Automakers, help dealers right-size now

Over the past decade, dealerships have done everything the manufacturers have asked: multimillion-dollar facility upgrades, more inventory and increased square footage. With the proliferation of the electric-vehicle and ride-share economies, what are automakers doing to return the favor, now that dealerships are oversized and underperforming?

Not enough.

For just the third time in a decade, the U.S. auto industry entered the summer selling season without a monthly sales gain.

This is the first sign of an industry in flux — even as the economy continues to soar. Consumers are holding onto their vehicles to steady their daily living expenses vs. trading up every three years. They are looking for the next-generation car to help them curb fuel costs. The topic of autonomous driving is hotter than ever, especially as millennials and mobility-challenged consumers seek the convenience of driverless cars. At the retail-sales level, Tesla is showing that market-shifting sales and service are possible — all without a dealership network.

With a dealership-footprint crisis at our doorstep, manufacturers should be working in lockstep with their dealer advisory councils to right-size dealerships now — not 10 years from now.

I clearly remember when we opened our 63,000-square-foot Hendrick Volkswagen Frisco facility in Texas. It was April 2015, and it was the largest free-standing VW dealership in the country. As general manager and partner, I was thrilled to be at the forefront of VW's effort to amplify its U.S. presence.

Five months later — and just weeks into my post as chairman of the Volkswagen National Dealer Advisory Council — the diesel emissions scandal hit. Imagine my surprise. The scandal sent the brand into a tailspin, and we painfully felt it at the dealership level.

I was spun into the highly scrutinized world of calming worried dealers and participating in negotiations that resulted in payments of $1.85 million to each of VW's 652 dealers in the United States. This phase of my career involved deep conversations with VW headquarters in Germany and opened my eyes to what is required for strategic and measured collaboration among automakers, advisory councils and dealerships.

As with any industry, the automotive retail sector runs amok with buzzwords. One of the newest is "right-size."

To dealers, there are many ways to right-size. Some may adjust the size of their teams, departments, inventory or physical space. No matter what route they choose, it helps to have the creativity and support of the manufacturer to make the changes effective.

My dealership friends and peers tell me that automakers are failing to deliver practical solutions to help them right-size their locations. Manufacturers' eyes are on recouping investments, creating incentives and out-marketing the other guys when they should be focused on keeping their dealerships profitable and building solid growth tracks.

Think short-term vs. long-term gains. Let's get back to Tesla. The company that we all underestimated a few years ago had a breakout 2018, transforming from a niche producer of electric vehicles into a true player in the luxury space. Tesla sold 90,700 vehicles in the fourth quarter of 2018, 33 percent more than it sold in all of 2017. When the dust settles at year end, we are likely looking at similar, if not better, growth.

So, should automakers ditch the dealer network? Of course not. But smart automakers had better be watching the Tesla game film. Sure, bigger and flashier retail centers help create a better consumer experience. But natural byproducts of larger footprints are higher expenses, more employees and additional real estate to manage. When volume tapers off, red ink starts to hit our balance sheets. Tesla has proved that creativity and disruption can go a long way in our industry.

Businesses succeed or fail based on how effectively and fluently information is shared. Dieselgate was a communications failure, plain and simple. With more people involved in decision-making, the scandal could have been dismantled before it started.

Automakers excel at coming up with innovative incentives and communicating them to their dealer partners. Why? Because profitability is baked into these incentives and their adoption across the dealership network is key to improving the overall business.

Although right-sizing strategies are more reactive than proactive, they are still just as important as incentives. Because every dealership has a different facility footprint and staffing model, each requires customized right-sizing strategies, which means that information-sharing from the top must be relevant, appropriate and individualized.

Successful communication is a two-way street. The moment we stop listening to our individual dealers is the moment we see manageable issues become massive black eyes on our industry.