Question
The traditional sales channels for car manufacturers has been to sell to customers through franchised dealerships. The automotive industry is at an inflection point with
The traditional sales channels for car manufacturers has been to sell to customers through franchised dealerships. The automotive industry is at an inflection point with the move from ICE vehicles to EV, the change in customer preference in buying online vs. through a dealership and with the introduction of alternative revenue channels such as connected services. As a result, automakers are evaluating their strategies and are reducing the number of dealerships. In an interview with WSJ, Global Buick chief Duncan Aldred said that all 2,000 Buick franchise dealers in the US will be given the opportunity to take a buyout. Taking the buyout means that the dealer will no longer be affiliated with the Buick brand and can no longer sell Buick vehicles, although they can still sell other General Motors vehicles. GM offered similar buyouts to its franchised Cadillac dealers in 2020 which brought its U.S. store count from 900 down to about 565. Buyout offers for Cadillac dealers ranged from about $300,000 to more than $1 million. GM has declined to disclose how much Buick dealers would be offered. GM booked a total of $274 million in costs during 2020 and 2021 related to the effort to buy out Cadillac dealers who were not prepared to invest $200,000 to $500,000 per store in the equipment and training to support the brand's shift to an all-electric vehicle lineup, planned by 2030. Required: When approached by the automaker with an offer price for their dealership, franchisees must consider if they are better off taking the money offered or continuing to operate their dealership. To make this comparison, franchisees must project their expected profitability for the foreseeable future. This will include adjusting the current year's profitability to reflect changes in costs, revenue, customer taste, competition, etc. Assuming you are the owner of a GM dealership franchise in downtown Toronto, what would be the relevant costs and revenues that would need to be adjusted to reflect the profitability that could be expected in the future?
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