Ford sales drop puts pressure on dealer network

DETROIT, Sept 21, 2006; Reuters reported that Ford Motor Co.'s factory closings and workforce reductions have highlighted another costly legacy from its boom years -- too many dealerships.

As it grapples with a decade of market share losses, Ford expects to cut the number of U.S. dealerships representing its brands by 600 over the next three years from a current count near 4,300, according to a person familiar with the plans.

But some analysts and dealers question whether Ford is doing enough to cut costs in its distribution system and wonder how many Ford dealers will be able to survive.

Dealers make most of their profit from higher-margin used car and parts sales, but they rely on new car sales to drive traffic to their other services, industry executives say.

"Dealers are going under," said Jim Ziegler, a Georgia-based consultant for dealers. "You are going to see a lot of bankruptcies in the next couple of years."

Even after its planned reduction, Ford will still have more than three times the number of dealerships as Toyota Motor Corp. (7203.T: Quote, NEWS, Research), which is poised to overtake it as the No. 2 U.S. automaker by sales.

The question has longer term implications for Ford since automakers typically rely on regional dealer groups to fund a large share of advertising costs each year.

Ford is prepared to offer some financial aid to unprofitable dealers, according to the person familiar with the plans. Like other automakers, Ford's dealerships are owned by families and listed dealer groups, meaning each Ford-assisted closure will involve a separate negotiation. The only exception for Ford is a single company-owned showroom in New York City.

Given its market share slide, Ford can only support about 2,500 dealers now, Ziegler said.

By contrast, Toyota currently has only about 1,200 U.S. dealers with another 200 for its luxury Lexus brand. Toyota sales are up 11 percent so far this year, while Ford's sales have dropped almost 10 percent.

"It's the strength of our dealer network, which is proving increasingly central to our growth," Toyota vice president Jim Lentz said earlier this month.

FALLING MARKET SHARE

A swollen retail network is just one of the Ford's problems. The company unveiled a turnaround plan last week that aims to cut $5 billion, close 16 plants and cut nearly 45,000 jobs.

Ford's U.S. market share has fallen from almost 26 percent in 1995 to about 17 percent, and the company projects it could drop to 14 percent.

Ford North American sales chief, Cisco Codina, told Reuters last week that Ford was working to come to grips with the problem of too many dealers, especially in and around East Coast and California cities, which he termed "problem areas."

Jim Latimer, general manager of Big Apple Ford in New York City, said there are about a dozen Ford dealers in Queens and on Long Island that compete with his store.

"If you wiped the slate clean and said instead of ten dealers we only need five, that would be ideal," said Latimer, who said his dealership was "marginally profitable".

Glenn Mercer, an independent auto analyst, said Ford's recent restructuring plan had failed to address the costs of getting cars to consumers, including advertising that can add $400 to $500 per vehicle on average.

"The tendency to ignore the distribution system is disconcerting," he said. "The whole downstream side is just left open." (Additional reporting for Reuters by Nick Zieminski in New York and Kevin Krolicki in Detroit)