Putting up a Fight

In the first half of this year, the automotive retail industry continued to distance itself from memories of the Great Recession. But there are some memories dealers won’t soon forget.

Based on early June returns, LMC Automotive and J.D. Power and Associates were calling for a 500,000-unit increase in sales from a year ago. That’s in spite of the fact that the average transaction price was pacing at a record high for the month of June — the same month Colorado and New Hampshire approved a new round of dealer-protection bills.

The complex relationship between dealers and manufacturers has had its high and low points through the decades, but fueling recent strains were the 2009 bankruptcy filings by General Motors and Chrysler. Their strategies included plans to shed their dealer networks of a total of 2,800 storefronts. Little explanation was offered for how and why dealers were selected for disenfranchisement.

Keeping that memory fresh are OEM facility-image and bonus-for-sales-target programs. The latter is often referred to as “two-tier pricing,” because the tactic can create different pricing in the same market as dealers aim for bonus targets. As for OEM-required facility upgrades, dealers say they aren’t far enough removed from the economic downturn to consider spending millions on renovations. What they want is proof such projects are worth the investment, as well as guarantees that whatever changes they make will endure.

“They are symptoms of a bigger overall problem: manufacturer intrusion into dealers’ businesses,” the National Automobile Dealers Association (NADA)’s 2013 chairman, David Westcott, told F&I and Showroom in February. “Auto manufacturers that build flexibility into these programs have more success.”

That was the conclusion of Phase 1 of the NADA’s study on the economics of facility image programs. The study was commissioned in August 2011. The goal was to bring facts to what had been an anecdote-heavy debate. The second study showed that expansion of dealerships, particularly in the service drive, can pay off for dealers; however, modernization and standardization projects were either difficult to justify or appeared to be “of no benefit at all.”

Results of the second study were released on Feb. 9 at the 2013 NADA Convention and Expo in Orlando, Fla. The announcement came 53 days after a store closure reminded dealers of why they’re standing their ground — and the potential consequences.

CALLING IT QUITS

On Dec. 19, former Chevrolet dealer Marc Heitz said goodbye to his Norman, Okla., dealership. He walked away after a months-long war of words with his OEM. Heitz refused to remodel his store to comply with GM’s facility image requirements. He wasn’t the first or the last dealer to do so, but his circumstances were unique: He had spent $20 million to remodel his facility four years earlier.

The former dealer fashioned his store after a Bass Pro Shop — complete with a working windmill that generated a good part of the dealership’s electricity, and a 35-foot waterfall that flows into a 5,000-gallon fish tank stocked with bass. The facility also touts an amphitheater and a children’s playground he used to host community events and fundraisers.

Heitz’s goal was to turn Marc Heitz Chevrolet into a “destination,” a term familiar to most factory image programs. He says the project was approved by GM management, but the automaker changed course after launching its Essential Brand Elements (EBE) program in September 2009.

“In over 16 years as an owner/operator, I’ve never seen anything as heavy-handed or foolish as what I’ve encountered with the current leadership at GM and their hard-headed application of EBE,” says Heitz, who previously represented 12 different franchises, including Ford, Toyota, Nissan, Dodge, Chrysler, Jeep and six GM lines.

Heitz describes GM’s enforcement of EBE as “over-reaching, ill-conceived design standards that have absolutely no consideration for the fact that some facilities exceed the expected standard. It seems as if GM never considered that there are some dealers out there in facilities that are as nice, or in many cases, nicer, than the EBE designs.”

Ryndee Carney, a GM spokesperson, declined to comment on any specific case. She did describe such renovations as completely voluntary. “Internal data show key dealership metrics are positive when compared to dealers that have not renovated their facilities,” she says, noting a 5 to 7 percent annual rise in sales for complying dealers, as well as improvements in profitability and first-time service visits of 2 and 3 percent, respectively.

Carney points out that 96 percent of GM’s dealers participate in EBE, a cooperative program that rewards dealers who voluntarily meet customer experience standards for facilities, as well as sales and service training, among other requirements.

