NADA's Scarpelli says stair-step programs can damage brands

DETROIT -- Automakers' use of stair-step incentive programs, which are designed to boost sales volume, could have a long-term adverse effect, potentially hurting consumer loyalty and weakening demand for the brand, Mark Scarpelli, chairman of the National Automobile Dealers Association, said Tuesday.

"Any dealer who's had to deal with these programs can tell you that that they are not only trust killers, but they're brand killers, too," Scarpelli said at an Automotive Press Association-NADA luncheon here.

Aggressive stair-step programs are just one part of what Scarpelli calls "factory creep," or automakers' increasing attempt to control dealership operations, which he fears erodes the "entrepreneurial spirit" of a dealership.

Consumer confidence deteriorates when two customers come into the dealership on different days of the month for the same vehicle and get two different prices, said Scarpelli, who is president of Raymond Chevrolet and Raymond Kia in Antioch, Ill., and co-owner of Ray Chevrolet in Fox Lake, Ill.

"That lack of consistency, lack of transparency, and lack of explanation is leading directly to a lack of trust -- lack of trust in both the individual dealer, and, in fact, lack of trust in every dealer who also carries that make," Scarpelli said.

"And when you have a lack of trust in every brand dealer -- guess what? -- you have a lack of trust in that brand itself. And that lack of trust in the brand leads directly to a lack of loyalty to the brand."

This summer, Analysis Group, an economic research firm, conducted a study on behalf of NADA on the use of stair-step incentives and what they accomplish.

The research firm looked at sales information, consumer survey data and economic information and found that aggressive stair steps decrease consumer loyalty and their trust in the brand. Over time, that lack of loyalty to a brand curbs consumer demand.

Stair-step programs only achieve higher volume by lowering prices, Scarpelli said. Manufacturers aren't actually creating demand. They are "dropping to a lower point on the demand curve," he said.

"On a new, lower demand curve, you only have two choices: You can sell fewer vehicles, or you can further lower prices just to be able to sell the same amount you would have originally," he said.

The Analysis Group called that a "death spiral," he added.

The report found that automakers that implement aggressive stair-step programs risk damaging the brand in the long run, and "eventually no amount of discounting can profitably overcome" lack of demand, Scarpelli said.

Later this month, NADA will share other findings from the report with automakers. The report also examined the impact on residual values, used-vehicle prices and consumer satisfaction for brands that use stair steps aggressively vs. brands that don't.

"America's dealers and manufacturers have the same exact goal -- selling our inventory in large volume and at competitive prices," Scarpelli said. "But we believe that goal should be achieved in the right way: Meaning in a way that enhances customer experience, and that maintains the integrity of the brand."

Combatting aggressive stair-step incentive programs has been an initiative of NADA for several years. In 2012, NADA launched an advertising campaign opposing stair steps.

At the time, NADA argued that stair-step incentives amounted to illegal two-tier pricing by the manufacturer to retailers. "Two-tier pricing and mandatory facility upgrades are symptoms of a bigger overall problem: manufacturer intrusion into dealers' businesses," NADA's then-chairman, Bill Underriner, said during a speech to the same group in Detroit five years ago.

Now, Scarpelli said NADA wants to help automakers see the impact of stair steps from the dealership perspective, and continue the conversation with them.

"Obviously our OEM partners have the right and the benefit to run their business their own way. We are merely pointing out a perspective of how it is on the retail side of the business. These stair-step incentive programs are not easily explained, are not understandable" for consumers, he said.

"A consumer might walk away and be disenfranchised with the dealership or the brand itself. We wanted to continue that conversation and make sure that everybody is aware of what goes on on the retail side of the business."

Potentially unfair incentives have spread beyond the sales side of the dealership, he added. Automakers have rolled out incentive programs for tires, oils and parts in service departments, or require participation in service programs to qualify for sales bonuses, he told Automotive News.

"In some cases, if you don't channel your resources and sell and present those products, it could be a negative," he said. "You could lose some ground with your manufacturer on an incentive basis. We've all been keying in on the front end of the business. This is in fixed operations now, too."

NADA executives accept that incentives won't disappear, but Peter Welch, president of the association, said consumers are growing increasingly more sophisticated with the pricing transparency available online, and they have "long, long memories." Therefore, manufacturers who apply too many stair-step programs are undermining the brand and ruining customer trust.

"Some of these companies are literally destroying their brands and we think it's alarming," he said.

Wes Lutz, incoming 2018 NADA chairman and president of Extreme Dodge-Chrysler-Jeep-Ram in Jackson, Mich., said he just wants programs that are fair. "I just want a program that allows me to treat all customers equally and fairly," he said.

In addition, he noted, because stair-step programs lead to deal-making frenzies at the end of the month and consumers have been trained to tap into that, "We do the bulk of our business in the last 10 days of the month and we hate it."

Jamie LaReau contributed to this report.