GM's do-better letters unnerve dealers
Some feel unfairly branded as underachievers, fear penalties
 | Westcott: Renewed concern |
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As David Westcott steps in as chairman of the National Automobile Dealers Association, the group faces renewed concerns about performance review letters being sent to dealers by automakers.
After General Motors mailed the latest round of review letters in November and December, NADA sent a Jan. 3 memo to members advising them to take a factory communication seriously and respond to it.
"My understanding is GM took the dealers who had the lowest RSI [Retail Sales Index] and sent out letters to the lowest 25 percent in each state," Westcott says.
That would mean more than 1,000 dealers received letters, since GM has about 4,500 dealerships.
GM would not confirm or deny sending any letters to dealers for poor showings on the RSI. But GM spokeswoman Ryndee Carney wrote in an e-mail that GM periodically "provides our dealers with an evaluation of their sales performance using the Retail Sales Index measurement."
The RSI compares a dealer's actual reported retail sales "anywhere in the United States to expected registrations in the dealer's area of responsibility, computed based on GM's state average market share in each vehicle segment," Carney wrote.
GM believes its RSI method, "which is similar to the approach used by many other automakers, fairly and objectively measures dealer sales performance," wrote Carney.
Westcott confirms that other automakers have sent similar letters. And dealers who get such letters say they worry that an automaker might use the letters to build a case against them to terminate their franchise.
At issue is whether the formulas are fair. Some dealers complain the formulas fail to factor in mitigating circumstances in each market.
For example, after GM realigned market territories after its bankruptcy, some lawyers say many dealers missed sales targets for the first time.
"They realigned the territories where dealers didn't have a sales advantage," says Mike Charapp, a dealer lawyer and partner of Charapp & Weiss in McLean, Va. "A lot of dealers are getting less than 100 RSI and negative letters when they never got them in their entire careers."
Carney would not provide specifics on how GM computes and evaluates its RSI figures.
During its restructuring, GM sought to eliminate 2,064 dealerships. GM eventually agreed to reinstate about 700 that had filed for arbitration.
Wanting to win
Some dealers say GM recently began to calculate dealerships' individual monthly sales targets based on a certain percentage of RSI. That is a change from past practice, when GM set sales objectives based on the dealer's inventory and sales for the preceding three months.
The switch to an RSI target has resulted in sharply higher monthly sales objectives for some dealerships. One East Coast dealer said his January target jumped 40 percent from a year earlier -- "way north of where the objective had been forever," he said.
"I told my guys that we were going to try at all costs to hit the target," the dealer says. "But I quickly realized that I was giving away more cars than I should." He received a memo from GM that called his sales performance "unsatisfactory."
GM marketing chief Alan Batey says if GM sends correspondence to its dealers, it would be confidential.
But, Batey says, "We want to win. We want to be the leaders in the market. With that comes a requirement that we've got the best dealers providing the best customer care."
The GM letter, a copy of which was obtained by Automotive News, grades a dealership as "superior" or "satisfactory" if it has an RSI of at least 100.
GM works with dealers "daily" to achieve its sales and customer service goals, Batey says.
"It's not about criticizing or threatening anyone," Batey says. "It's about, if we have an issue, how do we work with them to improve it? We have training and other tools to be able to help these dealers."
A flawed formula
But outgoing NADA Chairman Bill Underriner says the letters are "a threat to dealers." He adds, "The dealer needs to respond to those letters."
Underriner's concern is real.
In 2009, Nissan North America tried to terminate Sims Nissan in Warren, Ohio, after labeling it the worst-performing Nissan store in Ohio and one of the worst in a 13-state region.
Nissan sent several warning letters to Sims Nissan to build its case, the dealership's lawyer says.
"There were a series of letters over a course of a year or two, they had four or more letters sent back and forth," says Chris DeVito, partner at Morganstern MacAdams & DeVito in Cleveland.
Sims argued that the store is located 11 miles from GM's Lordstown plant, which makes the Chevrolet Cruze. So the market is stacked against non-GM brands because GM provides discounts to Lordstown employees, their family members and friends and thousands of retirees.
Three Ohio tribunals reviewing the case agreed with Sims and denied Nissan's attempt to terminate the franchise. Nissan is appealing.
Nissan declined to comment on the case in litigation, but said in a statement: "Nissan continuously collaborates with dealers to increase customer satisfaction and sales. These efforts take into account a variety of factors, including the unique circumstances of a particular dealer's operations and the opportunities for improving their competitiveness."
Detroit-area Superior Nissan lost its fight against termination by Nissan in 2012 when a federal judge ruled the automaker had given the store ample time to improve its sales and customer satisfaction.
Nissan issued its first poor-performance letter to Superior in 2003 and followed it with at least three more letters offering the store chances to improve before issuing a termination notice effective in March 2008.
State franchise laws offer dealers some protection, lawyers say. In New Jersey, for example, franchise law stipulates that a manufacturer cannot judge a dealer's performance without taking into consideration market conditions, says Jim Appleton, president of the New Jersey Coalition of Automotive Retailers in Trenton, N.J.
"In New Jersey, the legal effect of that kind of a letter would be, 'Thanks for sharing,'" Appleton says.
The state franchise law places a burden on the manufacturer to prove that its actions to the dealers have been reasonable, he says.
Ultimately, Appleton and many dealers want manufacturers to change the grading systems to account for mitigating local market conditions.
"They develop these programs as if one size fits all, in an ivory tower academic way," says Appleton. "In the real world, where dealers live and work, the programs don't make any sense."
Staff Reporter Mike Colias contributed to this report
• Take it seriously.
• Respond to it.
• Outline all mitigating circumstances that caused low sales.
• Offer a plan for improvement.
Source: NADA
You can reach Jamie LaReau at jlareau@crain.com. -- Follow Jamie on 
