Depending upon the side of the transaction you are on, the intense demand for vehicles by the consuming public can be a very good or very bad situation. The transaction I am referring to is not the one between the dealer and consumer, but between the manufacturer and dealer. Many dealers are finding that not only can they not obtain a sufficient number of vehicles to meet the demands of the consuming public, but they cannot obtain a sufficient number of vehicles to carry on a viable business, period.
More so than in many, many years, Bass Sox Mercer has been fielding calls from dealers complaining that they can’t get a sufficient number and mix of vehicles to be competitive in their market. These complaints go beyond not having enough of a temporarily “hot” model. The dealers contacting our law firm report that they can’t obtain enough of almost every model offered by their manufacturer. These dealers range from Chevrolet dealers to Volkswagen and Audi dealers to Volvo dealers.
Anytime that production capacity is limited the manufacturer becomes a king-maker. There will be winners and there will be losers. With limited available allocation, it is inevitable that certain dealers will be favored over others. Even assuming the manufacturer applies their base allocation system fairly, there are a significant number of vehicles that are handed out to dealers at the sole discretion of local or regional representatives. We have found that the smaller the dealer the less important they are to their manufacturer representatives. As a result, it appears to be the larger volume dealers who are favored with allocation.
For the VW and Audi dealers who are not large volume dealers, allocation has suffered over the past two years as the vehicles in those brands have become increasingly popular. These dealers have been thrown into a vicious cycle of not having a sufficient mix of vehicles available for their customer to purchase, then falling below required sales performance levels to, ultimately, receiving a letter of termination for failure to perform under the sales obligations of the Dealer Agreement. We currently have both VW and Audi clients that have either received a termination notice or are under threat of termination for an alleged failure to sell enough new vehicles. The absurdity of VW and Audi’s position is that the dealer sells their new vehicle inventory as fast as they receive them only to be allocated less than a sufficient amount of vehicles to replenish their inventory. As a result, these dealers are being asked to sell more vehicles than VW and Audi are willing to supply.
Manufacturers routinely hide behind the mantra that all dealers are “treated equally” under the turn-and-earn allocation system. However, when a dealer doesn’t receive at least as many vehicles in allocation as were sold in the prior allocation period something is terribly wrong. This is the situation that many VW and Audi dealers now find themselves. For a few of these dealers, the replacement allocation has been reduced to a mere trickle. We have one Audi dealer that has three vehicles total on their lot with no more vehicles due from the manufacturer for two months. For dealers in this situation, it becomes a fait a compli that they will simply die on the proverbial vine if not terminated sooner by the manufacturer.
Dealers who find themselves in this situation should immediately retain experienced motor vehicle franchise counsel to make a legal demand on the manufacturer to provide the dealer with more vehicles or else be responsible for the damages which result when the dealer is forced to go out of business.
Other dealers, such as Chevrolet dealers, are in the category of being short in some, but not all models offered by the manufacturer. Although these dealers have not reached a point of threatened viability they are, nevertheless, losing an unusual amount of customers as a result of not having sufficient inventory. These same dealers are also having their sales performance calculation negatively impacted by the lack of sufficient inventory. Dealers in this category need to keep the pressure on the manufacturer to provide more vehicles. Dealers should be specific about which models they are short on and do so in writing. Having this paper trail will not only put pressure on your manufacturer representative to treat you fairly on allocation, but will protect you from allowing the manufacturer to capitalize on allegations of sales performance deficiencies.
For Volvo dealers the situation is very different. We have been told that few, if any, dealers have sufficient vehicle inventory. Instead of providing United States dealers with vehicles, Volvo has chosen to divert their vehicles to countries like China. Although Volvo doesn’t appear to be showing favoritism amongst its United States dealers it is nonetheless potentially in violation of a number of state franchise laws and Volvo’s own Dealer Agreement for depriving dealers of a sufficient quantity and mix of vehicles to allow them to be viable. When entering into dealer agreements with its dealers, Volvo became obligated to provide those dealers with enough new vehicles to sustain dealership operations. That does NOT mean that Volvo has to create production capacity that it does not have but what it does mean that it must provide its U.S. dealers with enough vehicles out of what is actually produced to give those dealers a chance to survive. Right now Volvo dealers are struggling just to keep the doors open. They don’t have enough Volvo vehicles of any type to cover their dealership overhead.
The Volvo situation may be ripe for a class or mass action by all United States dealers arguing that each has been adversely affected by Volvo’s failure to meet its obligation to provide a sufficient number and mix vehicles to those dealers. The benefit of such an action is that no one dealer is sticking their neck out in battling the manufacturer and no one dealer is bearing the cost of the fight. There is strength in numbers.
One final note. As soon as dealers see a pattern of limited allocation and long before dealers reach the point of threatened viability, you should print and retain copies of any allocation reports available which show the allocation to your dealership as compared to other dealers in the zone or region. These reports are critical in countering the manufacturer’s argument that the turn-and-earn system is fair and equitable. Generally, however, the manufacturers do not maintain these reports and, thus, they are not available at a later date through the discovery process when the dealership’s attorney will need them.
