I wrote in last month’s column that the expected limited availability of vehicles across all linemakes, and in particular Japanese manufacturers, was going to be serious concern on several fronts. At this writing, Toyota’s production is currently down by 48%, Honda by 53% and Nissan by 26%. Other Japanese automakers are down as well along with parts shortages affecting domestic manufacturer production. In addition to the obvious loss of critical revenue from the sale of vehicles, the lack of a sufficient supply of vehicles impacts the viability of a facility upgrade and will undoubtedly cause some dealers to be at a greater disadvantage than others due to favoritism in the allocation of available vehicles. For those dealers operating under a sales deficiency letter, however, there is a silver lining.
Manufacturers who have been sending threatening letters which demand the dealer sell more cars or be subject to termination, will have no leg to stand on in continuing to pressure dealers if they cannot supply a sufficient number of cars. Dealers can’t increase sales if they don’t have cars to sell! Subaru is the first manufacturer we are aware of that has admitted to this fact in writing.
This week, one of our dealer clients who had been previously threatened with termination if his sales did not significantly improve, received a letter of Subaru. The letter stated that Subaru was withdrawing its notice of default until such time as Subaru can provide additional vehicles to the dealer. At that time, Subaru stated it would reassess the dealer’s performance. Imagine that – a manufacturer being honest about the dealer’s circumstances! Kudos to Subaru for being in touch with reality!
For the rest of our dealer clients who are operating under the threat of termination due to an alleged failure to meet sales standards, we will keep reminding the manufacturer that the sales performance matrix is totally invalid under the current industry circumstances. In a turn-and-earn allocation system, dealers cannot increase their sales without obtaining a long-term increase in their new car inventory. Dealers cannot earn more vehicles over the long-term without increasing sales over the short-term. In normal times, this short-term bump in sales comes about by obtaining additional vehicle inventory from dealer-trades or from a one-time “special allocation” from the factory. These aren’t, however, normal times. There are no dealer-trades to be had other than for an exorbitant premium and, as we know, the factory is not in a position to provide a special allocation of vehicles to anyone.
Dealers who have received a sales deficiency notice from their manufacturer in recent months should be sure to make the argument in writing that under the current vehicle production constraints it is impossible for the dealer to increase its sales volume. As a result, these dealers should demand the withdraw of the deficiency notice as has been done by Subaru.
Add points are heating up again
After several years of little to no activity by manufacturers in adding new dealerships, we have begun to see a marked increase in notices of proposed new dealership points across the country. The most active manufacturers appear to be Kia, Hyundai, VW and Audi.
Dealers of all linemakes need to remember that almost every state’s motor vehicle franchise laws require a manufacturer to give notice to existing dealers of a proposed new dealership location in their area and further provide existing dealers the right to protest the addition of another dealership into the market.
Add points are the classic example of where the economic interests of dealers and manufacturers diverge. The addition of a new dealership into an already well-represented market will serve to cannibalize sales that the existing dealers would have otherwise captured, in turn, making it very difficult for the existing dealers, as well as the new dealer, to be profitable. To the contrary, from the manufacturer’s standpoint, if the addition of that new dealership generates just a few additional vehicle sales into the market on an aggregate basis then the manufacturer has increased its revenue. For this reason, it is very difficult for the manufacturer to accept an otherwise common-sense business case that an additional dealership in the market is not only unnecessary but will be harmful to existing dealers. Of course, if the manufacturers truly cared about dealers’ profitability they would make their decision by first analyzing the effect the new point will have on the bottom line of existing dealers. Our experience, however, is that the manufacturers do not perform such an analysis, but instead hold onto the tired, old mantra that a new dealership will increase all dealers’ sales in the market due to greater product exposure.
Because the manufacturers’ and dealers’ interest are so diverse in this area, dealers must seriously consider taking advantage of the right to challenge the proposed addition of a new point into their market. State franchise laws generally require the hearing officer or judge to take into consideration not only the benefit to consumers (convenience), but the harm to existing dealers. As a result, if the protesting dealer has, for example, recently upgraded his or her facility then a strong argument can be made that the loss of revenue, which will result from the new dealership will be particularly threatening to the existing dealer’s financial viability. Likewise, if the existing dealers in the market are selling their expected number of vehicles under the manufacturer’s own sales performance formula, and there has not been a significant change in population, then the existing dealer has a strong case against establishment of an additional franchise in the market.
Unlike other types of “litigation” against the manufacturers, an add point protest is typically administrative in nature and, as a result, is not viewed by the manufacturer as a particularly aggressive move on a dealer’s part. Instead, we have found that manufacturers accept, albeit begrudgingly, that the protesting dealer is protecting his or her investment in the franchise. We have further found that the vast majority of add point challenges are settled with the manufacturer offering the dealer some significant benefit (cash, an LOI for another point, advertising assistance, facility assistance, etc.) in exchange for agreement to allow the new dealership. In other cases, the dealer and manufacturer agree to disagree and the challenge goes to a final hearing.
Whatever the situation, existing dealers who receive a notice of a proposed new dealership point for their market should not waste the hard-fought rights provided under state franchise laws if they believe in good faith that the new point will do more harm than good.