When Chuck Ghesquiere started building his stylish, new Mercedes-Benz of Bloomfield Hills dealership on Woodward Avenue in 1992, the luxury brand was just coming off a year when sales fell 25%.
"Everybody thought I was crazy," he said.
But he knew the then-struggling German automaker planned to close one-fourth of its dealerships, with hopes that it would benefit stores that remained open and help the company get back on its feet. In the end, the plan worked, boosting overall sales for Mercedes-Benz and its dealers.
"It went over very well," Ghesquiere said Monday.
Around the world, automakers that aggressively restructured their dealership networks have benefited. Industry analysts say it demonstrates what Detroit's automakers could accomplish if they found a way to quickly shrink their glut of dealerships or consolidate brands under one roof.
Progress has been slow for Detroit automakers, which generally have taken the approach of clustering complementary brands, such as Buick and Pontiac with GMC, so fewer stores can sell more vehicles. Last year, they trimmed their dealers by only 2%.
Mercedes, Mazda and other once-struggling automakers that aggressively shed stores ended up putting stronger dealerships in a better position to compete in the marketplace and ultimately sell more cars and trucks.
"It's been a good thing," said Ralph Thayer, who owns a variety of import-brand dealerships, including Mazda stores in Livonia and Monroe.
These dealership network turnarounds have added to the evidence that less is often more when it comes to the number of dealerships.
"At the end of the day, it's the dealers who sell the cars," said Paul Melville, a partner with Grant Thornton LLP, a global accounting, tax and business advisory firm. He helped several major automakers downsize their dealership networks in the last decade in Britain and recently moved to metro Detroit to prepare for what he views as an inevitable wave of dealership consolidation.
Japanese sell more per store
Detroit's automakers would need to trim about 6,600, or 40%, of their nearly 16,000 dealerships nationwide to get their average yearly sales to 1,000 per store, which would put them in the ballpark with the top Japanese automakers.
That's because dealerships selling Toyota, Honda and Nissan brands average 1,273 sales per store, while Detroit automakers average fewer than half that, or 580 per outlet. That translates into less money for marketing, stores, employees and customer amenities, such as free loaner cars, all of which can help buoy sales.
"They've got to fix it," Melville said in a recent interview in his Southfield office. "If you want to be competitive, you want dealers selling more cars."
A big downsizing of dealerships could also save Detroit's automakers as much as $4 billion in unnecessary costs, or $436 per vehicle they carry to support their dealer networks, according to CNW Marketing Research in Bandon, Ore.
The CNW estimate includes the cost of delivering vehicles to stores as well as a variety of administrative expenses that automakers incur to support their dealers. Those services include marketing assistance, parts and service support, training, auditing and other behind-the-scenes activities, such as routine communications about financing, new products and recalls.
If they could focus that service on fewer, more-profitable dealerships, the rewards could be great.
In Britain, where laws governing dealer franchises are less stringent, major automakers reduced their collective number of new-car outlets by 24% between 1995 and 2005, data from Grant Thornton show. Sales per dealer went up 54%. Profits at the stores increased 20%, allowing the dealerships to reinvest in the business to attract even more customers.
Consider also the Mercedes comeback story.
While reducing dealerships was just one component of the Mercedes turnaround plan during the 1990s, its importance should not be overlooked, said Mike Jackson, who was chief executive of Mercedes-Benz's U.S. sales arm from 1997 to 1999 and served in other executive roles there during that decade.
In 1991, during the Gulf War, Mercedes sales crashed 25% after the U.S. government imposed a 10% tax on luxury vehicles. (It was phased out later in the decade.) The German automaker's 408 dealerships in the United States had to divvy up fewer than 59,000 sales that year, leaving stores with an average of 144 sales apiece and a lot of financial distress.
So until it could increase sales, Mercedes cut stores to restore dealer profits and make its outlets strong enough to compete again. Every year for the next nine years, Mercedes shed dealerships, often buying back franchises from its dealers.
Cutting dealerships, Jackson said, encouraged the stores that remained open to invest more money into their marketing, employees and facilities -- just like Ghesquiere did -- because they were guaranteed a bigger piece of the sales pie.
"We unleashed a massive amount of investment," said Jackson, who is now CEO of AutoNation, the country's largest chain of dealerships, with 327 franchises.
And every year, the number of sales per Mercedes dealership grew, along with the company's overall sales.
By 2000, Mercedes had cut a quarter of the stores it had when the troubles started, to 310 in all. The number of sales per store more than quadrupled, to 670, a healthy number for a luxury brand and enough to make dealers profitable. Overall, U.S. sales more than tripled to more than 207,000.
Mazda had a similar experience when it closed stores in the 1990s.
Mazda spokesman Jeremy Barnes said Mazda's success today is primarily because of its strong product lineup. But he said Mazda vehicles have never been sold through a stronger network of stores before -- and that's giving Mazda's new vehicles a huge edge.
"It's probably never been more important than it is today, because there is so much competition," he said.
The big payoff
A significant downsizing of dealers would be undeniably more challenging for General Motors Corp., Ford Motor Co. and Chrysler than it was for Mercedes or Mazda. Neither of those two companies had the thousands of dealerships that Detroit's automakers have built up over the decades.
It's also more difficult for Detroit's automakers to execute big reductions in the United States than they did in Europe, because laws here are more protective of independent dealers.
But experts like Melville and numerous dealers interviewed for this series say that, if GM, Ford and Chrysler continue reducing at their current rates, their sales, brand image and bottom lines would continue suffering for years, if not decades. That's because dealers can survive for a long time on used-car sales and service operations even as their new-car businesses stall.
Melville agrees with Detroit's automakers who said they don't believe a one-size-fits-all approach would solve this problem. But whatever the strategies, dealers and experts said Detroit must spend more money to solve the problem faster. A few dealers who are willing to sell out complained to the Free Press that they were offered only a few hundred thousand dollars for a store, when they think it's worth millions.
Big headaches for Detroit
Given all the demands on Detroit's automakers to invest in better, more fuel-efficient products and streamline their factories and workforces, it's easy to see why this suggestion might give GM, Ford and Chrysler a raging migraine.
"It's crippling expensive," said Jim Sanfilippo, a Detroit-based auto industry expert.
Steve Schwan, who sells Buick, Pontiac, GMC and Cadillac cars and trucks outside Bismarck, N.D., says dealers have to pitch in more, too, because they stand to benefit when nearby stores close.
Ghesquiere, who also owns a Cadillac store in Rochester, says Detroit automakers and their dealers can solve this problem together quickly, if they make it a top priority and get down to business.
"There's a number that works for both of them, if they're open to talking," he said.
Jackson is one of many dealers who say Detroit's automakers haven't spent more money restructuring their retail networks because they struggle to justify the cost against the benefit, especially against all their other demands.
"They may agree with the concept," he said, "but, relative to other things they can do with their capital, they don't believe in the payoff."
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