As many of you may have seen this weekend, General Motors announced that they are reinstating approximately 660 of the 2000 dealers they planned on cutting as part of their government bailout.  In a good overview of the situation, an article in Saturday’s Wall Street Journal (“GM Reverses Cuts,” WSJ, 3/6/10)[sub]  these dealers are part of the approximately 1100 dealers that appealed their closing to GM when it was first announced last summer.  We think GM did an about face for a number of reasons:

• Many of these dealers were sustainable businesses that could survive long term.  They clearly got caught in a mathematical model that set an arbitrary number of dealer closings as part of GM’s bankruptcy process last summer;
• GM needs more dealers than they have currently to retain, let alone grow sales share in the U.S.  As the article points out, GM CEO Edward Whitacre Jr. has made growing sales in the U.S. a major part of his strategy and it would be very hard for GM to do that with the current reduced set of dealers.
• Many of these dealers are in areas where the competition is not as intense as in highly concentrated suburban regions and GM was basically abdicating sales needlessly.

The one danger in this announcement is that GM loses sight of the main reason they agreed to the drastic downsizing in the first place.  They need to get to a dealer ratio that allows them to compete on something other than price.  If you have multiple dealers selling the same product in a relatively small geographic area, all they do is compete with each other on price.  GM has to get away from this model, particularly for its premium brands like Cadillac.  In addition, as this article pointed out, Toyota has 1,452 dealers with average sales per dealer of 1,219.  GM currently has about 5,500 dealers with an average sales per dealer of 376. That differential puts GM and their dealers at a terrible profit disadvantage to many of their New Domestic competition.  The $64,000 question for GM management is what level of sales per dealer makes sense for GM?  With their much broader mix of rural small town and suburban/metro dealers, an arbitrary goal of matching Toyota doesn’t make a lot of sense.  (Besides, the smart aleck in me believes Toyota is doing a great job reducing their sales per dealer with their current safety nightmare.)  Given the management changes that have happened at GM under Mr. Whitacre’s leadership, we are modestly optimistic that GM will successfully figure this one out.