Hyundai wants to restart facility upgrades; dealers wary

LOS ANGELES — Hyundai and Genesis are resuming their dealership upgrade programs after halting them six months ago when the coronavirus pandemic disrupted the U.S. auto market.

And some dealers are pushing back.

Retailers say economic conditions remain uncertain in the U.S. and car buyers are increasingly moving online, especially under the shadow of the pandemic, making major investments in physical stores less appealing.

But executives at Hyundai Motor America say they feel the company's retail sales have rebounded from the coronavirus crisis thanks to aggressive factory promotions and hard work by dealers. And now is the time to move forward.

"When COVID-19 hit, we were the first to market with robust initiatives, and our dealers showed tremendous leadership," Hyundai Motor America CEO Jose Muñoz told Automotive News last week. "Our efforts paid off. Retail sales are up, we are gaining significant retail market share, and our dealers' net profits and return on sales are up."

Muñoz said the dealership programs, known as Accelerate at Hyundai and Keystone at Genesis, are critical to the automaker's next step: raising customer scores for sales and service, which are among the worst in the U.S. industry.

Dealers say the facility upgrades can cost from hundreds of thousands to millions of dollars, depending on their scale. Hyundai is moving from its classic "blue box" design to a bronze theme based on its Global Dealership Space Identity Program. Genesis wants to separate its identity at Hyundai stores with separate showrooms and service areas. In bigger markets, Genesis wants standalone dealerships that could cost several million dollars.

Dealers unhappy with the new programs have been reluctant to speak out publicly for fear of souring relations with the factory. Instead, they have used state dealer groups to express their frustration and ask for modifications.

Ted Smith, president of the Florida Automobile Dealers Association, said last week that there have been some changes to the plans to address dealer concerns, and more changes are expected. He declined to comment on the final details before seeing them.

"However, it is clear that the programs are not dealer-friendly for many of the Hyundai dealers who have invested in this brand over time and would like to see it grow," Smith said in an email response to questions from Automotive News.

A tug of war between an automaker and its dealers over facility upgrades is hardly new. But the economic upheaval caused by COVID-19 has complicated the industry debate — as well as factory timetables to execute new investments.

Some Hyundai and Genesis dealers don't want the investment programs to restart Oct. 1 as scheduled. Meanwhile, the new management team at Hyundai is eager to move forward, even though they point out the programs are voluntary.

Accelerate and Keystone were only presented to dealers in January, before being paused at the end of March.

Dealers are wary of facility spending in the current economic climate. But Hyundai counters that dealer profits are up and the upgrades shouldn't be postponed any longer.

While Hyundai brand total sales through August were down 14 percent because of the COVID-19 crisis, most of that loss came from a reduction in fleet sales, the automaker said. Genesis sales through August were down 24 percent, but that was partially because of inventory constraints and the COVID-caused delay in launching its first crossover.

Hyundai said average dealer net profits are actually up more than 60 percent this year through August, with return on sales hitting 2.7 percent.

Hyundai's goal is to reach 3 percent, putting its profitability in the top quartile for the industry.

Muñoz, who took over the North American region in May 2019 and also is global COO of Hyundai Motor Co., said the programs will position Hyundai and Genesis as top-tier brands to better compete with Japanese rivals.

"In order to emerge stronger than our competitors, we have to restart and invest in Accelerate and Keystone in the fourth quarter," Muñoz said. "These programs are critical to elevating our brand image and creating a retail environment that reflects the market-leading design and technology in our products."

Despite the industry's much-cited increase in online shopping, most buyers still want to visit a showroom, which remains the face of the brand, Muñoz said. And Hyundai itself is spending more than $1 billion to help dealers upgrade facilities through bonuses and other financial assistance. About two-thirds of Hyundai brand dealers have enrolled in Accelerate, the company reports.

A key argument by Muñoz and other executives is that Hyundai and Genesis have delivered a stream of top-tier products that have won quality and satisfaction awards — and many more new vehicles are coming, including electric vehicles. But the dealer experience remains subpar, according to industry metrics.

In July, the leaders of eight state associations wrote a letter to Muñoz and Genesis Motor America CEO Mark Del Rosso asking for modifications to the programs, which they called coercive.

"Multiple facets of the Accelerate and Keystone programs seek to regulate independent dealer behaviors and directly tie vehicle pricing to adherence of HMA's and GMA's demands," said the letter, obtained by Automotive News.

"These unnecessary requirements amount to economic coercion on the part of HMA and GMA and significantly limit the dealers' ability to innovate," said the letter, signed by the presidents of dealer associations from Arizona, California, Florida, Illinois, New Jersey, North Carolina, Texas and Virginia.

While retailers have issues with program details such as vehicle pricing and information-sharing, the major sticking point comes down to facility upgrades, the dealer associations said in the letter.

Since July, Hyundai and Genesis executives have held meetings with the national dealer advisory panels of both brands, including a session in mid-September, to hash out some of the differences. Dealers say some progress has been made.

Peter Lanzavecchia, a member of the Genesis advisory panel and owner of Genesis of Cherry Hill and Burns Hyundai in Marlton, N.J., said the programs are really about investing in the long-term success of the brands.

"While it's easy to say, 'Wait, there's a pandemic, we've got to postpone this,' we've already postponed it for six months," Lanzavecchia said. "The parent company is investing billions and billions of dollars in Hyundai and Genesis."

Randy Parker, vice president of national sales for Hyundai Motor America, said the Hyundai brand has been gaining retail market share this year and has its strongest lineup of vehicles ever. Improving brand image will help fuel that trend.

"As we enter the next phase of recovery, we are reinstating our facilities program but will continue to remain flexible as the market changes," he said. "We believe strongly that these investments will pay off for our dealers."