Disenfranchising Dealerships

52597319        General Motors, Chrysler, and Ford suffered devastating losses in early 2008 during the financial recession in the United States. Their market share in the auto industry rapidly decreased from 70% to 53% during this time, yet only GM and Chrysler accepted a government bailout to stay afloat. Given this shock, changes in management, distribution, and operations were needed to adjust to their losses in hopes of recovering their previous market share and profits.

        However, reports have shown increasing tension from the owners of GM’s franchised dealerships and their corporate headquarters. In late 2009 the before and after agreements that GM’s corporate office sent to their dealers was published online. The wording and agreements written in these reports faced a lot of controversy among the franchise dealers and investors in the market. The agreements stated that the corporate office would now be able to “dictate cars purchased, the buildings they are sold in, and power to change the terms of the agreement at any point in time” (Farago, 2009). Bloggers of the industry predicted major public outcry from franchise owners, loss of customers and profits, and future declarations of bankruptcy. In recent years GM has managed to recover and increase profits and their stock, but the bloggers were correct in their assumptions regarding attitudes of franchise owners toward the corporate conglomerate.

Following the recession, GM believed it was necessary to lay-off a lot of their employees and pressure franchise owners to do the same. This may have been an unavoidable course of action, but it did leave  franchise owners and local employees feeling resentful. Some experts in the field and other economists believed this strategy was against the general philosophy of franchising. Individual dealership owners no longer had the same oversight and power over the location they worked so tirelessly to make their own. Soon GM would issue more guidelines, protocols, and warnings to dealerships.

In 2011 GM’s corporate office sent letters to dealership owners that strongly encouraged them to improve their sales and market strategies, while also stating that their current operations were “simply unacceptable”. The letters measured each individual dealerships sales performance reports using a RSI measure. The letters were sent out to the bottom 25% of dealers in each state using their RSI measure of their sales performance.  Many of these letters claimed the sales of the respective dealerships were “unsatisfactory” or “in need of significant improvement”.  However, as pointed out in a post on an online auto blog, it is mathematically impossible to have all of the franchised dealerships have above average sales when compared to one another. Some experts have stated that these letters could be a precursor to GM’s intention to abandon smaller family-owned dealerships and move to larger dealer groups who have larger access to the capital and in locations with larger consumer bases.

Stocks

GM’s stock from 2008 to 2016. As seen above, their stocks reduced by half during the recession but are at a price level similar to before the crash.

While GM has been able to recover from the financial crisis of 2008, their management philosophy and relationships with dealerships continues to be strained. Public outcry of their initiatives is limited to local employees and dealerships most affected by their change, but GM will ultimately not suffer if their plan works and dealers who are able to meet their demands will experience increased revenues.

Sources:

General Motors Threatens Dealers’ Franchises

GM New Dealer Agreements

9 thoughts on “Disenfranchising Dealerships

  1. Under Chapter 11 bankruptcy the reorganized GM was not obligated to honor dealership contracts (in general bankruptcy renders contracts void, at the discretion of the bankruptcy judge). At that time GM issued “The Letter” to about 10% of its dealers (including the one in Rockbridge County, the site of which is now occupied by a Ford dealership).

    See Autos and Economics (at http://autosandeconomics.blogspot.com) for extensive commentary, particularly by David Ruggles, a dealership specialist.

    But back to franchising: do other franchisees care who is part of their network?

  2. The financial criss of 2008 certainly deteriorated auto sales and companies’ revenue. For GM, it seems as though the Great Recession pressed the “reset” button on their franchising strategies. I imagine that young franchises have much more oversight than older franchises. Once a franchise is established and reputable, new ones may operate on “autopilot.” When the economy was turned on its head, the reputation of GM was unearthed and corporate likely felt as though they had to intervene and reestablish their brand. But U.S. car sales hit record highs during 2015, so it will be interesting to follow how this corporate intervention tightens or relaxes in 2016.

    http://www.wsj.com/articles/u-s-car-sales-poised-for-their-best-month-ever-1451999939

  3. It seems that the disenfranchising efforts made by GM and Chrysler were necessary to curtail the “unsatisfactory” sales performance that you mentioned. In 2009, the bottom 25% of Chrysler dealers accounted for only 12% of total sales. These dealerships were simply not generating enough revenue to warrant continued licensing. Chrysler and GM both had dealership networks that were far larger than those of competitors, such as Toyota, which resulted in their inventory being spread out among too many dealerships. In 2008, Chrysler dealerships sold an average of 303 vehicles each, compared to 1,292 average sales in Toyota showrooms.

