Car Dealerships to Close; Edmunds.com Explains Impact

SANTA MONICA, Calif.--Today, Chrysler has communicated to 789 of its 3188 dealerships that they will have to close by June 9. Most of the affected dealerships are located in densely populated areas where there are multiple Chrysler dealerships currently competing for the same business. It is estimated that approximately 38,000 people will lose their jobs. It is rumored that tomorrow, General Motors will announce 1,000-2,000 dealership closings.

What does this mean for the affected local communities, for car buyers and for the automakers?

Impact on Local Communities:

Local communities who are losing dealerships will clearly see a rise in unemployment. Sales tax is often cited as another area of loss, but this is actually not an overall risk.

“Dealerships may be going away, but customers are not. In other words, when a dealership closes, its customer may buy a competitive product, or buy from another Chrysler dealership. The sales tax is still being paid. The risk for communities is that the tax may shift to a different town,” explained Edmunds.com CEO Jeremy Anwyl.

Impact on Car Buyers:

The closing of dealerships will change the competitive landscape for buyers. Currently, shoppers in saturated markets can essentially instigate “bidding wars” for their business, encouraging dealerships to undercut each others’ prices in competition for each car sale. With fewer dealerships in each area, that will become much harder to do, and buyers will pay more as a result.

On the brighter side for consumers, the automakers are able to eliminate businesses with poor customer service records.

One last point for current owners of the affected brands: as always, manufacturer-backed warranties can be serviced by other dealerships that carry their brand. “We recommend no one ever buy a dealer-backed warranty because if the dealership goes under, no one is obligated to fulfill it,” reminded Edmunds.com Consumer Advice Editor Philip Reed. More consumer advice can be found in an article entitled “What if My Carmaker, Dealer or Warranty Company Goes Under?” (http://www.edmunds.com/advice/warranties/articles/145006/article.html).

Impact on Automakers:

Some people mistakenly believe that car companies will somehow save a significant amount of money by having fewer dealerships. In truth, there are only minor savings gained by cutting the regional staff and the streamlining of certain processes required to serve a smaller dealer body.

The real motivation in cutting dealerships is to improve the profitability of the remaining dealers. Stronger dealers can invest in better facilities and be generally more effective in their marketing, bolstering the automaker’s brand name in the process.

“As these dealers are more competitive against other brands, sales could increase, at least in theory,” commented Anwyl. “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. In this way, dealerships may benefit, but manufacturers suffer further sales declines.”

“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,” noted Edmunds’ AutoObserver.com Editor Michelle Krebs. “Chrysler didn’t play favorites in making the decision; a handful of the stores being closed are owned by well-connected industry ‘hot shots.’”