I had a question the other day: Why is closing dealerships a cost savings for Chrysler? My understanding is that dealers were independently-owned businesses that bought inventory from the manufacturer, and then sold and serviced the cars.
I came up with only two answers:
- Auto makers finance dealer inventory in some way (either as financing or putting the inventory on consignment) such that cutting back on dealers cuts back on financing needs. Yes, with fewer dealers, the others are likely to need more inventory, but basic inventory theory says the total in the system will still be less with fewer outlets. Also, they might preferentially cut weaker dealers more likely to need financing in favor of larger dealers who can self-finance
- Having too many dealers competing against each other with the same product undermines pricing in the market. Dealers cut pricing to the bone in order to get the servicing income stream after the sale. While this should not directly affect the pricing to the manufacturer, it might be argued that retail discounting is a negative for the brand over time (electronics manufacturers have debated this point for years, and there is certainly no consensus on this).
Megan McArdle provides her own answers to this question, some similar and some different:
A number of readers have asked a simple, obvious question: why do the dealers cost Chrysler so much money that they want to shut them down? I don't have a complete answer to it, but here's what I understand:
- Inventory: Chrysler often has to take back unsold inventory. A lot of dealers selling a little inventory is costly, because you have to ship a minimum number of cars to each dealer
- Financing: Chrysler helps many dealers float their purchases (though to be fair, those dealers also tap their own credit for things like advertising, expanding the company's effective spending)
- Brand costs: Shabby, run-down dealerships don't improve the image of the firm, and if they are the only game in town, drive users to other cars.
She follows with a good analysis of why independent dealers exist in the first place.
It will be interesting to see how this goes down. Frequent readers will know that I often have said that the power base of many small-medium size towns is made up of 1) the auto dealers, 2) the beverage wholesalers and 3) the owners of the local TV stations and newspapers. Auto dealers wield a lot of local political power - they are often the largest single financial supporter of local politicians and even some Congressional reps. They also wield power as typically the largest single advertiser in local media, so they get sympathetic coverage. Over the years, they have translated this into a lot of legislative help (such as limitations on Internet competition).