Thursday, 4 June 2009

Lies, Damn Lies, and Statistics!

David Ruggles
See also Cliff Banks article in Wards
As I watched the Senate hearings today on CSPAN my blood boiled. When asked about the money they would save by cutting their dealer count these guys, Henderson (GM) and Press (Chrysler), engaged in some serious obfuscation. They asserted that by swapping an "under performing" dealer for a "performing dealer" they would pick up the gross profit of the additional sales of the new "performing" dealer. These calculations of the difference between what they got and what they felt they were entitled to makes up the bulk of what they claim the rejected dealers "cost" their companies.
I have a little experience in this area. I have operated dealerships in a number of markets. As a consultant I have visited hundreds of dealerships and worked closely with them. The best dealers are those who have structured their business in such a way as to be less vulnerable to the inevitable downturn in either the new vehicle market or the times when the offerings of their manufacturer weren't well accepted in the market. These successful dealers learned to develop their pre-owned business and other profit centers, and they probably brought in other manufacturer makes to help cover their fixed costs in the event of a market downturn.
These dealers are typically still profitable, despite our difficult sales environment. These are precisely the type of dealers targeted by Chrysler and GM.
Markets are not created equal. To understand the concept, think in terms of MSR, which stands for Minimum Sales Responsibility in the Chrysler business. GM has its own terminology, but the same meaning. MSR is where a manufacturer's national market share percentage is applied to the total new vehicle volume in a specific dealer's market. Any deficiency – shortfall from the target – is what a manufacturer views as lost sales. They can calculate the gross profit they would have made had the dealer hit its MSR. But now they appear to count it as a cost in justifying the arbitrary termination of dealers and their employees. There are additional assumptions. The gross profit they calculate is the margin they make when they sell the a new vehicle to the dealer. The dealer has to sell it at retail to make money themselves, which isn't always possible. MSR also varies by locality; it is certainly possible that a dealer who exceeds MSR in one market would underperform in another.
The fact is, Chrysler and GM resent dealers who have managed their business in such a way as to not be overly dependent on selling their products. Many rejected dealers have been targeted as a result of their business acumen. In addition, Chrysler and GM are moving to force more expense onto their retained dealers. GM has sent out "participation agreements" that any dealer wanting to go forward must sign. It effectively replaces the franchise agreement, forcing dealers to agree to do anything and everything, or else. Don't sign, and the dealer is terminated. GM and Chrysler want more elaborate and expensive facilities. The also want exclusivity in those expanded facilities, meaning the manufacturers won't allow competitive makes in these facilities, even though they are purchased or leased by the dealer, NOT the manufacturer.
Normally, dealers would be protected from these types of unreasonable demands by state and federal franchise laws. But GM and Chrysler are taking advantage of their bankruptcies to avoid these restraints. They are showing why these laws existed in the first place - there is a long history of franchisors abusing franchisees, once the franchisee has money in the business that they can't extract. The auto industry isn't unique, but each store represents a far larger investment than in fast food or most other franchising. Congress and the states had made such blackmail illegal; now Chapter 11 is being manipulated to allow it.
