BMW's U.S. dealers could face a double-digit percentage increase in sales targets this year. Patrick Womack, BMW's National Dealer Forum chairman, says that's not realistic.
"This would be a very difficult task at hand, given the flat marketplace," said Womack, general manager of Laurel BMW of Westmont in suburban Chicago.
It's easy to see Womack's trepidation. The auto industry is staring into the maw of a downturn, fueled by rising interest rates, slumping profitability and the threat of demand-sapping tariffs.
U.S. light-vehicle sales in 2018 were 17.3 million, up 0.6 percent from the previous year. BMW's U.S. sales were up 1.7 percent.
BMW's dealer forum has its own ask of the automaker — more marketing dollars to support the 2019 product pipeline.
"If we are asked to increase the sales rate of our vehicles, there needs to be more marketing spend to support that," Womack said. "We feel that we are not spending at the level of our competitors."
Womack, 54, is optimistic about BMW's product lineup. The new X7, arriving in U.S. dealerships in March, will let BMW play in the large premium crossover market, a shortcoming in the brand's crossover lineup.
The Mercedes-Benz GLS and Audi Q7 have dominated the market for large luxury crossovers. "We are very late to the dance with [the X7], unfortunately," Womack said.
On the sedan side, the "long-in-the-tooth" 3 series receives a much-anticipated redesign, he said.
"While the 3 series is a great car, it seems the public is on to trucks right now, so I have concerns with the volume being there," Womack said.
He spoke with Staff Reporter Urvaksh Karkaria. Here are edited excerpts.
Q: Can BMW catch up in the large crossover segment with the X7?
A: This should fit the consumer who wants both technology, great driveability, and needs space. This is truly a three-row vehicle that drives like a BMW and fills a void we have had in our lineup.
I have to give BMW credit here. We saw [the X7] two years ago at the product committee's annual meeting and were skeptical. BMW listened to most of our concerns and actually made some minor changes. What you see now will fit the needs and wants of our client base.
I am hoping we don't get overloaded with inventory too soon. We need a strong loyalty program on these trucks to keep them in our dealer network through at least the second owner. People who have been loyal to the brand have never had anything that really was a true third-row-seat vehicle.
Even though we are late, the timing is good. Everyone is looking at trucks now. The reason is people want space, people are more active.
What were your big-selling models in the past few months?
Across the country, we have obviously seen volume growth in the truck market with X3 and X5 leading the way.
We are in suburban Chicago, and trucks have always been great sellers in this market, with our volume vehicle being the X5. We sold over 30 alone in November at our store.
[The new X5] is a vast improvement and should provide great volume.
How is the new X2 selling?
Much better than the rocky start we had with the vehicle. This was truly just based on the lack of a good lease program, as this is a conquest vehicle. We lost a lot of opportunities early on, unfortunately. The average payment was close to $800 a month; it was too high. We made adjustments to get both the retail price down and the monthly lease payment down. So, now the vehicle is actually moving. The vehicle itself is fantastic and has the potential to be our volume leader down the road.
The original marketing for the launch of this vehicle was polarizing and actually scared some people.
What's missing in the product lineup?
I would love to see a short-wheelbase 7 series again. It truly was a driver's car and our center sold more [of that version] than long-wheelbase models. We drive our 7 series here in the U.S., whereas in Europe they are limousines and the clients have drivers. We have to get this message back to Germany.
We are eventually going to need to think about a midengine sports car as we still need to support our racing programs, as it is so prominent in the brand's DNA. Our competitors in motorsports have midengine offerings, yet we have the front-engine, rear-wheel models.
A midengine sports car would show what our engineers are capable of, and serve as an example of a low-volume, high-profit car.
Does the BMW model lineup need trimming?
We've been accused of having too many models. I would like to see the offerings be narrowed, frankly, and focus on making the best car we can for the money, that drives like a BMW and has great reliability. We have been a little blinded by chasing volume the last few years. Great product with great reliability sells cars.
What are the major headwinds for dealers in 2019?
We don't know if [President Donald] Trump's tariffs will actually be implemented and we don't know exactly what this does to our business.
Vehicle sales volume could be flat or declining.
We will have to buckle down and watch expenses as interest rates rise and floorplan expenses increase. We are seeing more customers that are upside down on their trade-ins. The days of 72- and 84-month financing is really going to leave a black eye on the auto business. It was a quick fix for some brands to keep the volume going. Long-term, it's detrimental, values are decreasing because there's so much product out there.
