Stair-step incentives are back
Tough call: Sell at a loss to chase bonus?
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Several automakers have rolled out incentive programs that pay dealers escalating bonuses as sales targets are hit in a bid to wrest back market share or boost key models.
So-called stair-step programs are returning after being scaled way back over the past year, dealers say. Instead of dumping cash on the hood in the form of customer incentives, which are up just slightly from last year, automakers --- especially Honda and General Motors --- are dangling carrots in front of dealers in hopes of lifting sales by getting them to chase tiered sales targets.
But many dealers say stair-step programs wreak havoc on local retail markets. Dealers gunning for their sales bogeys in the final days of a program often slash prices well below cost -- willing to sustain, say, $30,000 in losses in hopes of a $100,000 volume-based bonus at the end -- and drag down other dealers' prices in the process.
"It's just a cancer in the industry that isn't good for dealers or customers," Earl Hesterberg, CEO of megadealer Group 1 Automotive Inc., told analysts during a conference call last month. "There are too many stair-step programs out there. We didn't need any more."
General Motors and American Honda Motor Co. -- both stung by recent market share losses -- have new stair-step programs.
GM's program, its first major stair-step initiative since its 2009 bankruptcy, started April 25 and ends July 2. A close look at the program shows the hefty payouts as well as the program's complexity, another source of frustration to many dealers.
Chevy's program includes the high-volume Cruze and Malibu sedans, Equinox and Traverse crossovers and most Silverado pickups. Buick's program covers all models.
In broad strokes, Chevrolet and Buick-GMC dealers will get $100 per vehicle for every sale from 100 to 109.9 percent of their sales objective for the period. Sales of 110 to 119.9 percent of the bogey fetch $500 per unit. Sales from 120 to 150 percent net $750 per vehicle.
But it's not that simple. Payments are made only on unit sales exceeding 75 percent of the target. To kick-start the program, each sale made during the program's April 25-30 launch counted as 1.5 units. And the program isn't open-ended. If a dealer sells 152 units against a target of 100, the last two sales bring no bonus.
A four-page GM document outlining the program offers the example of a dealer whose target is 100 vehicles and sells, adjusted for April sales, 146 units. So the dealer qualifies for the $750 bonus level, paid on the 71 vehicles above the 75-unit minimum. The payout: $53,250.
Honda is running a stair-step program from March 1 through August in an effort to clear 2012 stocks of its top-selling Accord sedan ahead of a redesigned 2013 model. Each month, dealers who hit 80 percent or more of their sales objective can earn $100 to $500 for each Accord sale. This follows a similar program in January and February for both the Accord and the redesigned 2012 Civic, which was panned by some reviewers.
Chrysler has had stair-step programs with its dealers since early 2011, a dealer said. With the exception of a program designed to clear out the canceled Dodge Caliber, the programs have covered all models and changed monthly.
This month Chrysler is running two concurrent stair-step programs. The first offers $200 per vehicle for each vehicle sold in May if the dealer sells at least as many new vehicles this month as in March 2012. If the dealer falls short of March sales, the program doesn't pay.
The second measures May sales against a dealership's sales in May 2011 and sets different goals depending on the dealership's local market penetration. For one dealer, for example, sales 20 percent over year-earlier levels bring an additional $250 per vehicle. If sales are 40 percent higher, the bonus rises to $600 per vehicle.
 | Dealer Bill Wallace: "Business is good but not great. There seems to be plenty of availability of product. I think [stair steps are] going to come back." |
Chrysler leads
In an unusual twist, in April, Chrysler paid an extra $200 per vehicle to dealers who sold 50 percent of their March 2012 sales total by April 20. This moved some of the sales push, typically concentrated at the end of the month, to midmonth.
From mid-February to April 2, Nissan paid dealers $200 to $800 per vehicle for hitting three different sales tiers for several models, including the outgoing 2012 Altima sedan, Sentra subcompact, Murano and Rogue crossovers, Xterra and Pathfinder SUVs, Maxima sedan and Titan pickup.
Chrysler has led the way in bringing back dealer incentives. Reid Bigland, Chrysler Group's U.S. sales boss, has frequently used them since moving from Chrysler of Canada last summer.
The recent activity at other companies signals that, with inventories replenished, some automakers are willing to dig deeper on dealer incentives to lift sales in the United States, where market shares have swung sharply. But automakers are holding their fire on consumer incentives, which rose just 1 percent this year through April to an average $2,505 per vehicle, according to TrueCar.com.
Dealer incentives in general -- and stair-step programs in particular because they are so opaque to consumers -- offer a below-the-radar way to juice sales without customer discounts, which can hurt residual values and ultimately damage a brand's image.
Automakers "are looking beyond blanket incentives to tactical incentives," says Larry Dominique, executive vice president at TrueCar.com. "Some of them have gotten very good at stair steps and retro bonuses and volume bonuses that consumers never see."
It's unclear whether more automakers will jump into the fray.
Bill Wallace, a dealer in Stuart, Fla., who sells 10 brands, including Chrysler, Hyundai and Nissan, says he sees a "crack in the dam" for stair-step programs to multiply in coming months.
"Business is good but not great. There seems to be plenty of availability of product," Wallace says. "I think [stair steps are] going to come back."
Whether dealers like the programs or not depends largely on where the factory sets their sales bogey.
Many Chevy and Buick-GMC dealers complain that their stores' sales objectives aren't achievable and they don't intend to chase them. Take Carroll Smith, owner of Monument Chevrolet in Pasadena, Texas. He worries that he'll lose customers to rival dealers who are pursuing their targets aggressively. "Then that customer says: 'I'm not going to Monument Chevrolet ever again. Those guys are $1,000 higher,'" Smith says.
He thinks the stair-step program will simply shuffle buyers among rival Chevy stores rather than lure new customers from other brands.
Risk of falling short
It can be perilous for dealers who try to cash in, too. During a Honda stair-step program a few years ago, one dealer, who didn't want to be named, was selling cars up to $2,000 below cost in a bid to hit his target. He says he lost $70,000 on the steep discounts in the final week but still fell about 40 cars short -- missing out on $200,000 in incentive cash.
GM executives are pinning their hopes on dealers such as Courtney Cole. The dealer principal at Hare Chevrolet near Indianapolis believes her store can hit the cap of 150 percent of her bogey, which GM set at sales of 302 units of the five nameplates in the program by the July 2 deadline. Cole's carrot: $167,000 if her store maxes out at 150 percent, or 453 units. If she falls short of 302 units, she gets nothing.
"Maybe I'm too optimistic, but I always feel like we can hit these things," Cole says. "Any time there's extra money, we're happy."
Lindsay Chappell and Amy Wilson contributed to this report
| Honda's stair-step dealer incentive program on the 2012 Accord started March 1 and runs through August. Here's how it works. | |
| Say Dealer Jones' sales target is 100 Accords a month. | |
| If he sells | He gets |
| 79 units a month | $0 |
| 80-89 | $100 per unit |
| 90-94 | $200 per unit |
| 95-99 | $300 per unit |
| 100 or more | $500 per unit |
| Plus, at the end of the program, if he has sold 100% or more of his target for all months combined (600 units), he will get an extra payout that doubles whatever he received in monthly bonuses. | |
You can reach Mike Colias at mcolias@crain.com.
