Saturday, May 16, 2009

Told You So

Chris at Scale Your Organization wraps up the GM/Chrysler dealership problem.

Here’s a quiz for you: who has more retail outlets — Starbucks or General Motors (GM)?

If you listen to all the late night comics with their shtick on Starbucks and how there’s one on every corner, you think you know the answer. Well, you’d be wrong. Starbucks has about 6,300 company-owned stores and GM has almost 7,000 dealerships. Wow…

Now this is just a little unfair, Starbucks has another couple thousand franchise locations inside places like grocery stores and theme parks. And GM owns virtually none of their stores. But the fact that the numbers are even in the same ball park is stunning to me.


I think this excess of dealers is one good reason for the problem. Too many dealers chasing too few customers. And it leads to a fetid culture of sleeze-ball sales tactics, terrible service, and lousy margins. It’s little more than vultures preying on the few customers there are.

Starbucks has nothing in their store that costs over $250, and the vast majority of sales are under $10. I don’t know for certain, but I would have to imagine that their average transaction is in the $5 range. This just begs for a lot of outlets, to make the impulse purchase easy.

GM, on the other hand, probably has an average transaction around $10,000. I don’t know many people who decide on a whim to just drop by the Cadillac store and pop for a new $60,000 Escalade. Or stop in for a quick brake job. Why on earth do they need so many stores (or brands, but that’s another story)?

All excellent points, but what makes it even more interesting is that he posted this almost two years ago, on June 18, 2007, long before General Motors and Chrysler faced bankruptcy.

Now that the automakers are slashing dealerships — and also impacting the local economy where the dealerships are located — the question arises as to what would have happened if GM and Chrysler had listened to Chris back when they were in better shape? Could they have staved off their current situation?

Probably not. State laws — not to mention the auto dealer’s lobby — jealously protect the franchise contracts for dealers, and if GM or Chrysler had decided on their own to start cutting out losing stores, they would have either faced a blizzard of lawsuits or paid through the nose to cancel the contracts. For example, when GM decided to kill off Oldsmobile in 2000, it cost them almost $2 billion to do it, and a lot of that was for paying off the dealers that had to either close or re-configure their stores. I’m sure there’s someone today at GM wondering about the cost-benefit of shuttering Olds ten years ago versus the cost of keeping it running but reducing the number of models.

Ironically, the only way for GM and Chrysler to get out of their dealership contracts is to declare bankruptcy; clearly a Hobbesian choice when they were more solvent than they are now.