As Nissan Group executives ponder the fate of the automaker's controversial stair-step incentive program to boost new-vehicle sales, critics claim the plan is having negative effects on Nissan dealerships' fixed operations as well as their sales departments.
Nissan's stair-step program of sales incentives hurts dealership fixed operations, skeptics say
Jim Richter, a fixed ops consultant in Calera, Ala., says the aggressive sales targets in Nissan's incentive program encourage many of its dealerships to sell more vehicles to subprime borrowers with lower credit ratings. These customers, Richter says, often can't afford to pay for even the most basic post-sale repairs or maintenance that dealerships increasingly rely on for profits.
"Anytime you create a customer who doesn't have the financial wherewithal to take care of a product, something's got to give," Richter told Fixed Ops Journal. "In this case, it's service. You can do all the walkarounds you want, but if customers can't afford the additional services requests, no is no. It's hard to sell service in the drive when people can't even afford to change the oil in their car. If it's not warranty work, they just take a pass."
Steve Yaeger, manager of safety, dealer and heritage communications for Nissan North America, declined to respond. "We aren't providing comment on our dealer programs or private business discussions with our dealers," Yaeger says.
Dave Wright, owner of Dave Wright Nissan in Hiawatha, Iowa, says his dealership does not actively participate in the stair-step program, partly out of fear of an adverse impact on fixed ops revenue. "If we hit [a sales quota], we hit it," he says. "If we don't, we don't.
"We are not going to race to the bottom to hit the sales objectives," Wright says. "In a race to the bottom, you typically get customers who aren't loyal and don't return for service. All they're interested in is getting the cheapest tires, oil changes and so forth that they can get. It's all about the lowest price, not dealer loyalty."
Among the ways Nissan's stair-step sales incentive program hurts its dealerships' fixed operations, critics say:
- Aggressive sales targets encourage dealerships to sell more vehicles to customers with poor credit ratings
- Service retention rates for nonwarranty customers decline
- Rejection rates for maintenance and repair work recommended by service advisers rise as many customers can't afford it
- Declining service revenue forces dealerships to rely more on selling wholesale parts
- Automaker limits on parts returns inflate dealership inventories of obsolete parts
- Declining service absorption rates put even more pressure for profits on vehicle sales
Wright says he does not oppose factory sales incentive programs and volume bonuses, as long as their goals are reasonable. "But the numbers are realistic, not the kind that force you to go below market price just to get a sale," he says.
Scott Smith is president of Smith Automotive Group in Atlanta and incoming chairman of the Nissan National Dealer Advisory Board. He says the stair-step program adversely affects fixed ops revenue and service absorption rates at two of his group's four Nissan dealerships.
At those dealerships, he says, about 75 percent of buyers are subprime customers. At his other two Nissan stores, he says, it's about 25 percent.
"Fixed ops revenue grows faster at the two stores with less subprime buyers, so there' your acid test," Smith says. "You want customers with the wherewithal to come back for service and who want to protect their investment. We've had growth in market share [in Atlanta], but our fixed ops haven't proportionately caught up with that increase."
Other Nissan dealers say they have seen no link at their stores between the stair-step program and service retention.
"We're a big fixed ops player, and I don't see any correlation ," says Ray Brandt, CEO of Ray Brandt Automotive Group, which operates 15 dealerships in Louisiana and Mississippi, including two Nissan stores. "I don't agree at all with that."
Wayne Siegel is president of Legend Auto Group in Amityville, N.Y., which operates four dealerships, including a Nissan store. He says he has heard of some Nissan dealers selling more vehicles to subprime customers to meet stair-step quotas.
"But I haven't heard that it has reached a point where those customers can't afford to service their cars," Siegel says. "It's a reach for people to say it affects their [service] retention percentage."
Former Nissan CEO Carlos Ghosn promoted the incentive program this decade as part of his ambitious strategy to increase the automaker's U.S. new-vehicle market share to 10 percent, a figure that was briefly reached. The program rewards dealerships with increasingly larger per-vehicle cash bonuses as they hit progressively higher monthly, quarterly or year-end sales quotas.
The automaker's new leaders say they want to improve relations with U.S. Nissan dealers and shift their approach to retail sales. Many Nissan dealers have scorned and rejected the stair-step plan, complaining that it promotes discounting, effectively forces some dealerships to pay more to the factory for vehicles than other stores, and threatens the profitability of their service departments and parts counters.
Richter says he's seen negative effects of the program on the fixed operations departments of two Nissan dealerships that one of his clients owns, as well as a store in Georgia owned by another client. He declined to name the dealerships or quantify the negative impacts in terms of reduced repair orders and revenue.
But he noted that the first client's stores are "struggling to meet even a 20 percent closing rate" on additional-service recommendations made by service advisers. That compares with a rate of 40 percent or more at other dealerships the client owns, Richter says. The Georgia store is in a smaller market but is experiencing similar issues, he adds.
Without repeat customers coming back to the dealership for service and maintenance, Richter says, service absorption rates decline. That, in turn, puts more pressure on the sales department to make up for lost fixed ops revenue — a difficult proposition when a dealership already is selling cars at below invoice cost just to meet sales quotas, he notes.
Richter says the adverse impact of stair-step incentives can ripple throughout a fixed ops department, especially if the dealership isn't a large parts wholesaler that can generate revenue by selling to other dealers and independent repair and body shops.
"Some dealerships I work with sell parts only through the shop — no wholesaling," he says.
"So the shop becomes even more critical, because that's where the majority of these parts come from."
In other instances, he adds, smaller Nissan dealerships that sought to make up for lost fixed ops revenue were pushed into becoming parts wholesalers. But they got squeezed there, too, he says, because of Nissan's parts return allowance rate, which earlier this year stood at 2 percent of total monthly parts purchases. That return policy could force a dealership to keep more obsolete parts in stock, he argues.
Richter says Nissan has raised its return rate to 3 percent for the rest of the year. The automaker did not respond to a request to confirm that change.
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