Ending Olds: Sticker Shock for GM -- and Its Dealers

Franchise owners threaten lawsuits over the carmaker's nonnegotiable payout offer, which could ultimately top $1 billion

If Tench H. Phillips Jr. is any indicator, General Motors' efforts to phase out its 2,800 Oldsmobile dealerships will be costly and contentious. The Virginia Beach (Va.) dealer says he spent $500,000 in 1998 for a new Oldsmobile showroom, and now GM is killing off the 103-year-old car division. He wants to be paid generously for the improvements he made to support a dying line of cars. "They made me build a new showroom and told me Olds was coming back," says Phillips, whose dealership is paired with a Mercedes-Benz and a Land Rover store. "They left me holding the bag."

Phillips isn't alone. Oldsmobile dealers were told in December that the division was going away. Many of those who met with GM executives at the National Auto Dealers Assn. (NADA) convention in Las Vegas the week of Feb. 5 left the meeting saying the offer GM had made to buy out dealers' franchises wouldn't cut it. GM has offered dealers between $1,600 and $3,100 per car sold in their best sales year during the past three years. And GM will bump up the payout for "special circumstances," such as recent improvements made to showrooms.


  Some dealers are already saying they'll sue if they don't get their way. "I don't think we should accept what's been offered," says Trenton (N.J.) dealer Lew Coleman. "We have to put up a fight." If many dealers feel that way, eliminating Oldsmobile could become more troublesome than GM had initially bargained for.

Since making the announcement, GM has upped its buyout offer to dealers, albeit slightly. But lawsuits appear likely, and GM is in the precarious position of having to keep buyout costs low while making the dealers happy. More than 2,700 of the dealers also sell other GM brands. "We are being fair," says William Lovejoy, GM group vice-president for North American vehicle sales. "But we have to do the right thing for shareholders."

Doing that is already getting expensive. The auto maker took a $939 million charge in the fourth quarter of 2000 to account for dealer buyouts, incentives on Oldsmobile cars, tooling costs for products, and other costs associated with the action. The buyout package alone will cost between $500 million and $1 billion. And that's not counting legal costs, which GM executives think could come into play. "Will we get legal action? Yeah, I'm sure," Lovejoy concedes. "Some people aren't going to be satisfied."


  GM already is moving to head off litigation. First, Lovejoy warned that if dealers file a class action, the company would stop talking to all dealers about buyout offers. That pits the dealers who want to sue against those who would rather just take the settlement. And there are plenty of those as well. Jon J. Agresta, a New Jersey dealer who sells every GM brand except Saturn, says he'll accept the buyout offer for his two Olds showroom as is. Says Agresta: "This offer is probably more than the stores are worth."

There are other safeguards, as well. Even though GM will pay dealers more for special circumstances, such as newly upgraded dealerships or recently purchased franchises that dealers can no longer sell, GM's plan attempts to take negotiating out of the process. The buyout offers are made through a set formula that even accounts for rent costs, the value of showrooms, and property. That means every dealer gets paid for his or her franchise based on sales volume and value of the hard assets, says Roy Sobrero, director of dealer-network planning and investing for GM. Nothing is negotiable. And if a dealer nixes the offer, GM won't make a counteroffer and stuck having to negotiate every buyout package with each dealer.

But that's exactly where the lawsuits could start. Daniel E. Myers, a Tallahassee (Fla.) attorney who specializes in car-dealer issues, attended the NADA convention to gauge interest in litigation related to Oldsmobile. In anticipation of lawsuits, he says, he's closely watching how GM handles the phase-out. Already, Myers argues, GM's announcement to eliminate the brand has violated existing franchise agreements by cutting the value of Oldsmobile in the eyes of the public.


  "The franchise agreement requires GM to actively promote the brand," Myers argues. "The minute they gave notice in December that they were killing Oldsmobile, they rendered every Oldsmobile franchise worthless. That's not actively promoting the brand."

GM argues otherwise. With continued advertising and fat incentives given to Oldsmobile buyers, the company will support the brand for a few more years until it is discontinued, Lovejoy says. That should help.

Even so, GM has a history of strained relations with its 8,000 dealers, and things have only recently improved. Avoiding litigation will pressure GM to make the dealers happy. "This is one-third of our dealer body, and we don't want to stop talking to them," Lovejoy says. That's definitely the right attitude, but keeping the lines of communication open could get mighty expensive, which is bound to displease some GM shareholders.

By David Welch in Las Vegas

Edited by Beth Belton

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