Dealers Fighting Day Of Reckoning

By Phil LeBeau
|  Monday, Jan 11, 2010  |  Updated 11:42 AM EDT
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For auto dealers, this may go down as the worst week ever.

GM will announce plans to cut 2600 dealerships while Chrysler drops roughly 850. That's roughly 42% of the GM dealerships and 27% of the Chrysler stores going away. That doesn't mean the Dealers are automatically out of business, but their futures are cloudy at best. No wonder the National Auto Dealers Association (NADA) is pleading with Washington to stop the auto makers from cutting off so many members.

My guess is their call for help will fall on deaf ears.

For better or worse, the GM and Chrysler are moving quickly to become leaner companies with fewer dealerships. They are each trying to replicate the Toyota and Honda business model of fewer dealers that are larger, more profitable, and in theory better run.

Think of it as pruning a tree. Getting rid of the smaller, weaker branches so the remaining branches become healthier and stronger. The NADA would argue that GM and Chrysler are not pruning, but taking a hatchet to the sales tree.

The dealers have some valid arguments.

* Dropping these dealerships will spur many bankruptcies as over-leveraged dealers find they can't make debt payments.

*Residual values for the Chrysler and GM brands could take a big hit as dealers stuck with inventory are forced to liquidate their holdings at lower prices.

*And yes, the thousands of jobs are likely to be lost.

Those are legitimate concerns. That said, the dealers are making several arguments that don't hold water.

*The dealers claim it doesn't hurt GM or Chrysler having so many stores around the country. Not true. Too many dealers in too small of an area forces dealers from the same brand to undercut each other and cannibalize profits. And if you don't think that hurts the quality of sales and sales staff, think again. I have heard from many dealers who agree that GM and Chrysler are "over-dealered".

* There is also the argument that Toyota lost billions of dollars last year having fewer dealers around the country, so having fewer dealers does not guarantee success. This is one of the most absurd arguments the dealership body is putting out there. The Toyota loss is due to a whole host of factors that go way beyond sales per dealer (Japanese market tanking, business in China coming under pressure, and yes, the U.S. market plunging).

* Finally, you will also hear dealers argue that natural attrition and business forces will bring down the number of dealerships so cutting thousands in a matter of months is a bad move. If dealers were going out of business and consolidating at a faster pace, the Auto Task Force would not be pushing GM and Chrysler to make the cuts they are proposing.

Don't mistake what I'm saying as me having a lack of empathy for what the dealers are going through right now. I do feel bad for many of these business owners and employees who are genuine and hard working. And, as I have said many times, the overwhelming majority of dealers do a great job. I've heard from many dealers, and would love to hear from more about what they think of the impending cuts.

Drop me a note, tell me your thoughts here at BehindTheWheel@cnbc.com.

The day of reckoning is approaching for thousands of dealers, and the business will never be the same.

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_____________________________________

Questions?  Comments?  BehindTheWheel@cnbc.com

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