 Automotive (GPI), which owns dozens of dealerships, including those of Chrysler and GM. "Toyota has a bigger share of the market than Chrysler and has half the dealers…It doesn't make sense, though it is painful for the people being selected for elimination." Houston-based Group 1 is not losing any GM or Chrysler franchises.

automaker layoffs cut Michigan buyers

Richard Mealey, whose Chrysler dealership is in Birmingham, Mich., a 15-minute drive from Chrysler's Auburn Hills headquarters, has also been singled out. Mealey says he has no choice but to close his dealership, and 75 of his 89 employees will be laid off this week. He will keep a few to operate his body shop as an independent business, but Mealey says closing will be "devastating" for his family, business, and community. "We feel totally rejected, dejected, and very, very concerned about the future," he says. His loss is his customers' gain: He must sell more than 230 vehicles in the next 10 days at drastically reduced prices.

One reason that Chrysler and GM are reducing the number of Michigan dealers is because they have cut tens of thousands of their own employees—who used to get incentives to flip their cars every year—so those dealerships have lost a lot of regular and captive customers.

Car dealers usually cast a big political shadow in their states, and are also big fund-raisers and political donors at the federal level. But as the White House moves to restructure GM and Chrysler with billions in taxpayer money, the dealers' political clout isn't being felt. One Obama Administration official with knowledge of the White House auto industry task force deliberations said the fallout on the dealers was one of the hardest parts of the rapid restructuring. "These are good people, but these companies are choking on too many dealers, and we can't waste this opportunity—where so much is being done to bring them in line with Toyota and Honda—to leave these bloated dealer networks out of it," said the official, who spoke only on the condition of anonymity.

James Dollinger, a real estate and automotive industry consultant from Flint, Mich., who once sold more Buicks than any other car dealer in the country, says the automakers and the White House are making a big mistake. "Let the marketplace, not the companies which have made a hash of their businesses, decide who lives and who dies when it comes to the dealers," says Dollinger.

Yet both Detroit and Washington offer a similar reply: GM and Chrysler can't wait that long.

Kiley is a senior correspondent in BusinessWeek's Detroit bureau.