After Tumult, GM, Dealers Move On - Together This Time

After Tumult, GM, Dealers Move On - Together This Time

By Michelle Krebs July 6, 2010

If every General Motors dealer were like Mike Love, company executives could count on smooth sailing with the owners of their retail-distribution network and look to them as yet another reason for optimism about the future.

Love owns Love Chevrolet in Columbia, S.C. But until last year, he also operated Love Hummer and Love Saturn in Columbia. Then GM pared brands and made those franchises moot. Love's Saturn store "was better than most Saturn dealerships were" and he had spent millions of dollars on the quonset-hut format for the dedicated Hummer franchise that now looks like some remnant of an old military base.

But Love is taking the high road. "It was all disappointing, but we'll put our best foot forward and go on," said the third-generation GM dealer. "You can't worry about the things you can't control."

And now, Love said, he's actually applied for franchises for some additional surviving GM brands. "We're good GM players," he said. "They ought to be happy with us, and we're happy with them."

Actually, Love is more representative of the state of mind of the GM dealer body than one might surmise. Many GM dealers apparently are willing to let bygones be bygones, now that the company has backpedaled fiercely on its dealership consolidation plans, is coming out with one hot new product after another, has gotten its inventory situation in line, and is enjoying at least a gradual recovery in U.S. sales.

"With the guys that are left standing, if the business is going to come back, they're going to do all right," said George Magliano, director of North American auto-industry research for IHS Global Insight, based in Lexington, Mass. "And at the end of the day, that's what counts."

Many surviving dealers, of course, have become stronger. John Bergstrom, a multi-brand megadealer in Wisconsin, purchased a Cadillac outlet that was closing under GM's order. "But otherwise, in our part of the world, it's about the same as it was," he said. "They eliminated a whole bunch of Cadillac stores, then they put them back."

It also helps dealer attitudes that GM seems to have quenched its decades-long determination to "disintermediate" dealers altogether from the purchase process and is considering them more seriously as partners for the long haul. And dealers generally are happy with the new stewardship of Mark Reuss, president of GM's North American operations, because they believe he respects their importance.

Skinback Situation

That's a far cry from a year ago, when the company blew up its always-strained relationship with its dealers after the federal task force controlling the company ordered GM to significantly strip down the number of its outlets. The government's basic idea was that GM should shrink its dealer base because its share of the U.S. market had shriveled to 20 percent from the 40 percent that was once served by a dealer network of roughly the same size.

Become more like Toyota and Honda and do the same volume of business with many fewer dealers, the task force said; Toyota has only about 1,200 dealers across the country with a market share not that much smaller than GM's.

So GM's new leadership initially agreed to a cut to 4,100 dealers, including those peddling now-defunct brands, down from about 6,000 dealers before the bankruptcy filing.

But problems surfaced immediately with such a draconian strategy. Dealers, politicians and others argued that the economic impact on their communities would be dire. And by hitting dealers in small- and medium-sized markets especially hard, the government's plan would hurt GM the most in Middle America where its brands and market share tend to be strongest.

"The problem was that the members of the task force had no clue what the industry should look like," alleged David Cole, chairman of the Center for Automotive Research, in Ann Arbor, Mich., who personally lobbied GM and government officials on behalf of some Michigan GM dealers. "It was a bunch of financial guys, and they might as well have been giving advice on how to do heart surgery."

The initial, powerful pushback to the Obama administration's plans came via the considerable - and often underestimate - political clout of GM dealers. The targeted dealers, as well as the many local constituents who benefit from the dealers' presence in the community, deluged their Congresspeople, the White House and others with pleas and demands for clemency from the scheduled cuts. In many cases, the dealers got their way purely by virtue of throwing their weight around. 

Re-embracing Dealers

At the same time as GM survived, the financial crisis began subsiding and the auto market began to recover late last year, there was a broad re-consideration of the magnitude of GM's plans. Plus, about 1,600 GM and Chrysler dealers combined formally filed against the orders to close, under the arbitration process set up by the government. And while the closure of many Chrysler dealers had been immediate, the timetable was longer for most GM dealers because they were to be eliminated by non-renewal of their franchise agreements as those expired, usually within about a year.

Over the last several months, especially with the ascension of Reuss last winter, GM rethought this approach. And with new CEO Ed Whitacre firmly in charge and the initial federal-government auto task force mothballed, the rebounding company could come up with a more sober approach to its distribution challenge.

Yes, they concluded, GM historically was "over-dealered," but the planned cutbacks would go way too far and emasculate the company's retailing capabilities just as it was coming out with a spate of new products that would help it take advantage of a recovering market.

