A number of readers have asked a simple, obvious question:  why do the dealers cost Chrysler so much money that they want to shut them down?  I don't have a complete answer to it, but here's what I understand:

  • Inventory:  Chrysler often has to take back unsold inventory.  A lot of dealers selling a little inventory is costly, because you have to ship a minimum number of cars to each dealer
  • Financing:  Chrysler helps many dealers float their purchases (though to be fair, those dealers also tap their own credit for things like advertising, expanding the company's effective spending)
  • Brand costs:  Shabby, run-down dealerships don't improve the image of the firm, and if they are the only game in town, drive users to other cars.

There's a related question, though:  what good are dealers?  They're protected by franchise law, to be sure, but they do fill a big market niche.  Why are there dealer networks in the first place?

  • The franchise model provides high levels of customer service.  McDonalds doesn't franchise because it can't get access to capital; it franchises because the owner of a franchise will always care more than a hired manager about things like clean bathrooms and health regulations.  That helps keep the brand reputation high.
  • Dealers tap their personal credit for expenses.  Chrysler finances a lot, obviously, but this broadens their base.
  • Dealers tap into the local community.  A car is a big purchase.  People are more likely to buy a product from Chrysler because they know the guy who owns the Chrysler dealer than because they know the guy who manages the local corporate-owned store.
  • Dealers provide service and move used cars.  In the internet age, new cars are practically a commodity purchase; most consumers know about what htey should pay.  Used cars, on the other hand, are idiosyncratic.  But Chrysler doesn't benefit if a consumer buys a used Chrysler lemon--that breeds consumers who won't touch a new Chrysler, and drives down the price of new Chryslers by hurting their retail value.  It's useful to have dealers who have their own incentives to keep people happy with the brand.
  • Auto production has a very high minimum efficient scale.  The plants apparently don't break even until they're producing at 80-90%.  This means that the Dell model doesn't work--plants can't just scale back production until they have cars to build.  Nor does the Proctor and Gamble model work--Chrysler has to make money on every unit, but the purchase is too big for customers to be easily willing to take a less-than-perfect match. That, in turn, means that the dealers are really useful, because they do the difficult job of matching consumers to cars by adjusting price, options, and financing.

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