I have a friend who had a Chrysler-Jeep operation yanked from one store, and a Dodge operation from another. Now Chrysler can give them to a competitor. These yanked franchises didn't fall out of the sky, good money was paid for them. Chrysler wants to exact a 3 million dollar building from the other dealer in return for being granting it the franchises. The dealer who was NOT terminated was not selling near their MSR, so there must be other motivations. It will be poetic justice if the yanked Chrysler, Jeep and Dodge franchises languish for lack of a party willing to invest that much for a new facility. Time will tell.
According to Chrysler's Press the distribution costs per vehicle amount to about $1000. Of course, each vehicle bears its proportion of these costs regardless of which dealer they were shipped to. In Press' argument this cost would be less if they could replace under performing dealers with (fewer) performing dealers. But these costs aren't related to the number of dealers – they represent the money spent to develop and maintain the software in the first place.
Furthermore, neither executive mentioned the costs their companies have transferred to the dealer. While claiming there were substantial costs associated with the software and hardware related to their dealer communication IT package, Press neglected to mention that each dealer is charged about $2600 a month for this. He failed to mention that there really are very few, if any, field people these days, as dealer contacts are made by email and telephone instead of actual in-store visits. There was a concerted effort to overstate costs and avoid altogether any mention of how much of these costs are actually reimbursed by dealers. In fact, studies show that each dealer represents POSITIVE cash flow BEFORE they buy a vehicle or a part!
I've been frustrated by previously not being able to determine who made the decision to cut dealers, rather than to allow natural attrition to thin out dealer ranks. (That attrition rate is high at present!) It is hard to believe that Henderson and Press have that little understanding of the auto business. I have to conclude that the initiative to lower the dealer count is driven by the Task Force, who think Toyota's business model is what everyone should emulate. The Task Force may be made up of restructuring geniuses, but they have little understanding of the auto business. Their profession means they are mostly North Easterners who may not even own a vehicle, and are not oriented to the issues of smaller businesses. But when a dealer closes, it likely results in a bankruptcy in which a family's life savings are wiped out. It's not just a job loss. The Task Force doesn't seem to understand this. Closing dealerships will cost sales for Chrysler and GM, something they can ill afford. And the ill-will it generates will cost them a lot more than any potential savings.
Imagine Gillette volunteering to give up shelf space space at the super market to Schick! It's the same principle. Foreign competitors looking to expand their dealer base will scan the ranks of rejected GM and Chrysler dealers. If not for the recession, that would save many of the terminated dealers.
In the meantime the "task force" is driving the bus while all parties deny any micro managing by the government.
But remember: as bad is it is, it's better than liquidation! Those who think Chapter 11 for GM and Chrysler should have been declared last summer have forgotten the financial crisis. To operate in Chapter 11 still requires financing, and for almost a year now that has only been available from the US Treasury. The Task Force is necessary, but the specialized nature of their skill set is apparent. The faster these two firms exit Chapter 11 and the Task Force stops calling the shots, the better.

