Dealership Downsizing: What You Need to Know

Driving an American car may not be as smooth of a ride as it used to be.

Early Friday, General Motors (GM) told 1,100 of its dealers that their franchise agreements will not be renewed just one day after Chrysler announced a similar fate for 789 of its own dealers. And more dealer cuts are expected as Chrysler seeks to restructure under Chapter 11 bankruptcy protection and GM hurtles toward a June 1 deadline to avoid the same situation. In fact, GM has already announced plans to let go of 2,600 dealers by 2010 -- a move that would cut its dealership base in half.

For owners of GM and Chrysler vehicles, these cuts could have a big impact on how they maintain and service a car. Many owners will have to drive further to get their cars serviced or wait longer for replacement parts. And while those still willing to purchase a Chrysler- or GM-made car or truck may be able to negotiate better deals in the next few weeks, that leverage will soon disappear as the marketplace becomes less competitive.

Here s a rundown of how dealer downsizings will affect Chrysler and GM car owners -- and prospective buyers.

1. Longer drives and wait times for servicing and repairs

Chrysler and GM car owners have been spoiled when it comes to servicing their cars. The auto makers had 3,200 and 6,200 dealerships across the country, respectively, compared with just 1,445 for Japanese car maker Toyota. Certainly, many people choose domestic vehicles because of the number of dealers out there and the convenience factor, says Jack Nerad, editorial director of Kelley Blue Book. There s a dealer right in your town and neighborhood.

Now that Chrysler is getting rid of a quarter of its dealerships and GM is cutting about one-sixth of its own (at least for the time being), car owners will have to drive further and perhaps wait longer to get servicing or repairs.

Even those who take their vehicles to independent repair shops may feel the pinch, Nerad says. Since these shops get spare parts from various dealers, they may have to travel further to get parts or wait longer to get them delivered.

2. Don't worry about the warranty

When it comes to your warranty, you ve got nothing to worry about. President Obama s promise to back GM and Chrysler warranties if any of the companies goes under is still valid. The government will create a new Treasury Department program that will step in to cover warranties if the auto makers cannot cover these costs themselves.

3. Deals may be easier to get but don t expect fire sales

With a June 9 deadline looming, Chrysler, Jeep and Dodge dealership owners like Rick Shaub, owner of Montrose Motors in Germantown, Md., are facing a difficult predicament: Pay back their floor plan loans the money used to pay the manufacturer for the cars on the dealership lot or sell all inventory within three weeks.

It s a no-win situation for the dealer, but customers willing to purchase a new vehicle now may be able to negotiate better deals, says George Belch, a marketing professor at San Diego State University. There should be some short-term bargains possible, he notes.

Just don t expect to snag a $40,000 car for $10,000, says Shaub. Even though he owes his bank $2 million and has little hope of selling all of his inventory by June 9, he says the most he d knock off the price of a new vehicle is probably $1,000. It s not going to be a fire sale, he says. After June 9, he says all of his unsold cars will likely be auctioned off, but these auctions will be open to other dealers, not the public.

4. Longer term: less negotiating leverage for car buyers

One of the reasons that Toyota and Honda dealerships are more profitable is that there s fewer of them and that s certainly a model that GM and Chrysler are hoping to emulate. It s good for them as business people, Nerad says. I don t know if it s necessarily good for the consumer.

With fewer dealerships around, it will be harder and in some cases next to impossible for consumers to shop around for lower prices in their surrounding area. In the old days consumers had the opportunity to play the dealerships off one another, Belch says. But now if they want to buy a certain GM or Chrysler vehicle, their ability to do that will be reduced somewhat.

5. Community impact

Though some of the 789 Chrysler dealerships will remain open, selling used cars or other franchises, communities across the country will certainly feel the impact of the ones that close for good. There s a reason why suburban towns go out of their way to try to get an auto mall to locate within their city limits, Nerad says. As cities will lose tax revenue and the ranks of the unemployed grow by thousands, the ripple effects will be felt throughout the country.

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