May 13 (Bloomberg) -- General Motors Corp. and Chrysler LLC dealers in urban areas, where auto retailers are most numerous, probably will suffer the most when the companies reveal this week which stores will close.

Chrysler will disclose tomorrow which dealers it intends to retain, according to court documents. A day later, GM will notify 1,000 to 1,200 dealers whose franchises won’t be renewed, Susan Garontakos, a spokeswoman, said yesterday.

“They are going to be hit a lot harder in the urban areas,” said Paul Melville, a principal at Grant Thornton in Chicago. “That’s where you’ve got dealers almost on top of each other. Take somewhere like Detroit: If there’s 10 dealers in a 10 mile radius and you take five of them out, the customer is still going to drive for the brand he wants.”

GM, facing a U.S.-imposed June 1 bankruptcy deadline, and Chrysler, which filed for bankruptcy protection on April 30, want fewer dealers so those remaining will be more profitable.

GM, based in Detroit, will deliver letters May 15 to dealers whose stores fail to meet criteria such as sufficient working capital, sales or customer-satisfaction levels, explaining that the automaker will not renew their franchise agreements when they expire this year or in 2010, Garontakos said.

Steeper Cuts

The largest U.S. automaker said last month it plans to shrink its dealer network to about 3,600 from the 6,200 outlets it operated at the end of last year as part of the restructuring plan it presented to the Obama administration.

GM had a plan last year to trim its dealer body by 1,800, and Auburn Hills, Michigan-based Chrysler had planned to cut dealerships in metro areas by as much as 50 percent. The U.S. government, which provided emergency financing to both automakers, found those earlier targets insufficient. Now GM plans to cut its dealer body by 2,600 by the end of 2010. And Fiat SpA, not Chrysler, will decide which dealers will remain with the automaker after bankruptcy.

Chrysler said in court that it wouldn’t make incentive payments to dealers it wouldn’t keep, which lowered its budget for such payments by 25 percent. Chrysler has almost 3,200 retail outlets, so a cut of one quarter would shed about 800 stores.

‘Sleepless Nights’

Unwanted dealers won’t necessarily all go out of business immediately. Some may be able to get by with service operations, or by selling used cars or other brands’ models.

Many say they are anxious because they’ve received little information about how decisions will be communicated or whether their businesses are safe.

“It looks like another three sleepless nights for some dealers,” Russ Shelton, president of Shelton Pontiac Buick GMC Inc. in Rochester Hills, Michigan, said yesterday. He noted that many dealerships are long-held family businesses. “The toughest thing for these dealers is waiting for an answer.”

More than 100 dealers are asking members of Congress today to urge President Barack Obama’s automotive task force to slow down the automakers’ dealership-closing plans.

“The task force, in conjunction with Detroit’s finest, is making a big mistake,” said Alan Starling, a Chevrolet and Saturn dealer who went to Washington from St. Cloud, Florida. He said his family has been selling GM vehicles for 50 years and he now has 135 employees whose jobs are at stake. “The president may be getting some bad advice.”

Leaders of the National Automobile Dealers Association will meet tomorrow with members of the task force.

Rural Dealers Safer

David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan, said many of the dealers being tagged for closure likely have at least an inkling that their franchises will be canceled.

“The rural dealers where the domestic brands are very strong are not likely to be hit as hard as the urban dealers,” Cole said. “One of the objectives is to give dealers larger territories. If you go out into the middle of Iowa and have one dealer, that dealer is probably safe.”

GM said in the Feb. 17 plan submitted to the government that “most of this reduction will take place in metro and suburban markets where dealership overcapacity is most prevalent.”

Carrie McElwee, a Chrysler spokeswoman, said it is too early in the process to discuss specifics.

Earl Hesterberg, chief executive officer of Group 1 Automotive Inc., said “metro markets can be overdealered, so they could lose some stores.” Group 1 has eight Chrysler dealerships, all except one in urban markets.

Eyeing Profitability

“Real small towns could lose dealerships as well,” he said, “even if it’s the only one of that brand.” Hesterberg said automakers mainly will be looking to cut financially weak dealers who may have difficulty qualifying for wholesale loans to pay for their vehicle inventories.

GM may face some difficult decisions between new stores whose financial performance may be hurt by debt and run-down outlets that might be able to better withstand a recession because of lower overhead costs, Melville said.

“It could be the nice shiny dealership is the one they want to keep, from an image point of view,” Melville said. “I don’t know how they’re going to do it.”

Alan Helfman, who runs River Oaks Chrysler Jeep near Houston, said dealers just won’t know until they get the letters.

“Whatever happens, so be it,” Helfman said. “I guess we could sell the property and cut coupons.”

-- With assistance from Doron Levin and Mike Ramsey in Southfield, Michigan, and Alison Fitzgerald in Washington. Editors: Jamie Butters, John Lear.

To contact the reporter on this story: Katie Merx in Southfield, Michigan at kmerx@bloomberg.net

Last Updated: May 13, 2009 18:52 EDT