Sink profits into upgrades? Some dealers cringe

ATLANTA — As the auto industry began to emerge from the Great Recession, dealers facing pressure to make pricey updates to their buildings balked. It was too soon, they said; business hadn't recovered enough to invest millions of dollars in glossy new dealerships.

Fast-forward to the present. Sales have rebounded, and dealerships have posted some of their biggest profits ever in recent years. But unless a store is too small or otherwise in obvious need of refreshing, many dealers are still reluctant to spend on expensive building projects.

Why waste millions, the thinking goes, to update an already-nice building to satisfy an automaker's latest design whims?

Such projects aren't likely to generate a dollar in return on investment, many dealers contend. Moreover, today's dealership designs may not even be the right fit for a future expected to be dominated by digital retailing and other disruptive technology.

Still, automakers continue to push dealers for new and redesigned buildings. And dealers comply because, in many cases, adherence to automaker image program standards is necessary to earn certain payouts.

In 2018, dealer Steve Kalafer spent $1.6 million to renovate his "perfectly functional" Infiniti dealership in Flemington, N.J. There was bonus money on the line.

"We haven't sold one more car," Kalafer said. "In fact, because the market's turned, we sold less cars. I had to terminate two employees to bring my expenses in line, so I could show people a new coffee machine and a new fascia."

Automakers say their programs are reasonable. And some have noted that they've adjusted their requirements.

Lincoln, for instance, paused its program between December and August as brand executives conferred with dealers who objected to an initiative to persuade dealers in certain markets to build standalone showrooms. Hennessy Ford-Lincoln Atlanta is building its new dealership, with a separate showroom for Lincoln, in accordance with that program.

When the program relaunched in August, Lincoln said it was more flexible with regard to showroom size and pared back the margin withheld from dealers who don't build separate showrooms.

Many automakers are dialing back the frequency of updates, too — though dealers argue that's because they have to. A surge of state franchise statutes in the last decade limit how often automakers can demand dealership updates.

Dealers typically are hesitant to spend millions of their own money at an automaker's behest.

"We're no more excited than any dealer in the country" about the broad renovation requests, said Steve Hennessy, one of the owners of Hennessy Automobile Cos., the 11-dealership group in Atlanta building a new Ford-Lincoln store.

But, sometimes, it's worth it.

The need for, and likely return on investment, for the new Hennessy Ford-Lincoln building wasn't in question. The previous dealership was decades out of date.

At the same time, the Hennessy family has some already-modern stores slated for updates. For instance, their tony Lexus store a mile down the street will get its own renovation soon.

"Sometimes these projects are vanity projects for the manufacturers," said Peter Hennessy, another of the three brothers who operate the dealership group. "What I would say with the Lexus project is that they are being very careful about what is required of the dealers."

Before year end, Hennessy plans to launch an $11 million-plus redo of its Honda store in the Atlanta suburb of Woodstock, Peter Hennessy said.

"I don't know that we're going to sell any more new cars because of it," he said. "We will sell more used. And then we'll do a lot more fixed. So there's value there. ... Is there $11 million of value? With a Honda franchise — yes."

It's far from certain what will emerge as the right model for the dealership of the future. But many are betting that stores will have a smaller footprint and carry less inventory.

Inga Maurer, partner with global consulting firm McKinsey & Co., said at a Cox Automotive conference last month that alternative store formats are likely to emerge as dealerships face the specter of lower profits as sales move online. McKinsey estimates that up to half of used-vehicle sales and up to a quarter of new-vehicle sales will shift online by 2030.

Dealerships also have opportunity in the growing mobility space, such as by servicing ride-hailing vehicle fleets or operating their own vehicle subscription services.

The Hennessys are looking to the future. The new Ford-Lincoln store has a substantial commercial fleet servicing operation, and mobile repair units are in the works, too.

But even with the dealership of the future, Peter Hennessy said, "you've got to give a reason for a consumer to come to you."

Melissa Burden, Michael Martinez, David Muller and Lindsay Chappell contributed to this report.