Vehicle recalls will increase as the government gets more involved in product [quality] and manufacturers are held responsible. In years past, a lot of manufacturers cut corners to hit volume and profitability targets. Suppliers have gotten squeezed really hard on what they have to produce a part for and they've cut corners.
BMW trailed Mercedes in the sales race last year, but the gap is closing. Will 2019 be different?
Mercedes played the game better than us. Period. We are far from down for the count and will be back much stronger and smarter in 2019.
What I would like to be talking about [in late 2019] is, not who is No. 1, but who is the most profitable and working toward a long-term brighter future for their relationship with the dealer body? Which brand is more desirable to invest in? We are spending a lot of time working together with BMW to focus on programs that are sustainable long-term with minor tweaks.
Is BMW doing enough to promote certified pre-owned sales?
At one point, we had the industry-leading certified program, and now competitors have caught up. There needs to be additional focus and assets here to support this important part of the brand and business. Margin constriction tied to excessive volume targets has caused dealers to not want to spend the additional cost to certify their used cars. This is a very important part of our business that seems to get overlooked at times. CPO sales have the highest loyalty and also helps keep residual values high.
How is dealership profitability for the BMW retail network?
Under immense pressure, to put it lightly. The competitive nature to chase volume has eroded gross margins in a number of markets. We have to spend time looking at targets and addressing underperformers as BMW has ridden their horses too long and now they are dropping. This all starts with a believable [sales volume] target that can be explained to a dealer. We are working on more transparency here to better align with the manufacturer. I believe underperformers should be counseled and have added pressure put on them, as long as it is justified with a realistic target.
What are BMW dealerships doing to help profitability and reduce expenses?
We have to be smarter and refuse excess inventory as it is costing us all too much. We, as dealers, do much of the damage to ourselves by getting caught up in our egos of becoming the top dog.
[BMW of North America CEO Bernhard Kuhnt] has committed to going over BMW's expenses with a small working group of dealers to scrutinize every program and expense to see if it is needed, or if the money can be spent elsewhere. If we, as a group, can eliminate a program and its expense, and divert some of the funds to help our profitability, we will do this.
Is BMW asking dealers to invest in dealership facilities to meet revised image standards? How are dealers responding?
There has been an aggressive facility program upgrade for the last few years. It was met with much hesitance as profits have been under more pressure. Bernhard and his team made a very quick and fair modification to be more flexible with the dealers.
What do dealers think of the stair-step bonus program and targets?
Stair-step, given a realistic target, is not bad. But once that target seems unrealistic, the dealers revolt. There will be changes for 2019 in how these targets are arrived at and I hope this helps smooth some of the pain. Underperformers will no longer get a pass. And performers need to be rewarded for good behavior and not making bad business decisions to chase a target.
There's some suggestion that the stair-step program might go away.
We can only hope. I know that it was clearly communicated to BMW senior management. The dealer forum objects to the tactic because it devalues the brand. It also creates bad behavior, such as selling the car at an initial loss to try to chase a volume target bonus.
What is BMW doing to address affordability concerns?
While we are not lowering our pricing on new models, we are adding more equipment for basically the same prices. We have to be more competitive in the marketplace.
How do BMW dealers view the supposed shift toward electrification?
We are an open-minded group as a brand. Yet, different markets feel differently. What sells in Silicon Valley, does not sell in Chicago. Federal and state incentives need to be managed better as this distorts the marketplace and true demand for these vehicles.
Do you see adequate consumer demand for this powertrain technology, or is this shift being driven by government?
There is some customer demand. But, most of the interest is driven by subsidies, either by the federal government, or states. If you can buy a $90,000 car and get $7,500 from the government, and then an additional $7,000 from the state you live in, does this really show an honest demand for this technology, or is it falsely fueled by these incentives? I can't wait for the day when every manufacturer is on the same playing field here. Let the market decide what the consumers really want.
Is BMW offering financial support for investments dealers may need to make to adapt to EVs?
We are on our own to invest. We do have facility requirements. For instance, we are required to have both customer and service center charging stations. We do have tool requirements, as well as training for technicians, to better equip them for working on this product. We do this completely at our expense.
What is BMW planning to do to educate dealers about selling and servicing this new powertrain technology?
We have an in-depth training program for our technicians, as well as client advisers. We are hiring more trainers for in-store education.