    GM and Chrysler needed to scale down their franchise networks to reflect the shrinking size of the market following the Great Recession. Their tactics in doing so, as you mentioned, are subject to debate.

    http://www.nytimes.com/2009/05/16/business/16auto.html?_r=0

    • Whether that’s an issue that should have concerned Chrysler and GM depends upon whether (i) an additional dealership raises costs [in fact, car companies make modest amounts of money from dealerships, while incurring virtually no incremental costs] and (ii) whether a dealership with slow sales hurts the brand image [my sense and that of friends in the dealership world is NO, it does not]. So this was basically a poorly-thought-out policy that in the chaos of bankruptcy was too small an issue to engage senior management. On the other hand, the dealerships that were left did benefit, fewer competitors. But GM and Chrysler did not benefit.

  4. This is an interesting issue, as it pits the emotional feeling for small-town, mom and pop dealerships against the understandable need of the auto industry to dig itself out of the recession just like so many other industries did. Small dealerships are faced with unique challenges that other small-town firms may not face. For example, consumers may actively search out craft beers or family-owned restaurants, but even the most dedicated locavore needs a car – and there are few craft cars available. But even more interesting is the issue of succession in small-town dealerships. If the next generation of an owner’s family does not wish to continue in the business, a general manager from a neighboring market could save up and buy a small dealership – and find himself as owner. But according to Automotive News, some general managers can make much more money in that position in a larger market compared to being owner in a smaller market. And even if that general manager does decide to purchase the smaller dealership, he may not live close enough to be in the shop everyday. The same article (cited below) illustrates the issue of remote ownership. When an owner can’t be in each day, he relies on his general manager to run the shop, but the supply of quality managers appears to be dwindling. It will be interesting to observe the changing market, especially as auto sales increase.

    http://www.autonews.com/article/20151012/RETAIL07/310129970/the-slow-steady-demise-of-the-small-town-dealership

    • This reminds me of our class discussion on restaurant ownership. Typically the manager fills in all the loose ends of day-to-day operations in addition to their work in scheduling, checking inventory, and pursuing other methods to expand their business/increase profits. Finding workers who can do this job successfully and for a while is a challenge familiar to all industries. What still perplexes me is the method in which GM sought to solve these problems. Granted there was a recession, and as the Professor said, in bankruptcy the corporate office can change organizational structure, but as other industries and firms adjust to the recession there doesn’t seem to be as much outcry from former and current employees as there are is with GM

      • In response to the outrage at GM’s handling of the situation, I wanted to look into how other manufacturers like Chrysler were handling their interactions with dealerships. I found an article from 2009 that painted a very different picture than what we heard with GM. The workers were very loyal to the company claiming that management was great and one worker said, “I won’t leave until they tell me I can’t come back here anymore.” There are other workers who claim that they were offered jobs but decided not to leave out of respect and loyalty to the company. Chrysler cut 25% of its dealerships after the 2008 crisis without near as much outcry as GM. I’m sure not every case was the same as this dealership closing, but I feel an example like this at least calls in question some of GM’s business practices.

        Sources:
        http://www.chron.com/neighborhood/pearland-news/article/Amid-Chrysler-s-restructuring-it-s-farewell-to-1622897.php

        • I think the only useful metric on “outcry” would be the number of dealerships that filed for reinstatement – to my knowledge, Chrysler and GM look the same, once you correct for the difference in the absolute number of dealers.

          In the background is a longstanding trend towards the ownership by a single family / company of multiple dealerships, and the closing of really low-volume rural dealerships. [But I believe the highest volume Ford dealership anywhere in the world is a rural one, so this decline is partly a function of family businesses that find it impossible to successfully adapt, including but not limited to succession.]

  5. I think it is important to consider what outside pressures may have been pressed on GM after they accepted the government bailout in order to avoid bankruptcy. While the US government agreed to the bailout because the car industry is an integral part of the American economy, the failure or success of the bailout was going to directly affect the public’s view of the government. The Centennial Institute discusses how the US auto task force pressured both Chrysler and GM to reduce their number of dealerships. This outside pressure could help explain why the management of these manufactures decided to downsize franchises that were not posing a significant risk to their branding or current economic standing.

    http://www.ccu.edu/centennial/2012/09/how-obama-crushed-thousands-of-auto-dealerships/

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