GM's large dealer network "used to be one of our main, massive strengths," Reuss told the Associated Press in June. "I still think that's true. It can be true with the right dealers."

So, a few weeks ago GM consented to keep open about 900 dealerships across the country that it had planned to close, with a new goal of having about 5,000 dealers still operating as of this summer. GM sent letters of intent to reinstate 666 of about 1,100 dealers who filed reinstatement claims. Meanwhile, the remaining several dozen GM dealers scheduled to close are awaiting the resolution of their appeals to arbitrators.

Nothing Like Better Cars

In the meantime, things also are looking up for GM dealers because the company's business fundamentals are improving. Its lower manufacturing-cost position means better-contented cars and more pricing flexibility. The company is churning out popular new models.

"We have the best products we maybe ever have had, and in this business, product solves a lot of challenges," Bergstrom said.

And GM has slashed production enough that inventories are under tight control. "Before, it was kind of a push-pull situation, because GM had excess production and spent most of its time trying to get dealers to stock cars we didn't need," said Tom Durant, owner of Classic Chevrolet, in Grapevine, Texas, as well as seven other GM stores in Texas and Florida, and a member of GM's national dealer-relations council. "Now, it's a completely different situation: Dealers are crying for more vehicles. Coming out of bankruptcy, they overcut production of some models, and you won't see that completely corrected until fall."

Also re-lubricating the relationship is that GM seems - perhaps once and for all - to have backed away from the notion that its dealers are an impingement to business that must be cleared out of the way. GM, Ford and Chrysler all tried to various degrees and in various ways to disintermediate their dealer bodies over the last 20 years, but every single large-scale attempt to do so has failed.

Neither has the rise of online auto marketing and even sales activity made dinosaurs out of dealers, as some analysts had predicted - and some GM executives hoped.

Repeatedly over the years, this also is an area where the dealers' political clout has helped, as they have held the feet of state-level politicians and regulators to the fire to help ensure that franchise laws governing the relationship between dealers and manufacturers - and ensuring the traditional structure of car retailing - remain basically unchanged.

"In the past, the Big Three's objective was to take over the (retail) business, but they've backed off of that," Magliano said. "They have accepted now that their retail base is their face to the consumer - and that you work with your dealers and help them get involved in their communities, and you're going to do a lot better."

Higher Standards

But none of that means that GM-dealer relationships will go back exactly to how they were, even with surviving dealers. In the midst of crisis, GM has been able to impose new requirements such as a program called Essential Brand Elements. It focuses on facilities upgrades, training, customer sales and service retention, and, especially, upgrades in digital marketing and internet sales.

"There are quite a few parameters in it to help us all get headed down the same road," Durant said. "If you're not involved in it, you won't be able to compete with other dealers." Eager dealers, he said, will be rewarded with "an amount of money tied on the backside for dealers who are doing everything GM wants them to do" under the "EBE" program.

"We give dealers high-level benchmarks that they are expected to achieve," said GM spokeswoman Ryndee Carney, "and provide the tools to help them get there."

And experts said that GM will have the option to buy some dealerships back if dealers don't meet certain targets.

"My clients are saying, 'OK, we think we can live with this and can attain these performance measurements," said Tony Allison, partner in the retail-dealership group for Crowe Horwath, an Oak Brook, Ill.-based accounting and consulting firm. "Many of them are just happy to have their franchises back after being in a state of flux for awhile."

Internet is Crucial

Dealers must expect GM to keep pushing them on raising their level of sophistication and effectiveness in online marketing and sales, especially. About 97 percent of dealers are participating in the digital-marketing aspects of EBE since its installation in the fourth quarter, GM said, a high-water mark for dealer participation in internet training.

"Internet sales are important because we need an integrated communications strategy to talk with consumers using the channel that they prefer - that's increasingly online," Carney said. For example, GM is trying to help dealers respond to internet consumers faster and to improve the quality of the response. That might involve, for example, providing exactly and only the information that customers are looking for versus giving them information about what dealers want to promote.

"If the customer is looking for a price quote," Carney said, "give him one - don't give him an offer for a special price on an oil change."

And in general, GM dealers aren't completely out of the woods. Besides questions over the strength of the U.S. market receovery, of course, GM in particular remains heavy on dealers in many major metro areas, Cole said - a long-term weakness that wasn't much addressed even over the last year.

But at least the way forward is lined with indications of a once-again improving relationship between GM and its dealers, especially if the market recovery continues. "There's nothing like everyone being profitable," Cole said. -- Dale Buss, Contributing Writer 

Photos:

1. Love Chevrolet, part of the Love Automotive Group

2. GM CEO Ed Whitacre with Speaker of the House Nancy Pelosi

3. Chevrolet Equinox 

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.