Commentary: The Other Club Battering GM

It has twice the dealerships it needs, but their clout makes cutting them costly

Everyone knows union resistance is a major drag on General Motors Corp. (GM ) as it tries to turn itself around. But when it comes to maintaining the status quo, car dealers have at least as much power as the United Auto Workers.

True, GM franchisees last month agreed to absorb lower margins when the carmaker cut prices. That's a real concession since many of these guys are hurting. But the fact remains that GM has too many dealers, who often compete with each other and put even more pressure on prices. Though it sells nearly twice as many cars in the U.S. as Toyota Motor Corp. (TM ), GM has about five times as many dealers: 7,500 vs. 1,422. Do the math. GM theoretically could stand to lose half of its franchises.

Easier said than done, thanks to tough state laws that require GM to have a pretty good reason -- malfeasance on the part of a dealer, say -- to yank a franchise. One way around that is for GM to declare bankruptcy, which the company says it won't do. "Everyone talks about the unions and the financial difficulties facing GM and Ford," says J.D. Power & Associates (MHP ) President Stephen C. Goodall. "But both have too large a dealer body, and it's almost impossible to reduce it."

Dealers know they have power. When GM euthanized Oldsmobile in 2000, franchisees demanded big payouts, while some sued. GM wound up paying about $1 billion to bury the brand. Some Olds dealers still haven't settled.

Since axing another division is unpalatable, GM is trying a different tack: putting Pontiac, Buick, and GMC trucks under one dealer roof in every market. It's like merging three sub-brands into one. At the same time, the company is cutting redundant models -- look-alikes marketed under more than one nameplate -- and offering only unique cars and trucks for each division. Pontiac, for one, is slimming down from eight models to five.

For dealers who sell one brand, fewer models can mean lower volumes and profits. That's why GM hopes to convince the stand-alone crew to sell their stores to other dealers. By the end of 2007, sales and marketing chief Mark LaNeve says triple-play stores will drive 75% of sales from Buick, Pontiac, and GMC.

Keeping to that schedule won't be easy. To understand why, visit Wilmington, Del., where John Gambacorta sells Buicks and GMCs. Gambacorta is understandably reluctant to exit a business his family has been in since the '30s. GM hasn't made him an offer, but based on buyouts at other Buick franchises, Gambacorta stands to get a lump sum that adds up to just a few years of his pre-tax haul. No wonder he'd rather buy out the Pontiac dealer across town -- if only he could raise the money.

But if the lean times go on, Gambacorta may have to sell out. While many franchisees make enough to buy vacation homes and join country clubs, dealer margins last year slipped to 1.6%, a five-year low. Frank Ursomarso, another Wilmington dealer, says he can adequately advertise his Pontiacs only by siphoning money from his Honda, BMW, Volvo, and Jaguar dealers. And some dealers are losing top salespeople. "They put a dealer on every corner, and it's survival of the fittest," says Gambacorta. "In the heyday, everyone survived. But all that's changed."

For GM, the question is how much time and treasure it will take to get the 350 stand-alone dealers to go away. GM's franchisees still have clout thanks to those state laws, which tend to favor the dealer. Last year, AutoNation Inc. (AN ) sold a Dallas Buick franchise to a Pontiac-GMC dealer, but only after GM cut the retail chain a check for 600 grand. If GM was forced to do that every time it wanted to close a dealer, the bill would quickly amount to $200 million or more.

Franchise power manifests itself another way. When Pontiac dealers demanded a compact coupe to fill out their shrinking lineup, GM agreed to give them something called the G5. Trouble is, it's a sexed-up Chevrolet Cobalt -- precisely the kind of brand smudging GM is trying to avoid.

By David Welch

    Before it's here, it's on the Bloomberg Terminal.