Porsche vs. dealers: No contest
Porsche's U.S. sales were rising and its profits were booming in the early 1980s. The company wanted more direct control of its place in the U.S. luxury market.
In January 1984, the 323 U.S. dealers who sold Porsche cars learned that the company would not renew its contract with Volkswagen of America Inc., which had imported Porsches since 1969. As of September, the dealers were told, they no longer would get Porsches from VW.
The other shoe dropped Feb. 15, when Porsche executives met in Reno, Nev., with the automaker's dealers. Porsche said it had set up a new company, Porsche Cars North America Inc. It would be headed by a former U.S. head of BMW, Jack Cook.
A subsidiary of the new company, Porsche Centers Inc., would set up 40 stores across the United States to sell vehicles at retail and also distribute them to dealers, said Porsche AG CEO Peter Schutz.
"Each will be from a cookie cutter," Schutz told the startled dealers, "with a standard building of about 22,000 square feet on around two acres of land. Each will be in an industrial park near a major airport." All of the centers were to be up and running by the beginning of 1985, he said.
Porsche would spend about $25 million to build the centers, Schutz said. In addition, Schutz and Cook hoped to attract investment in the centers by existing dealers and wealthy Porsche owners.
Going it alone
At Porsche headquarters in Stuttgart, the company's new sales chief, Mario Jon Nedelcu, explained the reasoning behind the plan. Now that VW was building cars in the United States, he said, "the quality of the marketing organization could no longer develop in sufficient measure to suit our exclusive automobiles."
Schutz also was concerned about some U.S. dealers charging other dealers a hefty premium for hot Porsche models, thus inflating prices to customers. Porsche also would need a strong and efficient U.S. distribution network, Schutz knew, to fend off growing competition from Japan.
Consultants assured Schutz that Porsche was within its legal rights in planning its new network. "Since we were establishing a completely new marketing apparatus," Nedelcu said, "we had no contracts and no obligations. In this situation we could establish our business as we felt it should be, and in a form which suited the product."
Agents, not dealers
Porsche assured its dealers that they weren't out in the cold. They could continue to service the cars.
Acting as sales agents, they also could take orders for cars that the nearest Porsche Center would fill. But instead of maintaining their 16.7 percent dealer discount, they would have to accept 8 percent as agents.
Porsche gave the dealers 60 days to decide whether they wanted to be part of the new arrangement.
Dealer groups immediately attacked the plan. The National Automobile Dealers Association said it "strikes to the heart of the franchise system." NADA vowed to "take whatever actions necessary to preserve the legitimate interest of our Porsche dealers."
The American International Automobile Dealers Association said the scheme was "a frontal assault on the entire automotive franchise system and must be resisted by all automobile dealers. If Porsche can get away with this, every carmaker will try it."
U.S. Porsche dealers had invested as much as $300 million in their stores, AIADA said. Porsche's plan, it argued, would "render much of this investment valueless and inflict grievous damage on these dealers."
Taking it all away
Dealers ridiculed the notion of investment partnerships in the Porsche Centers. Said Joe Herman, a Porsche dealer in Rochester, N.Y.: "It was like being told, 'We are taking your wife away, but since we know you are still interested, you can buy a piece of the bedroom set and once in a while you can come and pay a visit.' "
Alan Johnson sold 200 Porsches a year at his San Diego dealership, and he raced Porsches as well. "I've developed an asset that I value very highly," he said. "Now somebody's taking that away from me."
Volkswagen of America also objected to the Porsche proposal. Fortune magazine estimated that VW made more than $40 million importing Porsches in 1983.
VW found itself the target of lawsuits by its independent distributors, which said the suspension of Porsche deliveries would violate state franchise laws. To protect itself, VW filed protests against Porsche with motor vehicle boards in several states.
Most states had laws that governed dealer termination and retail activity. Some prohibited automakers from selling cars directly at factory stores, a common practice in Europe. Despite the promise of lining up independent investors, the Porsche Centers smelled suspiciously like factory stores to many skeptics.
The dealers pledged to stick together. Just days after the Reno meeting, dealers contributed more than $1 million to a fund to fight the Porsche Centers plan. A new Porsche Dealers Action Committee hired law firms in Washington, D.C., and California to prepare federal suits.
Dealers filed lawsuits against Porsche and VW that sought more than $3 billion in damages and penalties. They also lodged 69 administrative protests with state motor vehicle authorities.
In March, Porsche gave in. Cook told dealers that the company was abandoning the Porsche Centers plan. Instead, he said, Porsche Cars North America would work directly with the traditional dealerships. It would negotiate a new franchise agreement with the Porsche Dealers Action Committee.
Following Europe's model
How did Porsche misjudge so badly? From a European vantage point, factory stores were the norm rather than a threat. Automakers in Europe could control their dealers much more rigorously, because their franchise agreements were exempted from European Community laws governing business competition.
Automotive News editorialized that Porsche had made "one of the biggest retreats in the history of the auto industry. … We fear that Porsche has damaged its relationship with its dealers and that it may take a long time for the wounds to heal."
Fortune said Schutz's "repeated defense of the plan before the family owners turned him into an advocate rather than an analyst ... Lacking confidence in his German executives, Schutz grew increasingly isolated as he concentrated on the specifics of his scheme."
In defeat, Schutz said that "in the time available, we couldn't wrestle all the alligators. You can't take on the whole world."
Cook had told his colleagues he was convinced the Porsche Centers project would succeed. He said later he was astonished by the uproar the plan created. "We obviously not only struck a nerve, but we struck a chord much deeper in the whole retail automotive dealer organization," he said.
A former BMW dealer, Cook took responsibility for the "agent" tag that had alienated many dealers. "That one is my fault," he said. "I wanted to differentiate between dealerships and the new entity."
Porsche's U.S. sales windfall proved transient. As the German mark rose against the dollar later in the 1980s, prices rose and sales fell.
In 1988, Cook left Porsche Cars North America. A spokesperson said, "Porsche has different plans and measures to promote sales in the United States."
Karl Ludvigsen is the author of Porsche - Excellence Was Expected, published by Robert Bentley Inc. The book is available at www.bentleypublishers.com.