Monday, April 06, 2009

Closing GM Dealerships Will Definitely NOT Help

Every time I hear a backseat driver critic of the American car industry impart their infinite wisdom on why filing Chapter 11 would be the best option at this point for General Motors and Chrysler, one of the key factors that they cite is the ensuing restructuring would force General Motors and Chrysler to close their "excessive" number of dealerships. As if that would be an indisputably wise move. And as if General Motors and Chrysler couldn't make that decision even without the draconian move of filing Chapter 11. While I don't dispute that with or without a bankruptcy filing we'll see a large number of dealership closings, I do dispute the accepted premise that such a move would in any way move these automakers towards improved viability.

The useless comparison that's always made is that General Motors has four times (or whatever the official number is) more dealerships nationwide than Toyota or Honda. The logical conclusion of this comparison is that GM closing three-quarters of its dealerships would cut overhead costs (which it would) and create a more level playing field for automobile sales with foreign competitors (which it almost certainly would not). There is a reason why General Motors has four times the number of dealerships as Toyota and Honda, and it can be easily determined by a simple evaluation of traffic on the freeways of Southern California compared to the Main Streets of Fort Dodge, Iowa, or Portsmouth, Ohio.

It's no coincidence that urban America has freeways full of Toyota Priuses and rural America has Main Streets full of Chevy Yukons (or less controversially, Oldsmobile Aleros). General Motors, along with Ford and to a lesser extent Chrysler, has created a market niche BECAUSE OF their large number of dealerships in areas where Toyota and Honda don't play ball. Closing large swaths of those dealerships in places like the aforementioned Fort Dodge and Portsmouth is more likely to drive residents in those communities away from purchasing GM products and towards Toyotas and Hondas, not the opposite which is the accepted theory among those with a rudimentary understanding of the situation but nonetheless fancy themselves experts.

It's an imperfect comparison because of the price disparity, but it's no secret that K-Mart faces long-term viability problems itself. K-Mart, like General Motors, has created a customer base in smaller towns and cities where there is often little to no retail competition. Bloomingdales, on the other hand, is doing better with its limited locations mostly in urban centers. Would it make business sense for K-Mart to close its stores in small towns across America and operate only in cities where Bloomingdales has franchises? Would that improve K-Mart's financial viability? If you listen to those who gleefully call for the closing of hundreds (even thousands) of GM and Chrysler dealerships, it'd be a stroke of business genius.

Bottom line: American automakers' financial decline would have been much more abrupt if not for their continued successes in the very markets where modern "experts" think they should shut down dealerships. In the event of bankruptcy and hundreds of dealership closings in these markets, buyers in these markets no longer have a convenience benefit for continuing to purchase GM products and the companies will fold entirely at an even faster pace. If the family in Portsmouth, OH, has to drive to Cincinnati to buy or repair a car in the first place, they're LESS, not more, likely to buy a Chevy from a bankrupt company.