Despite sales woes, Ford vows to boost its dealers' profits
Dealers have responded to the peacemaking efforts. But for many of them, the relationship remains strained by market share losses, cuts in the factory's dealer discount and declining dealership profitability. Even as Ford Motor's domestic brands struggle, Ford executives say that strengthening dealers' profits is a priority.
Getting to that point will require Ford Motor to confront the tough task of reducing the number of its franchised dealerships. With a plan to trim its rooftop count in 18 key metropolitan markets, Ford is consolidating its retail network.
The company aims to increase retail sales per dealership, said Cisco Codina, Ford Motor's group vice president of North American marketing, sales and service. Ford also wants to help dealers improve other profit-generating operations at their stores, such as parts and service, he said.
"For us, it's extremely important to have a healthy distribution system," he told Automotive News. "We will work tirelessly to make sure that happens.
"My goal, if I look at five years from now, is to look back and say we did it the right way. We didn't force anyone into doing something they didn't want to do, but we were very honest about the issues in the marketplace, and we'll work our way through it."
Ford executives have treated dealers more gingerly since some of the automaker's retail tactics backfired in the past decade.
Factory store furor
Dealers were angered when Ford started buying up dealerships and service centers and imposing new customer-satisfaction rules.
Launched under former CEO Jacques Nasser, the Blue Oval dealer certification program and Ford Retail Network created friction that eased only when the factory backed down.
Ford promoted dealer advocate Jim O'Connor to help repair the rift. Amid the turmoil, O'Connor was preparing to retire and buy his own dealership. But he stayed on in response to appeals first by Nasser and then by Bill Ford, Nasser's successor.
Ford Motor initiated the strife in 1997 as it sought to counter the growth of public dealership groups.
The company launched a plan to merge dealerships in some markets and operate them as joint ventures with local dealers. Through what eventually became known as the Auto Collection, Ford invested in dealerships in Oklahoma City; Tulsa, Okla.; Salt Lake City; San Diego; and Rochester, N.Y.
The venture drew the ire of Ford's dealers. They worried that the Auto Collection represented unfair factory competition. Some dealers heckled Ford executives during the National Automobile Dealers Association convention in San Francisco in 1999.
By 2001, Ford dropped the plan. The company sold off its dealership network and pledged to stay out of the retail business. O'Connor and his sales team traveled around the country in a campaign to rebuild relations with dealers.
"I said, 'We're going to build cars. You're going to sell them. Period. And that's the way the strategy is going to be for the future,'" O'Connor recalled. "Very frankly, that's all they wanted to hear."
Blue Oval woes
Dealer complaints didn't end with the collapse of the Auto Collection experiment. Ford launched its Blue Oval dealer certification program in 2000, cutting the dealer discount to help pay for the program. To become certified and thus eligible for bonuses, dealerships had to meet factory-imposed standards for operations and customer satisfaction.
Ford raised dealer invoice prices by 1 percentage point. It then paid certified dealers a per-vehicle bonus of 1.25 percent of base sticker - about $250 on average.
Dealers claimed that the program amounted to two-tier pricing. Some sued. And the bonuses proved too expensive for Ford as it went through a financial crisis. By late 2002, Ford backpedaled, saying it would drop the program in 2005.
But Blue Oval didn't go away entirely. Ford revised the program in April 2005, replacing the old bonuses with ones that were tied to sales performance.
Though the new bonuses were lower, all dealers were eligible, regardless of certification. The automaker estimated that the new bonuses would provide Ford-brand dealerships with only about 53 percent of the prior bonus revenue.
Ford ended up paying out less than it had planned. Dealers had trouble meeting sales objectives last year as Ford's market share dropped.
Early in 2006, the company switched to a flat pay-per-vehicle bonus. Dealers earn the bonuses when they sell certain nameplates that are aligned with Ford and Mercury sales priorities.
Profits, satisfaction slump
Despite the repair efforts, dealers still aren't happy with the state of business at Ford Motor.
Ford division, Lincoln and Mercury ranked near the bottom of NADA's latest dealer attitude survey, conducted last winter. The survey measures dealer satisfaction with automakers' policies, field and headquarters staff and franchise value.
