Volvo's new knack for worrying dealers

Volvo isn't shy about experimenting with new business models — sometimes to the consternation of its retailers.

While Volvo's penchant to shake up the status quo might give it an edge in the market, the unpredictability it creates could dent dealership franchise values, industry watchers say.

In 2017, the Swedish automaker helped pioneer a subscription model that bundled the use of a vehicle with insurance and maintenance costs into a monthly payment. But it ran into a buzz saw of opposition from some dealers who argued that Volvo was violating state franchise laws meant to prohibit manufacturers from competing with their franchisees. Eventually, the Swedish automaker rolled out version 2.0 of the program that addressed many of the dealer concerns.

More recently, Volvo announced a business adjustment that could have long-term consequences for its dealers. In March, Volvo committed globally to become an electric vehicle-only brand by the end of the decade. The automaker proposed upending the retail model by announcing it would move to an online-only, factory-set price sales strategy for its fleet of battery-powered models.

Volvo has adopted unconventional approaches to selling vehicles in the U.S.

"All this pioneering activity that Volvo wants to do can erode dealer confidence toward the brand," said Alan Haig, president of buy-sell advisory firm Haig Partners.

Following the March announcement, Volvo Cars global boss Hakan Samuelsson suggested the role of the dealership employee would evolve as car-buying moves online.

"The sales competence would move a bit away from knowing a lot about financing and different lease models because that will be done, preset, on the Web page," Samuelsson told Automotive News at the time. "But knowing the car, explaining all the features in the car — that will be a very important role" for dealers.

The comments were not well received by some of Volvo's American retailers, who were concerned about their role in an EV future. Volvo clarified that Samuelsson was talking about "global" retail operations — not U.S. franchises.

Ernie Norcross, owner of Volvo Cars Memphis in Tennessee and also chairman of the Volvo Retail Advisory Board, spoke up at the time to say his fellow retailers were nonetheless fearful about where they stood. Without controlling the customer experience of the sale, he reasoned, dealerships would be nothing but delivery and service centers.

Haig maintains that strong factory-dealer partnerships drive franchise values.

"Dealers don't like the idea of the factory getting in between them and their customers," he said. "Why would a dealer want to acquire a franchise if they believe the factory is working against their interest?"

Tesla's success with its direct-to- consumer sales model is emboldening automakers, said Richard Sox, managing partner at Bass Sox Mercer of Tallahassee, Fla., a law firm well known for representing auto dealers.

"The dealers are the frogs in the boiling water," Sox said, referring to the old fable of heating up a pan of hot water so gradually that the frogs in it don't realize they're being boiled. "The manufacturers have a plan to slowly turn the heat up over time as they take away more and more of the retail transaction from them."

An unclear future can degrade franchise valuations, warned Erin Kerrigan, managing director at Kerrigan Advisors, the dealership-selling advisory. The firm has downgraded its outlook for the Volvo franchise from "positive" to "steady," citing "the significant proposed changes to its retail model and the unknown effect on future dealership profitability."

The value of a business is based on its projected future earnings, Kerrigan said. "If you cannot clearly project the business model of a franchise today because it's unclear what route it will be taking, it impacts buyer demand and pricing today," she said.

Kerrigan said she had been seeing "a lot of positive momentum" in demand for Volvo dealerships, but lately, that interest has cooled.

Adam Simms, CEO of Price Simms Auto Group, which operates two San Francisco Bay area Volvo stores, said Volvo is promoting extreme positions in a business that evolves incrementally.

He cites Volvo affiliate Polestar as an example. Under the original plan for the brand, Polestar dealers would carry no vehicle inventory and instead receive customer-ordered cars for delivery. The EV brand has since pivoted, now offering dealers 10 vehicles to hold at their stores to satisfy impulse buyers.

"There are customers that want to order the car, and there are customers that want to drive the car, buy the car and take the car home," said Simms, who operates two Polestar locations in the Bay area. "You've got to be able to embrace both — it's not one or the other."

But some Volvo dealers welcome the brand's willingness to experiment.

Volvo's retail initiatives are attracting younger buyers, and making the brand "cool," said Matthew Haiken, owner of New Jersey-based Prestige Collection, which operates two Volvo stores in East Hanover and Englewood.

"I love being a partner of a company willing to adapt," Haiken said. "If we don't try new things, then the third parties will take over. It's resonating with customers."

Volvo's results bear out Haiken's outlook. Volvo's U.S. sales last year surged 57 percent from five years ago. The brand delivered 110,129 vehicles, the highest since 2006.

While Volvo bosses in Gothenburg, Sweden, find new ways for the brand to stay relevant globally, Volvo Car USA CEO Anders Gustafsson is charged with adapting those plans to the realities of U.S. dealer franchise laws.

Following the dealer fracas over the online sales strategy, Gustafsson went on a six-city roadshow in April to explain to dealers that Volvo was not kicking them to the curb. Dealers will continue to sell the vehicles and maintain the customer relationship, Gustafsson assured retailers.

"A lot of Anders' job is controlling the narrative from global," Haiken said.

Haiken said Volvo's U.S. management does a good job of communicating with dealers on regional strategy. But it's a different matter with missives from Sweden.

"There's definitely stuff that comes from global that's a surprise to dealers," Haiken said. "It's frustrating, and I feel for Anders."

Simms characterizes Gustafsson as being stuck between a rock and a hard place. Gustafsson is challenged with translating Sweden's vision to the U.S. market, Simms said.