Wednesday, 3 June 2009

Dealerships are a Cost? - I Don't Think So!

Mike Smitka
The statements of the CEOs of GM and Chrysler at today's Senate hearing on dealership closures make very little sense overall. (For details, see the National Automobile Dealers Association website. Full details should be on the website of the Senate Committee on Commerce, Science and Transportation.) It is true that some dealers run shoddy operations that hurt the brand in the communities where they operate; that is a problem in any franchise system. Current state franchising laws make it very difficult for "the factory" to yank the franchise of such dealers. Well and good if those are the dealerships being targeted – but there is no evidence that is the case. Are there that many bad apples in the GM dealership barrel? I don't think so.
The only GM statement that had any numbers in it refered to incentives paid to dealers and sales people, along with training, advertising and other support, at an average of $1,000 per vehicle.* For GM to save money, they have to cut that number a lot. Is there a lot of fat to be cut?
I don't think so. Here's why.
So let's say GM trims the number of dealers. IT and the like are fixed costs, independent of the number of dealers – though generally dealers get charged for software, brochures, everything. There are thus big savings only if the incentives are trimmed. So the bottom line is that for consolidation to save GM money, the productivity of sales staff and the dealership as a whole has to increase. With 20% of dealerships being cut, each sales person has to sell 25% more (= 1/.8), because for this to make sense the dealership can't add personnel or other costs. All while the dealership is earning significantly less for each car they sell. Is that realistic? I don't think so.
With fewer sales points, GM will somehow have to attract more customers, a lot more customers, to each physical location. They've failed at that in the past two decades. Are GM products so hot now and henceforth that they can get by with fewer locations? I don't think so.
OK, so GM wants newer dealerships, sometimes in new locations, so that volume per dealership can increase. But if I'm making less per vehicle because GM has just cut the wholesale discount, why would I want to do that? Not unless I'm making so much money that I can be coerced by GM into handing more over to them. If I were the banker for such a dealership, how would I react? They want me to lend them a lot of money to build a new dealership in a down market under a marketing plan that intends to cut the margins that dealers earn? Would I as a banker lend them the money to do it? I don't think so.
And hasn't GM ever heard of the internet, customers shopping online, test driving here and there, but coming to a dealership only to sign the paperwork? Does a fancy store add value in the new retailing world? Carpet reeking of mildew is one thing, I've been in dealerships like that, and walked out. But will fancy brick and mortar make me more likely to say "yes" to a harried salesperson? I don't think so.
Finally, what of Certified Preowned Vehicles? GM needs to sell those – especially once leasing starts to increase and rental car companies renew their now-aging fleets. "Underperforming" dealers are still in business because they were doing something right. Looking only at new vehicles is narrow-sighted. Are the fewer number of urban megastores going to let GM move that metal? I don't think so.
One possibility is that this is coming from the Administration's automotive team. They've proven to be brilliant workout specialists, getting the potentially viable portion of Chrysler through Chapter 11 in a manner the bankruptcy lawyers I've talked to thought impossible. Is that skill set likely to suit them to understanding the complexities of franchising, particularly franchising in the multiproduct context of a car dealer? (Dealers have at least 5 business lines, new, used, service, parts sales, finance & insurance brokering, and often a body shop.) Probably not. This lack of understanding may be further muddied by a comparison of dealer averages between Toyota and GM. That assumes that Toyota does well because of its dealerships, rather than the other way around: Toyota's dealers do well because Toyota's market share has steadily risen, ahead of their dealer count. But Toyota's attempt to sell full-sized pickups has flopped, because they don't have all those small, rural dealers who at GM sell their most profitable product. See David Ruggle's post below on The Task Force. He's actually seen restructuring first hand, and knows more of the specialized skills that entails.
Let me hazard a guess, [after consulting with a friend, almost surely wrong] that the incentive system for GM's factory reps focuses on the number of new cars they sell. For them, an "underperforming" dealer makes them look bad, there's no way they can match the bonus of a rival who drew "better" dealers. The smarter dealers watch the mix of used and new vehicles, and if they can snap up preowned on the cheap at auction and make more money, they'll shift their emphasis in that direction. But the reps who handle the certified preowned side of the business, well, they're kept in the back room, out of sight. Management doesn't see their success. [Again, GM was the one to launch the CPO business, and it's built into their rep system, so that doing well on CPOs was a positive, not a negative to reps.] But that means GM will be cutting their smarter dealers, the ones with the best business skills and feel for the market. Does that make good business sense? I don't think so.
* CEO Fritz Henderson: "GM pays about $1,000 a vehicle for dealer and salesperson incentives, advertising, field sales, service and training, and information technology support, he said." Automotive News. There was no breakdown or support for this $1,000 figure. GM does not have anything to say about salespeople and their compensation; that's up to the dealer, whether they work salary, straight commission, or something in between.

Tuesday, 2 June 2009

The "Throughput" Myth!

