Pub. 58 2017-2018 Issue 1

39 FALL 2017 17 This author rejects OEM assertions to the contrary. Calculations of the “structural and administrative cost savings” of removing smaller dealerships from their networks, provided by GM and then-Chrysler to the US government during these companies’ bankruptcy filings, leave me unpersuaded. The fact that the companies included in dealership-support costs items such as transport (which are charged back to dealers anyway); the fact that they included costs that are proportionate to unit volumes, not to outlet count (such as advertising); the fact they could not agree between the two of them as to what costs to include in the calculations; and the fact that their estimates varied by a factor of almost 4x, all combine to completely undermine their assertions of high per- dealer support costs (exhibit). My guesstimate (and it is only that) is that the net cost to an OEM of keeping a rural point open is probably $25,000 annually or less – and with the OEMs’ tendency to charge dealers for more and more of the support offered, it may be much less. As more than one dealer told us: “Warranty audits have gone from being an expense for the factory, to a profit center!” OEMRepresentation of Dealer Support Costs Source: SIGTARP, Factors Affecting the Decisions of General Motors and Chrysler to Reduce Their Dealership Networks, July 2010 Fourthly, with ownership being primarily private, all these stores face – sooner or later – succession issues, which make the challenges listed so far even more pressing. As several dealers expressed to us: “My family built this store up over decades, and we’ve always invested in it, but I can’t ask myself and my heirs to bet our family’s capital again and again: the table stakes just keep growing!” The current owner may be up to all these challenges, but she has to ask herself if children are, or if they should be put in the position of having to take them on. And f inally, small rural dealers complained with unique vehemence to us about the lack of OEM understanding of and support for their special situation. True, all dealers have some sort of love/hate relationship with the factory, which is only natural given that factory’s and the dealer’s goals will never perfectly align. But the refrain of factory indifference at best—and hostility at worst—was very clear when we spoke to small rural dealerships. It is completely nonsensical, in our view, for OEMs to ever take an indifferent or hostile attitude toward small rural stores. These stores tend to have highly committed owners, with a lot of “skin in the game.” They know their local markets well. They typically have high local market shares and good customer relations. They form the one market type where relentless foreign competition is less severe. They incur low OEM support costs. 17 On the other hand, it is true, small rural dealers tend to be further out of compliance with OEM standards (for facilities and any number of other requirements): of course it must annoy an OEM to see its store wedged into the same building with an all makes and models (AMM) parts store or body shop, or to realize the dealer is making more money from his boat and ATV store than from cars and trucks. But in our view, despite these issues, on average these stores represent assets rather than liabilities for OEMs, and should be treated as such. We do not see why a more positive attitude cannot be taken (see Rural Outlook below): as one very senior executive of one very large public chain told us: “If the OEMs were smart they would keep every one of these rural stores, as they are a competitive advantage for the Detroit factories. It is in the metro areas where over-dealering is a problem, not in the countryside.” In summary, the challenges of small rural stores (above and beyond those facing all dealers everywhere), are all about dealing with heavy investment burdens in a no-growth environment, with difficult family considerations to take into account, and without much OEM support. Rural Outlook Taking all this into account, what should small rural dealers do? First of all, of course they could just throw in the towel and exit. Our interviewees were very divided on this point. Some were absolutely certain that rural stores would close at high rates over the next decade, especially during a recession, as they were “too small to survive.” Others were much more appreciative of the staying power of the small rural store: “These guys have deep local roots, they paid the land off decades ago, they know all their customers, the store employs most of their family, they are some of the few small-town business people left standing, the service business will always be there—and they have seen it all and they are tough: I don’t expect many of them to quit.” Perhaps for most the deciding factor will be the succession issue. But as a result of these divided opinions, we have no forecast for rural dealer counts in 2025: there are clear arguments for both staying and going. Secondly, given growing investment requirements, rural small dealers probably do need to build scale. And if new sales aren’t growing, then picking up more service market share is the place to focus, by pulling share from independent service outlets. That means competitive oil changes, sales of tires, extended hours and express lanes, probably satellite service (rural customers need distributed service even more than do metro-area consumers), and more. As one dealer told us, “Let’s face it, though I hate to say it: in the future my store is going to be ‘service in front, sales in back.’” And of course, there is consolidation: increasingly we see small towns where all three domestic stores are owned by the same dealer principal. Third, if the rural store cannot grow its core businesses, the only other option for boosting profits is to diversify. And in our travels we saw an almost limitless variety of diversifying  DEALERSHIP OF TOMORROW — CONTINUED ON PAGE 40  DEALERSHIP OF TOMORROW — CONTINUED FROM PAGE 37