This has been a long time coming. Both Chrysler and GM (GM) are expected to notify up to 2000 dealers combined that they are closing either today or tomorrow. The moves are expected to cost about 150,000 jobs at the dealership level. Note, these job losses DO NOT include losses associated with the dealerships such as cleaning & maintenance crews contracted to do work on the premises and other ancillary services.
Is this a good thing? As sad as it is, and a bad as the job losses will be, it is the best thing for the industry on all levels. Those dealerships left will become stronger as their market share immediately grows and increased profitability ought to follow.
Now the GM closings, as far as I know can only be done in a Chapter 11 scenario. In any other scenario, GM will most likely spend an eternity in State Courts for violation of State Franchise Laws. A Chapter 11 eliminates that scenario. Now the other option is for GM to offer franchisees a sweetner to take the deal (they just may as those being closed are most likely not profitable now). This would be a waste of time and money for GM, BUT, based on its history, just may be what happens.
Who is the main beneficiary of this? AutoNation (AN). Why?
1- They have made no secret of their desire to reduce domestic exposure, this may do it for them very easily. Now, if some of their dealerships are chosen, since AutoNation owns the building and land on almost all dealerships, transferring that property to another brand is virtually as simple as moving existing inventory to another dealer, changing signs and then moving new inventory in.
2- Most of the closing are expected to be in Metro markets. AutoNation has heavy exposure to those very markets. So, even if the scenario in #1 does not unfold, they do just fine because they receive large market share from the dealerships closing around them.
3- Totally aside from the other two scenarios, there are other dealer groups in a precarious situation that simply will not be able to withstand the loss of a franchise, even a marginally profitable one. Consider the scenario. A dealer with three dealerships Ford (F), GM (GM) and Chrysler. Depending on the mix, the GM dealership could be covering for losses at Ford and Chrysler (or Chrysler at Ford & GM). But, because of the area concentration of GM (Chrysler) dealerships, their is selected to close. Now the dealer is stuck with two money losing dealerships and that may just force the closure of the other two.
Before you dismiss this scenario, you must consider that most dealers own multiple locations and depending on the sales mix in the area, the above scenario is not only possible, but very likely in a number of locations.
The summary here is that the end number of closings from these actions will be in excess of the final, stated number form both Chrysler and GM.
When all is said and done, the clear winners will be those left standing. Their earnings power when its over will be in excess of pre-dealer decimation levels even with industry sales below 2006-2007 levels. They will receive immediate benefits from share and margin increases that will be maintained as a return to previous dealer levels is not likely for years..
Disclosure (“none” means no position):Long AN, none