DETROIT (May 14, 2009) — General Motors Corp., which is preparing for a 40 percent cut in its dealer network by the end of 2010, this week will send warning letters to nearly 1,000 dealers.
Sources familiar with GM's plan told Automotive News that the letters were to be sent today to about 1,000 “underperforming” dealers and will arrive at their dealerships May 15. The letters will warn dealers that their franchise agreements will not be renewed when they expire in October 2010, the sources said.
The letters will outline the dealership's deficiencies and detail how the dealership failed to meet the requirements of GM's sales and service agreements, said one of the sources familiar with the contents.
Chrysler L.L.C., which filed for bankruptcy on April 30, also will tell up to 1,000 of its 3,189 U.S. dealers it is terminating their franchise agreements, according to the sources who asked not to be identified because the controversial closure plans have not yet been announced.
The moves to shut down auto dealerships underscores how the economic pain caused by the downward spiral of both auto makers—now operating under U.S. government oversight—is spreading beyond their home base in Detroit.
GM has said it plans to cut about 2,600 dealerships by the end of 2010. The move is part of a massive restructuring effort launched after the Barack Obama administration gave GM until June 1 to demonstrate its future viability or seek a bankruptcy filing.
At the end of 2008, GM had 6,246 U.S. dealerships. The car maker said it would target 1,000 to 1,200 “underperforming” dealerships initially. Besides the 1,000 underperformers that GM will cut, another 500 dealerships will be cut loose when GM sells the Hummer, Saab and Saturn brands. The company also has 35 standalone Pontiac dealerships that will go away when it phases out the Pontiac brand by year-end 2010.
GM expects to lose about 500 more dealerships through natural attrition this year.
The auto maker has said that through April there are 275 dealerships that are “off the books now.” Those dealerships closed as a combination of voluntarily termination and consolidations—GM does not separate them.
The remaining 500 or 600 dealerships of the 2,600 GM plans to cut will be closed through consolidations and through buy-sell negotiations.
GM is using the following criteria to determine which dealerships will not be renewed: customer satisfaction scores, profitability, sales effectiveness and working capital.
GM spokeswoman Susan Garontakos said May 13: “Most dealers know who they are if they're underperforming in CSI (customer satisfaction index), profitability, capitalization and sales effectiveness. There are scores they need to meet or exceed to be retained.”
She said the company would not comment on the timing of any such communication with dealers.
Chrysler spokeswoman Kathy Graham said the auto maker had not announced its dealership closure plans.
“We have not announced anything at this point,” she said. “We are not done with our process at this point.”
Chrysler Chief Executive Bob Nardelli said in a memo to staff on May 12—a copy of which was obtained by Reuters—that the auto maker would determine how to organize its dealer networks during the rest of the week.
Reuters contributed to this report, which was published in Automotive News, a sister publication of Tire Business.