Are There Too Many Dealerships?

I’ve been saying since the 1980s that there are too many dealerships. If you’ve been around that long, you probably have too. The law of supply and demand has always worked to our disfavor when it has come to making the kind of money we should make based on the amount of money and risk we have in play.

I believe the over-dealerization (A word I made up, go with it) started in the 1970s as the Japanese imports started to come onto the scene. Those franchises followed the footprint of the domestics with a strategy of, well there are three Chevy or Ford stores in the market, so we need three Toyota, Honda, Datsun, etc.

As more and more importers discovered our thirst for inexpensive, gas efficient, and higher quality vehicles, the number of new car dealerships mushroomed. Even to this day, dealers are willing to stand in line and spend big bucks for a chance at an open point that might just turn out to be the next great Honda franchise.

Those domestic franchises had been set in place many years before when the road systems made traveling from one store to the next, a bit time consuming and often not worth the ride.

Today in some markets you can go to 5 Chevrolet dealerships within 5-minute intervals. Or, can now you can make that same journey in 2 seconds with the click of a mouse.

Saturn had the right idea. Give a dealer multiple points in a specific market and let the dealer decide the if, where and when. Setting up a non-negotiating selling process and selling everything for full window sticker was the rule of the day. In the end, they just didn’t have the product to be competitive.

The last few months have been the equivalent of having fewer dealerships because of less product availability.

Individual dealers and dealer groups are reporting record profits nationwide. Do you think it’s because dealers have all of sudden gotten that much smarter?

That’s not to say that the smartest of the smart haven’t done a lot to maximize their profit potential, but there is a tendency to ignore the reality of the situation and to think, “hot dang, we got this thing figured out.”

The only thing that’s been figured out is the law of supply and demand which works every time. When you have a low supply of vehicles and an ample number of buyers, your gross and net profit goes up. The reverse is also true.

This honeymoon won’t last forever. Fewer dealers will. That’s all I’m gonna say,