First Chrysler, GM Next...

AUBURN HILLS, Mich. — Chrysler announced Thursday in a motion filed with the U.S. Bankruptcy Court that it plans to shut down 789 dealerships as part of its reorganization process.

Chrysler has notified affected dealers, and it was widely rumored Thursday that General Motors would make a similar move on Friday.

Chrysler?s reduction would represent roughly 25 percent of its dealer network and 14 percent of the automaker?s sales volume. Reportedly, the majority of these stores are in large metropolitan areas, where several Chrysler dealerships often compete head-to-head in the same city.

If the motion is approved by the court, these dealerships will stop selling Chrysler, Dodge and Jeep vehicles ?on or about? June 9, officials indicated.

?We are in the process of revitalizing Chrysler?s business to succeed as a viable enterprise under new ownership in the future,? explained Jim Press, Chrysler vice chairman and president. ?The unprecedented decline in the industry has had a significant impact on our sales and forced us to reduce production levels to better match the needs of the market.

?With the downsizing of operations after the sale and reduction of plants and production, similar reductions must be made to the size of the dealer body,? he continued. ?We appreciate the support of our dealers and regret this painful action. We wish market conditions made it possible to keep everyone.?

According to officials, Chrysler plans to honor warranty and incentives payments in the remaining time that the affected dealers stay open. The automaker also said it intends to help in the redistribution of new vehicle and parts to the remaining dealer network.

?It is with a deep sense of sadness that we must take steps to end some of our sales and service dealer agreements,? commented Steven Landry, executive vice president for North American sales and marketing, global service and parts. ?The decision, though difficult, was based on a data-driven matrix that assessed a number of key metrics.

He continued: ?The review was an objective and rigorous process that was both thoughtful and thorough. We plan to work to have an orderly transition. These are extraordinary times, and they call for an extraordinary response.

?It is important to our dealers and to our customers that these steps be completed quickly and seamlessly as we transition to a new Chrysler,? Landry added.

Industry Reaction

According to analysis from Edmunds.com, Chrysler isn?t likely to save a significant amount of money by cutting its dealer base. Typically, with a smaller dealer body, there are only ?minor savings? generated from reducing regional staff and consolidating certain processes, analysts shared.

What Edmunds.com called the ?real motivation? is the chance for the remaining stores to boost profits.

And with the majority of the cuts coming in heavily populated areas with multiple Chrysler stores, it reduces same-brand competition in some areas.

In essence, with fewer Chrysler dealers, the remaining stores can invest more in improving their facilities and marketing.

?As these dealers are more competitive against other brands, sales could increase, at least in theory,? explained Jeremy Anwyl, chief executive officer of Edmunds.com. ?However, in practice, there is risk: One path to profitability for a dealer is through higher profit margins achieved by charging higher prices.

?As prices rise, other brands become more competitive and consumers may flee,? he continued. ?In this way, dealerships may benefit, but manufacturers suffer further sales declines.?

Edmunds? AutoObserver.com editor Michelle Krebs added: ?This move allows Chrysler to eliminate dealerships that did not embrace the opportunity to extend their franchises to include Dodge and Jeep vehicles, which are also owned by the Chrysler LLC parent company.?

Moving on, the nation?s auto dealers released a statement late Thursday afternoon about the Chrysler announcement, saying it ?marks a very sad day in retail automotive history.?

?These dealers and their more than 40,000 employees have done nothing but proudly represent the Chrysler brand through good times and bad, and today find themselves left behind as the company reorganizes itself in bankruptcy court,? officials with the National Automobile Dealers Association noted.

?While NADA understands the realities of the current marketplace, we also know that dealers didn?t cause the situation that Chrysler finds itself in today,? they continued. ?Furthermore, we believe that these draconian dealer cuts are not only misguided but counterproductive.?

NADA officials went on to suggest that a reduction in dealers likely leads to less revenue for the automaker. 

?Dealers are the manufacturer?s customer; they buy the cars and parts and even the signs in front of their dealerships,? the organization continued. ?NADA fully expects Chrysler to honor all its obligations to the affected dealers who have been nothing but good partners over the years.

?NADA will continue to work aggressively on all fronts with regard to assisting these dealers during these historically challenging times,? they added.

The reduction in store count also impacts several of the nation?s large auto retailers. AutoNation, for instance, said it will close seven Chrysler stores, but that only amounts to 1 percent of its 2008 operating income.

?We believe Chrysler?s consolidation plan is a difficult but positive step forward for Chrysler and the automotive retail industry,? stated Mike Jackson, AutoNation?s chairman and CEO. ?Dealer consolidation is a necessary measure in today?s automotive industry and will strengthen America?s dealer network and improve dealer profitability over the long term.?

Meanwhile, over at Lithia Motors, executives said two Chrysler stores ? located in Omaha, Neb., and Colorado Springs, Colo. ? will be closed.

That said, Lithia indicated that it may be awarded new franchise in five markets, which would add Chrysler or Jeep brands to existing outlets.

Sid DeBoer, chairman and CEO of Lithia, commented: ?Since the inception of Chrysler?s ?Genesis? brand alignment, aimed to consolidate all three brands under one roof, we have been actively positioning ourselves for success. With today?s announcement, we are a net beneficiary as we gain more than we lose and the results are in line with our expectations. 

?We would like to express our sincere sympathy for dealers, suppliers and store personnel across the country that will be impacted by today?s announcement,? he continued. ?Dealers are critical to auto manufacturers as they distribute products and services in an efficient and profitable manner.?