Why furor over facilities won't go away
Dealers: 'Voluntary' fixes lead to cutthroat pricing
Photo credit: JOE WILSSENS
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Martin NeSmith personifies the boiling point over manufacturer facility programs.
NeSmith just built a Chevrolet-Buick-GMC store in Jesup, Ga., spending an extra $500,000 to comply with General Motors' Essential Brand Elements program. But with hefty volume-based payouts for complying and a shrinking dealer margin, he figures he had little choice.
That money has become "a carrot that all the dealers are chasing," said NeSmith, whose store will open April 2. Last year he sold about 1,100 new cars between his two stores. "It's caused dealers to be cutthroat on pricing because they're doing everything they can to get that EBE money."
NeSmith's experience explains the intensity of the attention paid to a National Automobile Dealers Association study released Feb. 4.
That study, which dominated conversation in meeting rooms and on the exhibition floor at last week's annual NADA convention in Las Vegas, weighed in on the carrots and sticks used in facility programs. The conclusion: A perfect resolution isn't obvious.
When it comes to dealer objections about facility demands, the volume-based incentives tied to some of the programs take center stage. Many dealers argue the incentives amount to illegal two-tier pricing -- in other words, dealers who don't get the bonus money ultimately pay more for the vehicle. They compete against dealers who get the money and use it to offer lower prices to consumers.
The competitive disadvantage puts a dealer's very survival at risk, some dealers say. Furthermore, bonus payments are funded by cuts made to the dealer margin, dealers say. Essentially, they think it was their money to begin with.
Manufacturers typically note they're helping to pay for dealer renovations and say there's no competitive disadvantage because every dealer has the chance to earn the incentives.
Stephen Wade, the 2011 NADA chairman, disagrees:
"If you're getting something that equates to $300 to $700 or $800 a car more than the man next door to you, how is he competitive?" asked Wade, a multibrand dealer in Utah and California. "Certainly it's an unlevel playing field, especially if it doesn't take you much to do that [the renovations], where the man next door, he can't afford to do it."
The dilemma is driving many dealers out of the business, said Wade, who spearheaded the NADA study.
 | Wade: Dealers are driven out of the business. |
Mercer: 'Troubled' dealers
While manufacturers and dealers should seek better ways to distribute facility-related incentives, study author Glenn Mercer concluded that the industry is probably stuck with the challenge.
"Many of the dealers we spoke with were very troubled by these questions, and we can see why," Mercer, a former McKinsey & Co. partner, said in his report. "On the other hand, we can see the OEM's point of view as well, since OEMs offering incentives can point out to dealers that some money is better than no money at all, and that various OEMs offer no construction incentives, period."
The issue will continue to boil.
A 2009 Florida law that calls for manufacturers to pay 80 percent or more of such incentives -- even to dealers who don't make facility renovations -- will be tested in the coming months.
"It's not what we're going to do," GM North America President Mark Reuss told Automotive News late last year with regard to that requirement.
The Florida law will be put to the test in GM's case this year, said John Forehand, a Florida dealer lawyer who helped draft the language.
If EBE payments stop to GM dealers who initially signed up for the program but have declined to follow through on the requirements, those dealers can challenge GM for the 80 percent, Forehand said.
Forehand said Friday that he has filed just such a suit for a Cadillac dealer in state court in Miami.
GM's payments are based on the number of vehicles that each dealer orders. Annual payouts range from around $40,000 for the smallest dealers to $1.5 million or more for large ones.
The study generally concluded that facility programs cost too much, produce uncertain results and matter little to shoppers.
 | Reuss: GM disagrees with Florida law. |
What's next
NADA reviewed the results with six manufacturers -- General Motors, Ford, Chrysler, Toyota, Honda and Mazda -- before it released the study. NADA officials now plan a visit along the East Coast to meet with other manufacturers in coming weeks.
Volkswagen of America CEO Jonathan Browning said the study's conclusions are very broad and don't apply to everyone.
"You can see many cases of tremendous returns, whether that be in terms of sales, in terms of profitability, the customer experience," Browning said.
At the NADA convention, Wade called for manufacturers to take a timeout on their programs and consider the study recommendations. GM, Ford, Chrysler and Toyota initially declined to slow down implementation.
Calling the next several weeks a wait-and-see period, NADA officials said they intend to follow up with manufacturers in the coming months and continue to press for changes.
Group 1 Automotive Inc. CEO Earl Hesterberg calls the incentives a big concern.
"I would be OK with some financial support for dealers who spend the money, but that is secondary," said Hesterberg, who leads the fourth-largest U.S. dealership group.
"The primary need dealers have today is more margin in selling the new car itself. And there's no doubt in my mind that the money to encourage these facility actions has come at the expense of more trading margin in the new car."
Mike Colias and Christina Rogers contributed to this report
• Many dealers dislike the incentives and say they lead to two-tier pricing ...
• ... but some dealers get hooked on the money and don't want payments to end.
• Mercer concludes there is no "perfect resolution" to incentives dilemma: "We are probably just stuck with this challenge."
Source: Dealers, Mercer report
You can reach Amy Wilson at awilson@crain.com.
