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Detroit Confronts Surplus of Showrooms

Legacy of Dominance
Led to 'Overdealering';
Less Is More for Toyota

June 18, 2007; Page A10

  • The Problem: After losing market share over the years, U.S. auto makers have more dealers than they need.
  • The Effect: The large number can result in cannibalized sales and inefficient marketing efforts.
  • The Complication: State laws prevent the auto makers from closing dealerships, and buying out dealers can be expensive.

NORTH HOLLYWOOD, Calif. -- Detroit's Big Three will try to address their biggest competitive problem when they open contract talks with the United Auto Workers this summer. But as that drama nears, they are also starting to move more aggressively to tackle a second, potentially costly albatross stemming from the days when Detroit dominated the U.S. market: a surfeit of dealers.

Ford Motor Co. is aiming this year to trim about 200 dealers from its U.S. retail network of 4,200, and a similar number annually over the next several years, a company official said.

At the same time, the future owner of Chrysler Group, Cerberus Capital Management LP, has begun meeting with dealers and exploring ways of reducing their numbers, people familiar with the matter said. The company has 3,700 dealers and wants to eventually cut that to about 3,200, in part by combining Dodge, Chrysler and Jeep locations into three-brand "alpha" dealers, a company spokesman said.

General Motors Corp., which now has a total of 6,945 dealers for its eight brands, has been slowly reducing its dealer count over the past several years, mainly by urging separate Buick, Pontiac and GMC dealers to combine operations under one roof. At the end of last year, it had 7,000 dealers, down from 7,700 in 2002.

By contrast, Toyota Motor Corp. has about 1,400 dealers.

In Boston, Memphis, Miami, Los Angeles and other big markets where import brands sell well, the Detroit brands typically limp along with a few strong dealers and many others that are losing money and can't afford to advertise enough, hire and keep top sales people or spend money to give their showrooms the comforts and modern look found in stores selling foreign-name vehicles.

Michael Jackson, chief executive of the dealership chain AutoNation Inc., estimates that what he calls a "lack of retail muscle" lowers Detroit's sales to individual customers by 15% or more. "They have no idea what level of business they are leaving on the table," Mr. Jackson said.

But auto makers can't simply force dealers to close for not selling enough cars, thanks to state franchise laws written to protect local businesses. Buying out dealerships is expensive, too. Even small stores are often valued at $1 million or more.

Back when three of every four cars sold in America were made in Detroit, it made sense for Ford, GM and Chrysler to have a dealer on practically every corner. But after years of ceding market share to foreign nameplates, all three now have more showrooms than they need.

While some Ford, GM and Chrysler dealers have continued to grow and prosper, many others -- often small, single-location or family-owned dealerships -- have seen their new-car sales dwindle.

The problem, called overdealering in the industry, plays out each month along a quarter-mile stretch of Lankershim Boulevard in this suburb of Los Angeles. At 4437 Lankershim, Mayberry Lincoln-Mercury is a no-frills operation. Its modest showroom is just big enough to display three vehicles. The waiting area for customers consists of four green chairs and a 15-inch Sony television. The dealership runs no advertising, relying solely on repeat and word-of-mouth business. On average, it sells 20 to 25 new cars a month, according to Mike Mayberry, one of three brothers who run the family-owned dealership.

Just down the street, Toyota of North Hollywood is housed in a sprawling white complex with red and white flags flying along its eaves. In front, two dozen new cars are parked beneath palm trees, helium balloons tethered to the side mirrors. Hundreds more vehicles are stored in a four-story parking structure. In the showroom, cherry paneling accents the walls, small sharks glide around a huge tropical-fish tank and customers sit before a 60-inch flat-screen television set. Truck sales have expanded so much that they are now handled in a separate showroom, across the street.

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