Hyundai sued over allocation practice

With supply constrained across the industry because of microchip shortages and other challenges, retailers are more sensitive to irregularities in new-vehicle allocations.

A dealer in one of Hyundai Motor America's largest regions is suing the automaker for withholding inventory, alleging it is because the store has not opted into the Korean automaker's facility image program.

Central Avenue Hyundai of Hartsdale, N.Y., a suburb of New York City, filed a lawsuit in Westchester Supreme Court in New York in June asserting that new vehicles are being withheld as retaliation for not moving forward with the renovations charted in Accelerate.

The nub of the complaint has to do with discretionary allocations — a common industry practice in which a manufacturer exercises its prerogative to award additional vehicles to a dealer as its sees fit.

In an era of normal inventories, discretionary allocation is not a big issue among dealers. But now, with the factory pipeline sputtering for many retailers, every new vehicle is vital.

Central Avenue says it has been cut off from discretionary vehicles because it is not investing in its store.

The dealership says its allocation in the first quarter of 2022 dropped nearly 42 percent compared with the first quarter of 2021. That was the deepest dip in allocation compared with its 13 surrounding dealers.

The Accelerate program calls for significant reinvestment and expansion into larger facilities. Hyundai launched the campaign in January 2020 but put it on hold until October as retailers coped with the pandemic.

The lawsuit says Central Avenue Hyundai is at a disadvantage in the Accelerate plan because its tight urban quarters do not allow it to meet new physical space expectations.

When Hyundai restarted the program, it was met with pushback from some of its dealers who said it was not dealer-friendly and didn't acknowledge previous investments made by the automaker's retail network.

Central Avenue argues in the complaint that it already moved into a facility that costs $56,000 a month and spent $3 million on upgrades in 2015 to comply with an earlier iteration of Accelerate.

When it was asked to upgrade again three years after completing construction, Central Avenue filed a complaint with the New York Department of Motor Vehicles but later withdrew it.

In July, in a separate but similar lawsuit between Hyundai and a dealer in West Palm Beach, Fla., the automaker asserted its right to use discretionary allocation based on whether the dealer "has invested in the brand, including facilities, and whether the dealer is involved in litigation with HMA and the nature of any such litigation."

Using discretionary allocation to punish and reward dealers is a common practice among manufacturers, according to Henry Noye, a partner with East Coast law firm Obermayer Rebmann Maxwell & Hippel.

"They're going to say, 'This is voluntary, you don't have to do this,' but they also have the power of the purse. So when you try to do something else, you get less of a priority," Noye told Automotive News.

Discretionary allocation exists so that automakers can move inventory to dealerships for a variety of reasons, such as helping a store where vehicles have been damaged by extreme weather.

Central Avenue argues Hyundai is using its discretionary allocation powers to punish it for noncompliance, and that is "causing significant damage … in the form of lost sales, revenue and profit."

Hyundai Motor America maintains it has the right to reward dealers as it sees fit.

"We had a very simple view as we launched these programs…that these are all voluntary," Robert Grafton, Hyundai's vice president of dealer network and strategy, told Automotive News. "There's support for dealers who elect to participate in helping offset their [capital expenditure] expenses, and if a dealer elects not to participate, that's fine as well.

"We've committed over $1 billion to support our retail partners' investments, updating their facilities and ensuring that there's a consistent look that meets the brand standards and addresses consumer expectations," he said.

Grafton said 70 percent of Hyundai's 832 dealers have opted into the store upgrade program.

"You don't get 70 percent of an entire network doing anything unless they have confidence in terms of where the brand is headed, what it's trying to accomplish and how it's going about that."