GM in Bankruptcy May Speed Dealer Cuts to Match Chrysler’s Pace

GM in Bankruptcy May Speed Dealer Cuts to Match Chrysler’s Pace


May 16 (Bloomberg) -- General Motors Corp.’s plan to slash its dealer network by the end of 2010 may accelerate, matching the pace set by Chrysler LLC, in a bankruptcy the biggest U.S. automaker says is probable.

GM began telling 1,100 U.S. dealers yesterday their franchise agreements wouldn’t be renewed, meaning they would stop selling cars in about a year. A day earlier, Chrysler informed 789 U.S. dealers they’d stop selling cars by June 9.

A Chapter 11 filing would help GM shed franchise accords that would otherwise be binding. Using the courts to hasten dealer consolidation would help meet the goal of a “speedy” bankruptcy as outlined by Chief Executive Officer Fritz Henderson in a May 14 Bloomberg Television interview.

“If GM files bankruptcy, the landscape will change to reflect what Chrysler is doing with its dealer body,” said Billy Donley, a franchise and distribution attorney for Baker & Hostetler LLP in Houston.

The shutdowns are GM’s first step to pare domestic dealers to a range of 3,600 to 4,000 from 5,969 by the end of 2010. Having fewer retailers may allow the survivors to sell more cars at higher prices, boosting profit.

“It’s a cruel day, but it’s one of the casualties of the situation,” said Mike Robinet, a CSM Worldwide Inc. analyst in Northville, Michigan. “Dealer consolidation is a fairly substantial reason that Chrysler had to go into bankruptcy and a very good reason why GM will need to go in as well.”

GM’s Letter

GM told dealers in a letter the locations targeted for closing were measured by benchmarks including sales volume, customer feedback, capitalization, profitability and pairings with competing brands.

The notices went to “1,100 underperforming and very small sales-volume U.S. dealers,” GM said in a statement.

“It’s not something we do without a lot of consideration,” Mark LaNeve, GM’s North American sales chief, said on a conference call. “The dealers receiving these letters, unless they haven’t been paying attention at all, it should be no surprise at all to them.”

LaNeve said GM would follow the same reduction plan whether the automaker restructures in or out of court. An “orderly” wind-down would help preserve the value of dealers’ inventory, he said.

Chrysler, racing to complete an alliance with Fiat SpA and form a new company that would exit bankruptcy in as little as two months, gave its dealers less than four weeks to wrap up operations and sell off their cars and spare parts.

Susan Garontakos, a GM spokeswoman, said in an interview that she couldn’t speculate on how a bankruptcy proceeding might alter the company’s timetable.

‘On the Table’

“What’s currently on the table would change if they go into bankruptcy,” said Donley, the Baker & Hostetler attorney. “They may not let dealer agreements expire, they may just leave them in court.”

The dealers losing their franchise accords included R.L. Reising Sales Inc. in the Chicago suburb of Beecher, Illinois, which learned by letter that it will have to stop selling Chevrolets.

“It’s like someone rips your guts out,” said Joseph Reising, 49, the dealership’s vice president. Founded by his grandfather, the retailer has sold GM vehicles since 1929 and employs 15 full-time workers. “It leaves a big hole.”

GM Brands

Yesterday’s moves are in addition to about 470 dealers being shed as GM disposes of its Hummer, Saturn and Saab brands and drops Pontiac. GM has said it expects some dealers to leave voluntarily. GM plans to focus on its remaining Chevrolet, Cadillac, Buick and GMC brand dealerships in the future.

GM fell 6 cents, or 5.2 percent, to $1.09 yesterday in New York Stock Exchange composite trading. The shares have tumbled 95 percent in the past year.

In contrast to Chrysler, which waited until it filed bankruptcy to cancel dealerships, GM is moving to reduce its retail network now, saying it still hopes to avoid restructuring in court.

Still, Henderson in the May 14 interview said that bankruptcy is “probable” as GM works to shave operating costs and shrink debt and union-retiree obligations by $44 billion.

LaNeve said GM’s dealer consolidation won’t affect whether the automaker files for court protection, adding that the company needs to reduce its retail outlets in or out of bankruptcy.

GM didn’t make a list of dealers public, so the names surfaced more slowly than those on Chrysler’s roster, which were disclosed in a U.S. Bankruptcy Court filing.

‘No Big Deal’

Kenneth Keeton, owner of Keeton Motor Co. in Fordyce, Arkansas, said he received a letter from GM yesterday informing him GM would let his Buick-Pontiac-GM franchise agreement lapse in 2010.

“It ain’t no big deal to me,” said Keeton, whose 42-year- old store is among four dealerships, including another GM outlet, in a town of about 5,000 people. “The last 10 years, it’s cost me more to do business with them than it’s worth.”

Keeton, who said his dealership employs about 10 people, said he plans to stay in business selling used cars and offering service and towing.

BLOOMBERG