‘Less Is More' Says Mercedes

Anthony Fontanelle
June 21, 2007

Mercedes-Benz intends to show the whole auto industry that ‘less is more.’ The German automaker reported big profits by trimming down its dealers.

In 1992, when Chuck Ghesquiere begun building his chic, new Mercedes-Benz of Bloomfield Hills dealership on Woodward Avenue, the German luxury brand was just coming off a year when sales dropped 25 percent. "Everybody thought I was crazy," he said. But Ghesquiere knew the then-striving automaker intended to close one-fourth of its dealerships. This is in anticipation that it would benefit stores that remained open and help the company get back on its stand. Eventually, the plan worked, increasing the overall sales for Mercedes and its dealers. "It went over very well," Ghesquiere said last Monday.

By closing some of its dealerships, the German automakers gained focus on the remaining stores. It also slashed costs and gained concentration on the quality of Mercedes parts as well as the entire vehicle lineup.

To stress, automakers that aggressively restructured their dealership networks have benefited from such move. Industry analysts said it demonstrates what Detroit automakers could accomplish if they found a way to quickly shrink their glut of dealerships or consolidate brands under one roof.

Progress has been sluggish for Detroit automakers, which generally have taken the approach of huddling complementary brands, such as Buick and Pontiac with GMC, so fewer stores can sell more vehicles. In 2006, they slashed their dealers by only two percent.

Additionally, Mercedes, Mazda and other once-struggling auto manufacturers that aggressively shed stores ended up putting stronger dealerships in a better stand to vie for the ultimate post in the marketplace and sell more vehicles. "It's been a good thing," said Ralph Thayer, the owner of a variety of import-brand dealerships, including Mazda stores in Livonia and Monroe.

"At the end of the day, it's the dealers who sell the cars," said Paul Melville, a partner with Grant Thornton LLP, a global accounting, tax and business advisory firm. Melville helped several major automakers cut back their dealership networks in the last decade in Britain. He recently moved to metro Detroit to put in order what he views as an unavoidable wave of dealership consolidation.

Detroit automakers would need to cut about 6,600, or 40 percent, of their nearly 16,000 dealerships nationwide to get their average annual sales to 1,000 per store. This move is expected to restore them in the ballpark with the top Japanese automakers. "They've got to fix it," Melville said in a recent interview in his Southfield office. "If you want to be competitive, you want dealers selling more cars."

According to CNW marketing Research, a firm in Bandon, Ore., a big downsizing of dealerships could also save Detroit's automakers as much as $4 billion in unnecessary costs, or $436 per vehicle they carry to support their dealer networks. The CNW estimate covers the cost of delivering vehicles to stores and a wide range of administrative expenses that automakers incur to support their dealers. Those services include parts and service support, marketing assistance, training, auditing and other behind-the-scenes activities like routine communications about financing, new products and recalls.

If they could concentrate that service on fewer, more-profitable dealerships, the rewards could be great. In Britain, where laws governing dealer franchises are less stringent, major automakers reduced their collective number of new-car outlets by 24 percent between 1995 and 2005, data from Grant Thornton show. Sales per dealer increased 54 percent and gains at the stores increased 20 percent.

Given all the demands on Detroit automakers, it is understandable why they are very troubled. "It's crippling expensive," said Jim Sanfilippo, a Detroit-based auto industry expert.

Source:  Amazines.com