Ford Motor lost more than 1 million units of sales in the United States from 2000 to 2005. The U.S. market share of the Ford, Lincoln and Mercury brands fell from 25.7 percent in 1995 to 17.4 percent in 2005.
Average profits at Ford, Lincoln and Mercury dealerships also have dropped. In early 2005, then-Ford Motor U.S. sales chief Steve Lyons said he expected Ford dealers to post a combined profit of $1.2 billion for all of 2004. That was the lowest total since 2000 and a sharp drop from a recent annual average of nearly $1.6 billion, Lyons said.
In a documentary on the automaker's "Bold Moves" Web site, Brad Brownell, Ford car group's marketing manager, notes that profitability among the company's dealers is near an all-time low.
Codina has said that average dealership profit fell by as much as 10 percent in the first four months of 2006 from the year-ago period. That is the most recent period for which Ford officials would provide data.
The Ford Dealers Alliance reported in May that 36 percent of Ford dealers nationally are losing money. The percentage of unprofitable dealers in metropolitan markets is far lower, an alliance newsletter said.
That compares with the first 11 months of 2004, when about 75 percent of Ford dealers were profitable, Lyons said at the time.
The alliance, a watchdog group of Ford dealers, objects to further cuts that Ford is making to dealer discounts for the 2007 model year. The dealer discount is the difference between the sticker price and the dealer invoice, expressed as a percentage.
Dealer discount cuts
Discount reductions for the 2007 models run as high as 3 percentage points, and trucks are especially affected. With the changes, dealer discounts on 2007 Ford models now range from 10 to 16 percent.
Ford says it is trimming sticker prices, and thus the dealer discount, to reduce incentives and move sticker prices closer to transaction prices.
The profit performance is especially dire for Lincoln-Mercury dealers, Lyons said. In a recent interview, he said profits at the average Lincoln-Mercury store were "just above water" when he retired early this year.
"Stand-alone Lincoln-Mercurys just aren't going to be profitable for a while," Lyons said. "You're going to have to look for more ways to dual them with Ford" dealerships.
More multifranchise stores are likely to result from Ford's dealership consolidation efforts. Although the company has not offered specifics of its plan, the list of 18 targeted markets is known to be dominated by large metropolitan areas in the Midwest and Northeast.
Ford officials say they will look for voluntary candidates for consolidation. They insist they will not use strong-arm tactics to remove dealers. Instead, they say they want to trim the company's retail network by working with the strongest dealers in a market to buy weaker dealerships.
"Our strategy is to have an open dialogue with the dealers in that area and to work with them," Codina said. "It's very difficult because no one wants to sell."
But more Ford, Lincoln and Mercury dealers have been looking to get out in recent years, according to interviews with dealers, dealership accountants and dealer consultants.
In the past, Ford often insisted on finding a buyer for a dealership or replacing a closed store with a new point. Now Ford says it will let some of those points close for good.
Moving to more-stable ownership in major markets will help Ford and remaining dealers, executives say.
'Value the dealer body'
"You have to value the dealer body," former Ford sales chief O'Connor said. "It doesn't help the brand, and it doesn't help the Ford reputation, by turning over the franchise in a town over and over and over. Then there's no rapport between that dealership and their customers."
Although the dealer fix-it strategy is necessary, Lyons warned that it also will be difficult.
"You've got to have better residual values," Lyons said. "You have to have models that turn faster. One thing the factory could work on that is really systemic is simplifying the buying process and simplifying incentives."
Such improvements are crucial for Lyons, who is now on the retail end of the business. He plans to open a Ford dealership in surburban Phoenix in late 2007 or early 2008.
A suburban Detroit dealer says he's cautiously optimistic about the direction of Ford Motor's leaders.
"They seem to get it, that product is absolutely essential," said Robert Thibodeau Jr., dealer principal at Bob Thibodeau Ford in Center Line, Mich. "It's just a question of, we've got to get from 2006 to 2008."
In the meantime, dealers must continue to sharpen their own business practices, said Tom Addis, chairman of the Ford National Dealer Council. That means trimming costs and improving the profitability of backshop departments, said Addis, dealer principal at Lake City Ford in Coeur d'Alene, Idaho.
"It boils down," he said, "to dealer profitability, market representation and product."
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