Dropping Dodge-brand cars and Chrysler-brand trucks will upset Chrysler loyalists, but it makes perfect sense. Fortune's Alex Taylor explains why.
(Fortune) -- One of the biggest challenges U.S. automakers face is how to realign their aging brands and oversupply of dealers for the realities of the 21st century.
General Motors (Charts, Fortune 500), Ford, and Chrysler have more outlets in stagnant or shrinking markets than they can support with their sliding market shares. Tired brands like Buick and Mercury don't resonate with today's buyers.
So Chrysler has come up with a better idea. According to news reports, it is considering stripping the Dodge name from its passenger cars and the Chrysler name from light trucks to create two distinct brands with no product overlap. Chrysler would become the car brand and Dodge the truck plan. SUVs would go to Jeep, which would also keep traditional off-road vehicles.
Change is hard, and I can already hear the moaning from traditionalists, decrying the indignity wreaked upon the glorious automotive heritage of Walter Chrysler and the Dodge brothers, as well as the loss of historic (or less so) nameplates like the Dodge Charger. And there is always the chance Chrysler could be making a big mistake. After all, it decided to stop production of the PT Cruiser, despite its long and successful run.
Still, save the tears. With the industry headed towards a weak year or two of auto sales, Chrysler can't make the change fast enough. I think the idea makes good sense, and here are the reasons why:
1. Dodge and Chrysler basically sell variations of each other's products. Chrysler's minivans and Dodge's minivans are identical except for some trim and option items. Likewise, the Dodge Avenger and Chrysler Sebring share the same engineering.
Back when the Big Three were really the Big Three, customers didn't seem to mind. General Motors marketed the same car under four different brands. Now, customers do care. Except for Toyota (Charts), which seems to have no difficulty selling the Toyota Camry and its upscale twin, the Lexus ES350, badge engineering doesn't work any longer.
2. Dodge and Chrysler basically appeal to the same kind of buyers. Historically, Dodge and Chrysler have been known as blue-collar brands that connect best with Middle America. To be sure, Chrysler is seen as a bit more upscale, but attempts to establish it as a true sub-luxury brand have failed, in part because its product offerings are not well-differentiated from Dodge. If the two brands were separated from each other, Chrysler will have the opportunity to rise on its own.
3. Consolidating the product lineup would allow Chrysler to accelerate the downsizing of its dealer body. For several years, Chrysler has been trying to move stand-alone dealers that sell only one or two of its brands into so-called Alpha stores that sell Dodge, Chrysler, and Jeep together. If the Dodge dealer in Terre Haute, for instance, learned that he was only going to be selling pickups and commercial trucks going forward, he would have lots of incentive to merge with a nearby Chrysler-Jeep outlet.
4. Marketing costs would shrink and profits per vehicle could rise. Maintaining separate brands is expensive for both the manufacturer and dealer. In addition to the cost of assembly and launch, there is the expense of inventory and advertising. Smaller inventories mean less need for rebates to move surplus cars.
For sure, there are drawbacks. Some dealers who can't or won't consolidate may have to be bought out of their franchises. Also, Dodge sold about 276,500 passenger cars through the first ten months of this year; some of those sales will get lost in the shuffle. The damage will be far less on the Chrysler side. One of its three light truck nameplates -- the Pacifica crossover -- is headed for extinction anyway.
Most important for Chrysler, and for GM and Ford (Charts, Fortune 500) as well, is to stabilize market share at a level that is both sustainable and profitable. One of the big changes in the new contract with the United Auto Workers is that the automakers now have the flexibility to cut production without paying onerous penalties to laid-off workers. But for that to pay off, they have to find a level of the market where they can survive and prosper.
When GM shed Oldsmobile and Chrysler Plymouth, the reverse happened: sales were lost and market share continued to decline. Dropping one or two marginal brands is risky enough, but Chrysler is making a much bigger bet now -- one that it can't afford to lose.