Why closing dealerships will help General Motors

Ron Loveys

TADA PRESIDENT

I've received many emails in recent weeks about the closing of General Motors dealerships across Canada.

In particular, readers want to know the rationale behind this move. Many question the wisdom in eliminating points of presence in the marketplace.

While I am not a GM dealer, and I have no first-hand knowledge of the decision-making process inside GM, I will attempt to answer the question as best I can.

The closing of 240 GM dealerships in Canada is part of a restructuring effort to make the automaker more competitive. The company has concluded that it has too many dealerships and vehicle lines, given its current market share (17 per cent in Canada).

GM has actually been working on this restructuring plan for years, but the global economic crisis has accelerated the process.

The U.S. and Canadian governments also played a part in GM's decision. Both directed the automaker to make drastic cuts, in order to qualify for federal financial assistance.

According to automotive analyst Dennis DesRosiers, the rationale for reducing the number of franchises from GM's perspective is this: With fewer dealers fighting each other for the same customers, GM will be able to generate higher profits for the remaining dealerships and for GM.

DesRosiers believes that a stronger dealer body would be a positive long-term development for GM.

But wouldn't keeping more dealerships open be good for business, meaning more dealerships would translate into more vehicles sold?

Not necessarily. When there are too many dealerships selling the same brands, then car-buying decisions come down to price. Dealerships under the same nameplate start competing with one another in a downward spiral of pricing, and neither the dealerships nor the manufacturer can earn a reasonable profit.

In this scenario, customers get great deals on vehicles, but dealerships and manufacturers earn thin profit margins on their products and services.

When manufacturers make profits, shareholders and stakeholders get a better return on their investments and money is re-invested in the company to design and produce better vehicles.

Car dealerships are not like Tim Hortons and McDonald's franchises, where opening an outlet on every corner leads to more sales and market share. Cars are not commodities – but in some cases, they have become so in consumers' eyes.

Another argument says that it costs manufacturers nothing to keep dealerships open, since dealerships operate as independent businesses and they pay for vehicles, parts, buildings and labour.

That's not entirely true. Dealerships do operate as independent businesses, but manufacturers provide marketing dollars and materials, financial subsidies and new technologies to dealers.

In my opinion, and without prejudice, GM had little choice but to close some dealerships. If the company didn't take this bold step, it might have meant the end of GM.

That would have been a disaster for the company, not to mention the loss of tens of thousands of jobs and tax dollars.

Sometimes a company finds itself in a situation that it never predicted, and it must choose the lesser of two unpleasant options.

What criteria did GM use to decide which dealerships got to keep their franchises and which didn't? That's a matter of some debate; only GM can answer that.

About 10 years ago, Ford Canada decided to reduce its dealer count within Toronto and other urban centres. That decision, while controversial, has helped Ford to become a stronger company.

It should be noted that not all GM dealerships that are losing their franchise agreements will be closing. Many will continue to provide new vehicle leasing, used vehicle sales and service. Some may even find a new automaker to represent.

With its decision to close dealerships, I am convinced that GM will be a stronger and more viable automaker in the years ahead, and my sympathies go out to all the employees who will be affected by the closings.

This was a tough decision to make, but it was the right one.

This column represents the views of TADA. Email: president@tada.ca or visit www.tada.ca.

Ron Loveys, president of the Toronto Automobile Dealers Association, is a GTA Ford-Lincoln dealer.

More videos from Wheels.ca and our partners