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When Is Too Many Too Much?

June 16, 2009

In order to come out of bankruptcy, Chrysler did something that I at first thought was counterintuitive. They decided to close 25% of their dealerships. You would think, closing dealerships, especially profitable ones, would lower their overall sales. Well, at least, I would think that way and it seems some in Congress thought the same way. However, after listening to Chrysler executives and reading some pieces by financial experts, I understand what their reasoning was. 

When there are lots of dealers in close proximity to one another, those dealers have to depend on pricing to close a deal. The lower the pricing, the lower their profit. As profit levels fall, dealers don’t have the capital to invest in physical plant or employee training.

Chrysler desperately needs to change their image from a low-end manufacturer. That’s hard to do when a customer walks into a dealership that has worn carpeting, water stained ceiling tiles, and walls in need of a new paint job. Many dealers were having a hard time keeping up with general maintenance because competition caused them to sell at such low margins.

Employee training suffered, too. Many auto salesmen weren’t exposed to the same training opportunities as were salesmen at the more profitable dealerships. Mechanics weren’t going to as many schools and the tools of their trade were not being upgraded appropriately.

All of this rings true. Good presentation and good service are a lot of the battle. Chrysler was losing the battle and it was time to change their battle plan.

In the late 90s and the early years of this century, everyone and their brother bought into Chrysle’s distribution model. Starbucks were built on almost every corner in major cities. Wal-Marts were within spitting distance of super Wal-Marts. You could throw a rock from one Old Navy clothing store and easily hit another. In this lean economic time, even Starbucks, the leader in uncontrolled growth began to reevaluate their expansion policy. They not only stopped opening new stores, they began to close some of their existing locations.

Chrysler and Starbucks learned their lesson the hard way. There are manufacturers in our industry that should take note. Years ago, outdoor reps looked for three distribution channels in a market; a specialty store, a department store, and a furniture store. Times changed and department stores and furniture stores went out of the category. Reps had to scramble for more sales floors. Now it is not unusual to see several specialty stores serving the same area carrying the same line or lines. Nurseries are in the outdoor business, too. Upscale hardware stores have entered the category. Of course, we can’t forget the ubiquitous Internet.

As more and more of our competition carry a line that was once was exclusive and profitable for us, we have to become more competitive. Many of us respond to this competition by offering better service, deeper in-stock programs, and all of the other devices specialty stores have had in their arsenal for years. But, sometimes it still gets back to price. When that happens, our margins drop. At first, the manufacturer makes the same margin while the retailer gets squeezed. If margins drop low enough, retailers will probably start looking for other lines to replace these less profitable ones. Then manufacturers start feeling the squeeze.

This is not to say that competition is bad. Far from it; clean competition keeps specialty retailers on our toes. The consumer gets a better deal and we end up stronger for it. But clean competition and overexposed competition are two different things. Selling to everyone in a market area is overexposed competition, not clean competition.

There are probably many of you reading this blog and thinking, “Our manufacturers understand the pitfalls associated with too many retailers in an area.” Don’t get me wrong; many manufacturers keep tight control over distribution. However, in these tense economic times, more and more are pressing their reps to open additional stores in an area. Some manufacturers branch out and sell to “etailers.” Some believe they can create enough product or brand differentiation to sell to their products to warehouse clubs and/or big boxes.  So, don’t be surprised if the store down the street gets a line you have been carrying for years.

Yours in confused retailing, Bruce