Volkswagen dealers have plenty of problems — low profitability, a sedan-rich product line in a crossover-crazy market, the remnants of an incredibly costly global diesel emissions scandal. Yet VW dealers are feeling the most optimistic that they've felt in years, says John Luciano, the incoming chairman of the Volkswagen National Dealer Advisory Council.
The reason? The brand's new North American leader, CEO Scott Keogh, has both a long record of success and a deep understanding of the American market. Dealers also see that Keogh has been given something special that his predecessors were not: autonomy over the region and the political power to make decisions. And that has dealers feeling fired up and ready to go, Luciano says.
Luciano, 59, the managing partner of Street Volkswagen in Amarillo, Texas, has been in the auto industry for 38 years, but picked up the VW franchise just five years ago when he began his current role with Street Volkswagen after a career that stretched across many brands, and many dealerships. He says he sees real promise in Volkswagen's future under Keogh.
Luciano spoke with Staff Reporter Larry P. Vellequette on Dec. 11. Here are edited excerpts.
Q: Is Volkswagen doing enough to promote certified sales?
A: At present time, no, but what we're hearing and what we're seeing and what is being talked about for the future, yes. For 2019, they're realizing the retention that comes from it; what it's done for the other brands — as Lexus, as Mercedes, especially as Toyota discovered — Volkswagen is realizing it does actually promote new-car sales over time. So I believe Michael Ashton [senior manager of CPO at Volkswagen of America] and his team definitely are getting the support there and there's lots of conversations about it, so it's forthcoming.
Is Volkswagen adequately advising its dealers how to prepare for changes such as mobility services, autonomous vehicles and vehicle electrification?
They are. We are seeing a lot and hearing a lot about where the brand wants to go in this coming electric world. Not so much on the autonomous side, but they definitely want to be the leader, they want to be the cutting edge of the electric vehicle market, and it's kind of exciting to watch. Those vehicles are going to be a big part of the U.S. market — 10 to 20 percent is probably the number — but still, it's a great thing to be in front of. I mean, Tesla has definitely proven to us that it doesn't look like it's a fad.
Electrification looks like it's real, and it's come in, so I applaud the fact that we are at least recognizing that and taking our chances. Anything we can do to get the [Micro]bus back in: good. Any time that thing gets shown or gets talked about or makes the press gets our phones ringing off the hook. "Can I give you a deposit? How can I order one? I want the first one!" It's pretty exciting, you know? It makes you feel good about the brand. I think that underscores that we're going to do a better job of getting back to our heritage and who we are, what we are, as a brand. I think Scott [Keogh] is going to be a great leader and a great marketer.
Is Volkswagen offering financial support to dealers for investments needed for electrification?
We're hearing that they will. We're hearing that [Volkswagen Credit] will be behind that. So the answer would be yes. It is definitely a full-blown commitment all the way to the top to do it, and they're going to do everything — down to the last technician and the training — everything to make sure that we're absolutely 100 percent prepared to do this when you're talking about a total investment that starts with a B and has a big number in front of it. With that kind of commitment, you're going to do the right things, and you're going to push it all the way. Even the little bit of hinting that you're starting to see from marketing, and seeing the things that we're doing with electrification that we're a part of now. It's fun! It's positive! Two years ago, I might not have thought it was going to be as big a deal as it's going to be, but I think it's leveled off, and I think we're seeing the numbers that it's probably truly going to end up, in some markets, it's going to be a big thing. In your big metros, that, with the ride sharing, is going to be a very big deal, like it is with the bicycles and the scooters. It's definitely going that way.
VW bucked the trend in 2018 with rising sales. But how are declining new-vehicle sales affecting Volkswagen dealership profitability?
You still have to look at the industry. We're up, but what are we up against? Coming out of what we're coming out of, it's definitely a positive thing, and it feels good to be in that position, but it still warrants a little bit of concern to pay attention to it. Is it real? Or is it just us getting back? We're going forward, without a question.
New-car margins are getting squeezed throughout the industry. What are VW dealerships doing to help profitably reduce expenses?
The brand is really taking a hard look at that with us, and it's definitely something that we talk about on a daily basis in our meetings with the council and with the brand, asking how to help those margins have monies in them that offset expenses within the store. Whether it be advertising credits, or floorplan credits, it's something we're really taking a good look at for 2019 and into the future. I really applaud them for doing it.
I can tell you, Duncan Movassaghi [senior vice president of sales at Volkswagen of America], since he's been with us, has really made that very, very clear, that we've got to make margin on both sides. We need to make some money when we sell it, but we've also got to pay very close attention to our costs, and how we can help, through marketing, through Tier 1, 2 or 3 advertising — it's definitely on the top of their list right now, and Duncan has been amazing bringing that with him from the UK. He was very successful over there in driving the market, and it's been really very refreshing for the last year that he's been with us.
They definitely have it on the agenda and on the radar, it's something we're definitely talking about for 2019. It's not the far, far future, but something that will be implemented in our 2019 cars.
How are rising interest rates affecting your dealerships? Is Volkswagen Credit helping mitigate the challenges created by higher rates?
