How does GM rid itself of 1000’s of dealers?

April 29, 2009

Yesterday, GM conducted a broadcast for all of its dealers explaining their strategy to reduce dealer count by 40%. The conference answered many questions but left many others unanswered. During the week of May 11, GM will send letters to 1000’s of dealers informing them that their dealership no longer meets the marketing strategy for GM’s restructured plan. These dealers will be offered an opportunity to return their cars, parts and special tools to General Motors for credit payment. I’ve heard conflicting reports as to whether there’ll be an additional payment for relinquishing the franchise, calculated on a dollar payment per retail vehicle sold over a specified period of time. Presumably dealers will have to make a choice as to whether to throw in the towel and accept GM’s terms or fight it out in court relying on state automobile franchise laws.

How does GM intend to win in the face of state laws that have stood up on behalf of dealers in the past? First, dealers that hold franchises that are being discontinued, such as Saturn, Saab, Hummer and Pontiac are particularly vulnerable. Arguably, the manufacturer has the right to terminate dealers based on the closure of their brand. Reports estimate that this may account for approximately 500 dealers. For the remaining dealers, GM’s best strategy may be a war of attrition.

GM dealers present franchise agreements will expire in 2010. While GM may not be able to legally refuse renewal, they probably can impose new and onerous requirements. These could include facility relocations and/or upgrades, higher capital standards, higher customer satisfaction and sales effectiveness requirements. These new requirements in 2010 may set the bar too high for many existing dealers to meet. Therefore, those dealers unable to meet the new requirements will have to throw in the towel or be subjected to GM’s lawful termination.

Compounding the problem for dealers who receive the termination letter will be a loss of confidence on the part of their employees, vendors and market place. Undoubtedly dealers that dodge the termination letter bullet will use it as a competitive weapon against their wounded cross-town rival. In other words, the letter itself will cast many already weak dealers into a death spiral.

I suspect that GM will accomplish most of its dealer reduction goals through the above stated means by some point in 2010. Unlike concessions by bond holders and unions, reduction in dealer count is probably not an immediate priority to avoid bankruptcy. Time is on the side of the General.