David Ruggles
Much has been written and spoken by the administration and in the media about the bankrupt Chrysler and GM Dealers lack of “throughput” as if it is a big drag on Manufacturer viability. This is used to justify the rejection of “deficient” and “extraneous” Dealers. It was pointed out in the Wall Street Journal recently that Toyota Dealers average 1613 new units per year while Chevrolet averages 643 and Dodge 408. The piece used the word “disastrous” to describe Buick Dealers’ 102 unit per year average, as if “throughput” is a settled issue as a negative. It is common knowledge that the administration’s automotive “task force” views “throughput” as a critical element to Chrysler and GM’s future profitability and is using Toyota as their benchmark.
In truth, new vehicle “throughput” has little to do with either Dealer or OEM profitability. For Dealers profitability has everything to do with the ratio of overhead to overall sales, which includes pre-owned, service, parts, etc. Dealers who have been committed to higher overhead levels are desperate to increase new vehicle “throughput” just to break even. Dealers who have been able to keep their overhead under control are less vulnerable to the vagaries of the overall automotive market and to the fact that Manufacturer offerings run hot and cold. Dealers who have learned to maximize the results of their other profit centers are also less vulnerable. In my own experience I ran the 2nd most profitable Chrysler dealership in the Chicago zone in the early eighties. We never sold as many as 100 units in a month. We were making $50 K a month in 1982 dollars during the peak of the Chrysler bailout crisis of that era. Chrysler had not succeeded in getting us to move into a higher overhead facility and otherwise boost our overhead. The profit leader was a large fleet dealer that had to sell thousands of units a year to beat our profit numbers. During that same era, Long Chevrolet, a Dealership that still holds the record for yearly new vehicle “throughput,” was shuttered and bankrupt. And for Manufacturers, each Dealer is a profit center, not an expense.
Toyota, with their high “throughput,” has one of the lowest J.D. Power “SSI” figures of any Manufacturer’s Dealers. “SSI” is Sales Satisfaction Index. Toyota’s high “throughput” must contribute to the fact that their customers are highly dissatisfied with their purchase experience even though they love their Toyota vehicles. Toyota’s sales numbers have tumbled along with the rest of the industry in recent months. Using Toyota as a model may not be the most intelligent benchmark for the “task force” to use as they have posted record losses recently.
It is widely understood within Toyota, and within the industry, that one big reason for the lack of success of Toyota’s superb new truck, the Tundra, is their lack of Dealer coverage. Adding Toyota Dealers will tend to lower each one’s “throughput.” It has been proven that truck owners, who tend to be loyal to their brand anyway, prefer to drive say 30 miles to their nearest Ford, Chevrolet, or Dodge Dealer than drive over a hundred miles to a Toyota store. Further, court documents in Chrysler’s bankruptcy included comments by Jim Press, ex Toyota exec, which indicate he is aware that shedding Dealers is counterproductive to Chrysler’s profitability. If he’s right, lowering the Dealer count to increase “throughput” is counter productive.
According to Joe Eberhardt, Chrysler’s senior vice president for sales and marketing, when a Manufacturer’s loses a Dealer, OEM costs stay the same and–at least in the short term–it loses that Dealer’s new vehicle and parts sales. “There’s no immediate payback,” he stated.
Arbitrarily stating that high “throughput” is an essential element to the viability of Chrysler and GM may sound good to those who think the “Factory” owns all of its’ Dealerships, but those in the know ain’t buying it. If the “task force” actually believes this, and they are in charge of fixing the two ailing automakers, we’re all in trouble! In the meantime, Ford and other competitors are gloating and making absolutely no moves to raise their Dealer’s “throughput” by reducing their Dealer count. I suspect there will be immediate moves by GM and Chrysler’s competitors to pick up some additional market representation by forming relationships with “rejected” Dealers and by securing abandoned GM and Chrysler facilities.

The Task Force

David Ruggles
I'm a vocal critic of a lot of what is being done in the auto business, but it is clear to me that "corporate restructuring specialists" are a specialized breed and it's quite likely that this skill set is not one held by many car people, if any. An executive from Alix Partners has been appointed to head the GM restructuring. They are the foremost restructuring specialists in the world. The sooner the restructuring is completed and the specialists are out of the way, the better. Putting car business people in charge a complex corporate bankruptcy might not be a good idea. Many corporations that handle it themselves do so under the auspices of specialized consultants, who are highly paid. Having said this, I'm not thrilled with the decision to cut dealers. It's not clear who made that decision. I'd sure like to find out [ad hominem attack deleted]!
But without gov't intervention it would have been Chapter 7 for Chrysler and GM and a shut down of auto production in North America for a period of long months.

Monday, 1 June 2009

More on Dealers: My Opinion in NYT

Mike Smitka
Here are a series of brief items in the New York Times "Room For Debate" online forum on their Opinion page: Link here. My contribution starts:
G.M.’s bankruptcy could still unravel unpleasantly. It’s a big customer for the supplier base, and they’re on the edge. Chrysler’s dealers got 26 days’ notice. G.M.’s franchises don’t expire until October 2010. But that’s remote from our everyday experience...