VCI has been a very good partner, as far as captives. There's quite a bit of talk about it, as I'm sure there is in all brands right now how we're going to carry that forward. The programs for December were very good. If they continue as they are and continue to grow and get better and focus on the units — especially sedans — everybody can't get out of it. Volkswagen's not getting out of it. We believe there still is a market, and right now, for me there is, in this part of the U.S., no question. Volkswagen's been very aggressive in their buying practices and what they've done for us over the last few years to continue to help growth with the brand and get back to where we need to be. It's going to be a challenge for everybody.
I still remember when I got in the car business in 1980 and 1981, we were pretty excited if you were under 20 percent. Interest rates were 18, 17, 16 percent, and maybe 20 percent. I can also remember when 48 months was an extended term, and dealers were saying the sky was falling, the world was ending. Now we've got that 84-month term out there, and leasing.
What's happening in Volkswagen dealerships with leasing?
I think leasing is still going to have to be really paid attention to, and I believe all brands are going to realize that. I think the short-term financing, because of the average cost of new vehicles, is now over $30,000. At some point, it's just pure mathematics. You're trying to keep things affordable, and you're trying to do it over a certain amount of years, and you divide $30,000 by six, and it's $5,000. Leasing is going to start to make more sense for people. The trick will be how you can bring back and consume those lease cars as they come back through your dealer body. That's the trick. It's not so much how much can you lease? It's how much can you stand as you try to bring it back into the market. That's what everybody is trying to balance.
Vehicle affordability is a big concern. What will the council do to address it?
It's always a concern. Profitability comes from affordability. You can't have one without the other. An overpriced car that's not on market? There's not going to be any profit in it because of what you're going to have to adjust by to make it sellable. It's a tough situation for all brands, no question.
Is Volkswagen asking dealers to invest in your facilities to meet revised image standards? How are dealers responding?
At this point in time, I have not heard of anything, and I don't see anything for 2019, unless I'm just not aware of it. That was kind of put on the back burner four years ago with everything else for a while until we can get things straightened out and get profitability back, get volume where it needs to be. I haven't seen anything. There's been no real requirements.
Volkswagen's global head of sales said last year that the brand wanted to move away from "glass palaces," so you're probably all right, in terms of added investment requirements.
You know, I think it's more along the lines of clean, presentable, nice — you know, not the Taj Mahals anymore with gold faucets. I think those days are kind of gone, and hopefully, they'll go away for all the brands. That would be good for all of us. You have to agree: people want a pleasant, nice facility. It's been proven to us over and over again, whether it be Starbucks or anybody else. You have a level of expectation when you go in to buy something. That's it. That's all they're looking for: presentable, clean, everything works, functional, somebody with a smile on their face. It's not asking too much.
Are Volkswagen's production and inventory levels in line with demand, and are incentive levels appropriate to manage that?
Production has definitely made an incredible turn over the last year. We're getting to those levels. Are we still working to try and have the right unit, at the right lot, on the right day, at the right price? Yes. I think probably everybody is, and maybe we got behind that curve for a little while. The current team, Duncan, Derrick Hatami [executive vice president of sales and marketing at Volkswagen of America]; it seems to be very, very high on their job list, trying to make it so that we're not sitting on tons and tons of inventory. We're in better shape than we have been in the last couple of years. As far as incentives, I don't think you'll ever get a dealer to say there's enough incentives. Somewhere along the way, you have to look at it and say, "We have this amount of money, and we can only go so far."
It's a tough question. We could always use more incentives, and we could always use more sales. I feel like more could be done on the leasing side than what we're doing. I believe that is a brand issue with everybody right now — trying to figure out what that level is and how much we should lease. As far as the dealer body is concerned, we want you to lease at much higher levels, and we want higher residuals. It's just a tough question. I feel that we've still got a little bit of room for growth there. But it's much better than 12 months ago? Without a doubt. Much, much better. It's trending the right way.
Has Volkswagen changed dealership bonus programs, and how are dealers responding?
There haven't really been any changes in the last 24 months. We feel like, with Scott, there's going to be. We have not seen the 2019 plan yet. But from what we're hearing, that will be the heavy discussions for the make meeting in San Francisco. Scott's got not even two months on the job at this point, and that's just a short amount of time.
Speaking of Scott Keogh, he became CEO of Volkswagen Group of America on Nov. 1. What was the dealer response?
Coming from a sister brand, coming from Audi and already knowing a lot about Volkswagen AG and what's there, I believe that gave him an incredible head start. We're thrilled to death that he is an American; he understands the American market, 26 years in the market; 13 years with his previous brand, and 13 with Audi. We love that. That gives us a nice sense that he understands what's got to happen and where it's got to go. Now it's just giving him a few extra days to get that plan and get it right.
We're very, very optimistic — not even cautiously optimistic. I mean, we're optimists, but I believe most dealers that I hear from, we know that — for once — we really have probably the right guy that can take us to the future.
I know that for the board in Germany that had to have been a big decision, to take a guy out of a 13-year incredible career, a 109-month streak of total sales growth at Audi, taking the brand where he took it. I think Mark Del Rosso will take the reins at Audi and just keep right on going. Mark's a great guy, and I think Audi will continue to go where it's going. But what a great decision. What a great decision for the Volkswagen brand. Within hours of the announcement, the attitude of the dealer body turned, it was by turn engagement, and relief, and "wow, this is going to be awesome." I know a lot of people are planning on making the meeting to hear what he's got to say. So we're excited about that. I truly believe Scott is the guy.