Heitz, however, says his store was penalized to the tune of more than $1 million per year for not meeting those standards. “If you don’t comply, you don’t qualify for the incentive monies or any of the awards like the Mark of Excellence — Marc Heitz won it nine years in a row — or trips for your management team. In other words, you would be a second-class dealership,” he says.

Rob Stanley is the dealer Heitz sold to this past December. Although no renovations are yet underway, Stanley says he’s completely willing to fund renovations. He expects to solidify plans on the necessary compliance standards with GM in the next month.

LOBBYING FOR ACTION

State associations have also been active, lobbying lawmakers for further protections against OEMs. The New Hampshire Automobile Dealers Association (NHADA), for instance, was successful in lobbying the legislature to approve a bill that amends the state’s Dealer Bill of Rights. It was signed into law by Gov. Maggie Hassan on June 25.

The New Hampshire measure attempts to level the playing field for dealers by limiting OEM-prescribed facility upgrades to every 15 years, after which the manufacturer must prove that any future renovations are necessary. The bill also restricts manufacturers from forcing dealers to use out-of-state contractors, among other provisions.

“Automobile manufacturers control nearly every aspect of a dealer’s livelihood. At the start of the relationship and at renewals, a dealer must sign a one-sided contract drafted by the manufacturer without any negotiation,” the NHADA states on its website. “Like all other states, New Hampshire has a Dealer Bill of Rights that provides some balance to this one-sided relationship.”

The Colorado Automobile Dealers Association (CADA) has also been active. Since 2009, the association has lobbied the state legislature to enact a number of dealer-protection bills, including limiting manufacturer-mandated facility renovations to once every seven years. Lawmakers also agreed to give dealers first right of refusal if a manufacturer terminates their franchise agreement through bankruptcy, then later attempts to open a new franchise in the same market.

The association was forced to return to the Colorado General Assembly during the most recent legislative session after several dealers claimed manufacturers were ignoring laws passed in the last four years. Last month, lawmakers approved a “clarifying” bill that ensures previously passed statutes apply to franchise agreements signed prior to 2009.

“Even though the number of times might not be too many, the amount of value and risk can be significant,” says Tim Jackson, president of the CADA. “If it’s just one time on one termination protection, for that dealer, it’s a monumental issue. It [determines] whether or not they can keep their franchise.”

The California New Car Dealers Association is awaiting approval of a dealer-protection bill, SB 155. It would enforce more stringent regulations upon manufacturers, particularly in terms of performance standards. Brian Maas, the CNCDA’s president, says one of the bill’s provisions would allow dealers to ignore manufacturer fines when a customer illegally exports vehicles overseas.

“Obviously, a dealer doesn’t have control of what happens to a car once they sell it to a buyer,” Maas says. “Manufacturers shouldn’t be penalizing dealers for certain things when it doesn’t seem fair.”

GOING TO COURT

Some dealers are taking manufacturers to court to defend their operations. In recent months, two New Jersey dealers filed separate lawsuits against their OEMs for what they consider unfair practices.

On April 26, Mahwah Kia filed a lawsuit against Kia Motors America after it threatened to terminate its franchise agreement due to poor sales. New Jersey Dealer Dennis Oberle claims in his suit that Kia didn’t provide enough inventory to sell.

In a letter dated Feb. 26, 2013, KMA said Mahwah breached its franchise agreement by failing to “vigorously and aggressively sell and promote Kia products.” But Oberle claims he was “coerced and intimidated” by Kia. He further charged the Korean automaker with not acting in good faith.

“Throughout 2011 and 2012, KMA imposed, and tried to impose, unreasonable standards of sales performance, and/or other requirements upon Mahwah Kia,” reads the complaint, in part. “At times, KMA admonished Mahwah Kia to retail more vehicles than KMA was willing to make available at wholesale to Mahwah Kia.”

New Jersey’s Lucas Chrysler Jeep Dodge Ram filed suit against Chrysler LLC in May. The dealer took action against the automaker after it terminated Lucas’ franchise agreement two months prior for failing to make costly renovations. The suit, which was still pending as of press time, charges Chrysler with only paying $150,000 of the $250,000 contribution it agreed to make to the facility remodel, which was supposed to be completed by the end of 2009. The dealer cites Chrysler’s bankruptcy protection filing and an unsteady business model as additional reasons for failing to meet its obligations.

