Wednesday, May 27, 2009

Chrysler's Dealership Problem: The Saga Continues

Part of Chrysler's dealership problem is a large number of dealerships with an excessive inventory of unsold vehicles sitting on their lots as 90 and 120 credit contracts become due. This only creates a serious cash flow and credit problem for Chrysler and is a prime factor in Chrysler's decision to close hundreds of underproductive or credit drag dealerships.

Chrysler unfortunately has huge supplies of some vehicles sitting on dealer lots such as the Crossfire, a 300 day supply, the Sebring and Avenger, 242 day supplies, and some Jeep models such as Patriot, with a 200 day supply as of May 15, 2009 reports. This creates a serious credit drag when dealers cannot pay for this inventory in 90 or 120 days because the product remains unsold. By contrast, although all brands of automobiles are suffering some sales losses, Toyota, Hyundai, Subaru and BMW dealers are in far healthier condition with average 60 day inventories of vehicles, and more likely to be off 90 or 120 day credit contracts to their suppliers in that time span compared to some troubled Chrysler dealers that Chrysler is hoping to ax.

Chrysler does have some models in short supply such as the Challenger, and nearly sold-out models such as the Magnum, or the Wrangler or Journey. But many dealers failed to sense the high demand for these particular models and instead purchased excessive numbers of underperforming units. Further, the cost of shipping vehicles across the country might run hundreds of dollars in some cases, so the problem of excessive dealer inventories is not always that easy to solve.

Problem dealers present an interesting dilemma for a manufacturer. On one level they are an outlet for their products, however at some point they can become a credit drag as well if they have an excessive amount of product on hand, and cannot pay for upcoming due credit contracts.

Back in the 1980's when I ran a smaller TV business, there was a far larger TV and appliance business that operated across the street. My business was run on a tightly managed cash only basis, while the larger business across the street took out the equivalent of several football fields full of TVs and appliances from the manufacturer, GE, on credit, but had trouble paying for the product when credit became due, yet only continued to purchase more product on credit. Eventually GE and other creditors had to force the company into liquidation.

The problem is with so much product and inventory on hand, underperforming dealers tend to sell the stock to pay rent, lights, salaries or other expenses, and with the stock sold, the manufacturer has no remaining equity left. Chrysler has little choice but to eliminate problem dealers like this.

One popular misstatement that the government continues to make is the assertion that Chrysler has too many trucks. However Chrysler's supply of trucks is in the 109 day range, which is not quite as bad as their average 132 day inventory of cars. Trucks will often be purchased by business for business purposes and often have a better built-in market than some car models. However, Chrysler products simply haven't developed the keener marketing skills of some brands such as Toyota, Hyundai or Subaru, which manage to more closely control supply and dealer inventory. Chrysler has allowed management issues to get out of hand, where excessive credit to dealers a well as huge supplies of poorly selling models has brought the company nearly to the point of extinction.


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