Thursday, August 2, 2007

Chrysler threat riles dealers

Sales jeopardize 173 dealerships
Donna Harris and Bradford Wernle
Automotive News Chrysler group dealers and their lawyers are girding for a fight over the company's threat to yank the franchises of 173 dealerships because of poor sales.

A letter this month by J.W. Dimond, Chrysler's national dealer placement manager, said dealers could lose their franchises if they do not meet their "minimum sales responsibility" within 180 days.

Most state franchise laws require automakers to give dealers 180 days to correct performance issues before franchises can be terminated.

The minimum sales responsibility is a monthly sales target that Chrysler sets for each dealership. Chrysler uses several factors, such as area population and the proximity of other dealerships, to calculate a dealership's sales goal.

Many dealers say those targets often are arbitrary and ignore local market conditions. Leo Jerome, a Chrysler-Jeep dealer in Lansing, Mich., said Chrysler doesn't fairly measure his market, which includes two General Motors assembly plants.

Most vehicle sales in the market are to GM employees, and "Chrysler doesn't take that as a factor," Jerome says.

"There is an overabundance of Chevrolet dealers for the size of the community, Jerome says. "The manufacturer has to come out of its ivory tower and pay attention to what happens in the market."

Chrysler vs. dealers
This year, the Chrysler group has threatened
  • To pull the franchises of 173 dealerships if they don't improve sales in 6 months
  • To bar about 470 dealers from factory used-car auctions if they miss sales goals

Cerberus not involved

The termination letters affect more than 4 percent of Chrysler's 3,700 U.S. dealerships. Chrysler seeks to reduce its retail network, largely by consolidating Chrysler, Jeep and Dodge franchises under the same dealership roof.

Steven Landry, Chrysler's executive vice president of NAFTA sales, global marketing, service and parts, told reporters last week: "We're not going after any dealers to get rid of them .... We'd like them to improve their performance."

Chrysler spokeswoman Lori McTavish said the company will work with the dealers to help them meet sales goals.

Chrysler officials said the threat did not originate with Cerberus Capital Management LP. The private equity company is expected to close as early as this week on its $7.4 billion deal to buy 80.1 percent of the Chrysler group from DaimlerChrysler.

No used cars

This is the second time this year that monthly sales goals have become an issue between Chrysler and its dealers.

In April, Chrysler warned about 470 dealers they would be banned from attending closed factory used-vehicle auctions, effective July 10, if they did not reach 50 percent of their sales goals.

Chrysler says the two lists of dealers are not related.

Jim Moors, a franchise lawyer for the National Automobile Dealers Association, says "Chrysler is acting on its rights" under its franchise agreement with dealers.

"Dealers need to take this very seriously," Moors told Automotive News. "They need to address the issues Chrysler has raised with them. They may want to challenge the accuracy of the sales performance criteria."

Chuck Eddy, a Chrysler group dealer in Austintown, Ohio, and Chrysler representative to NADA, said underperforming dealers shouldn't have been surprised by the letter. "The guys who aren't performing -- they had to know they were going to be asked to step up," Eddy said.

State dealer associations contacted by Automotive News said they have gotten few, if any, complaints from dealers about the letter. Several association executives said it was premature to expect a big response from dealers.

But a Michigan dealer who got the termination letter called Chrysler's threat "pretty ruthless and pretty underhanded." Chrysler executives "don't care about dealer profitability," said the dealer, who asked not to be identified. "They want to squeeze out as many dealers as they can."

Mike Charapp, a lawyer in suburban Washington who works with the Virginia Automobile Dealers Association, called Chrysler's sales targets "completely unrealistic."

"Its calculations don't take into account issues relating to brand preference and demographics of the market," Charapp said.

At odds
The Chrysler group is battling with some dealers over minimum sales responsibility, Chrysler's estimate of how many vehicles a dealership should sell in its market.
What Chrysler says: "Minimum sales responsibility is determined by the review of actual sales results and how that number matches the total dealer body's performance in a certain market or region. All dealers agree to meet the minimum sales responsibility of 100 percent in their market. That means they commit to perform on the same level as the average of their peers in that market."
What critics say: Dealer lawyer Eric Chase compares the Chrysler requirement with the observation by Garrison Keillor, host of "A Prairie Home Companion," that all children in Lake Wobegon are above average. "How could all 100 percent of the dealers be average?" Chase says. "It's absurd. It's ridiculous."

Blue Oval redux

Eric Chase, a dealer lawyer in Florham Park, N.J., said the form letter Chrysler sent to dealers was "a blunderbuss statement."

"This is going to be similar to the reaction you got with (Ford's) Blue Oval," Chase said. "The dealers will be very upset. It affects all of them. Who's next?"

Some Ford dealers sued to challenge Blue Oval, the dealer certification program Ford Motor Co. introduced in 2000. The dealers claimed the program created unfair systems of bonuses. Although the program continues, Ford stopped tying the bonuses to certification in 2005.

Loula Fuller, a dealer lawyer in Tallahassee, Fla., said the real issue in the Chrysler dispute appears to be the company's desire to slash its dealership network, not subpar sales at individual dealerships.

"Any time a manufacturer takes on a full-scale-war approach, there is something behind it -- and it's not poor sales," Fuller said. "It's costs."

Nelson Axelrod, a Chrysler group dealer in Wadsworth, Ohio, is among the dealers banned from Chrysler factory auctions. He hasn't gotten the termination letter.

But in response to statements by Chrysler officials that they do not plan to send letters to additional dealers, Axelrod said: "I don't believe that for one second."

"There's no question in my mind as to what the program is," Axelrod added. "This is the first stage. Whether I'm two years out or whatever, the writing is on the wall."

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