“As a result of the foregoing circumstances, plaintiff did not implement the facility renovations insisted upon by Daimler Chrysler in the Chrysler and Jeep franchise agreements and did not complete the renovations by Dec. 12, 2009, a date which was only just as defendant emerged from the ashes of … Chrysler LLC’s bankruptcy,” the complaint reads.

In the suit, the dealership says it met 100 percent of Chrysler’s sales requirements and claims that its facilities “are satisfactory and are relatively equivalent to those of plaintiff’s principal competitors.”

DEALERSHIP OF THE FUTURE

The NADA had hoped to prevent such legal battles when it hired industry consultant Glenn Mercer to review facility image programs. But as he notes in Phase 1 of his report, the “project was over the very day it started.” Mercer discovered there were some projects dealers actually welcomed, particularly operations with aging facilities. For Phase 2, Mercer broke the study into three segments: expansion, modernization and standardization projects.

Expansion projects, which include adding interior space to accommodate an OEM’s expanding line, garnered the least complaints from dealers. The main issue, Mercer contends, was that dealers felt automakers required more expansion than what they felt was necessary. Modernization projects, which include adding customer-friendly amenities such as Wi-Fi and upgraded fixtures, equipment and furniture, generated a great deal of controversy. The main complaint was the cost of the factory’s approved materials. Mercer says dealers just didn’t see the return on their investment.

Standardization projects — which require a similar look for all of an OEM’s dealers — produced the most controversy. Dealers simply felt there was no point in such projects, an opinion shared by economists, marketing professionals and financial advisors — the latter viewing such projects as “actually eroding dealership value.”

The timing of these projects, the burden they place on smaller operations and the incentives OEMs offer were common complaints across all project types. Dealers also wondered whether factories were incentivizing them to build facilities that were better suited for buying practices of the past, with the study suggesting that future dealerships may require smaller, boutique-style showrooms in high-traffic shopping areas. Service areas, according to the study, would then be separated and located on cheaper real estate.

“The dealership of the future may be a more diverse collection of store types, from suburban megastore to rural old-style store to new, urban innovative designs,” the report states. “Once again, it seems that more flexibility by OEMs … is warranted.”

The day after Mercer presented Phase 2 results to media at the NADA’s convention in February, Ford agreed to enhance its Ford Dealership Trustmark Facility Assistance Program, guaranteeing a dollar-for-dollar match of up to $750,000 for facility projects.

“Neither of our Ford or Lincoln programs are one-size-fits-all, and our dealers recognize that facilities are an important part of the overall customer experience,” says Elizabeth Weigandt, dealer communications manager for Ford. “We agree that facility programs need to make good business sense and benefit the customer. When it comes to Lincoln, our dealers recognize that customer expectations in the luxury segment are different.”

Volvo’s Manager of Network Retailer Development John Neu offered a similar opinion. “All industry studies, including J.D. Power’s SSI/CSI and NADA’s Factory Image Program Study, clearly indicate what today’s luxury buyer expects in a retail environment,” he says. “A clean, modern, amenity-rich and branded dealership is the price of entry in today’s premium sector.”

Expansion to accommodate its expanding line is exactly what Audi of America is asking of its dealers. “We realize it’s an important balance for dealers putting significant sums at stake,” says Jeremy Meyer, the company’s general manager of network development. “At the same time, it’s a balance that has to ensure Audi customers don’t face long waits for maintenance because the service department is too small, just for one example.”

Despite the pressures manufacturers inflict, the CNCDA’s Maas says that, at the end of the day, dealers are reliant on the carmakers for their product. “They deserve considerable credit because the quality of vehicles is probably the best it’s ever been in our lifetime across all manufacturers,” he says.

Even Heitz agrees that GM was justified in establishing compliance standards under its EBE program, because “the product and the market is deserving of investment.” He just couldn’t bring himself to take a “magnificent facility and all that it offers away from our customers and employees.”