It appears that all the push back from dealers has paid off. At the time I write this article, General Motors is issuing two-year extensions to the deadline for dealers to complete their Essential Brand Elements facility upgrades. It is not yet clear whether GM is agreeing to extensions with all dealers or just those in the “first wave” of required facility image upgrades. Whatever the case, GM’s actions serve as an excellent example of what can happen when dealers fight back against unwarranted facility upgrade requirements.
Almost every major vehicle manufacturer comes out with its latest, greatest facility image designs every few years, which typically include new space guides combined with new structural requirements pertaining to the look of the facility. For the latter requirement, manufacturers will include items like arched entrances, a particular type of tile in the showroom and a specific type of glass for the front of the facility. Of course, it is easy for the manufacturer to create a new image for its dealers’ facilities, but it is quite another question whether the cost of those image upgrades can be justified by the dealers who will be paying for them. A dealership facility can be attractive, clean and more than adequate in size to meet the needs of customers without including the manufacturer’s desired image changes.
Under the current economic circumstances, dealers should proceed very cautiously with spending millions of dollars on structural changes to their dealership facility if they believe their facility is more than adequate to meet the needs of their sales and service customers. The latest economic forecasts state that there is a 50% chance that the United States will dip into another recession (I am not sure we are out of the last one, but I am not the economic forecasting expert). When being asked to spend millions of dollars on a construction project, I don’t like those odds!
In addition to the broader economic conditions, many of our dealers, including GM dealers, complain that they cannot obtain enough vehicle allocation to keep up with customer demand as it is. Dealers tell us that they are at historic lows in day’s supply of vehicles and that dealer-trades for the most popular vehicles are virtually non-existent. It will not surprise you to hear me say that, if you are in this situation, you should be firing off monthly e-mails to your factory representative telling him or her that you continue to be short on vehicles. You have to be as specific as possible in requesting more allocation of the model vehicles most in demand in your market.
Unfortunately for most of you, other than maybe Honda and Toyota dealers, there does not appear to be any significant uptick in vehicle production capacity on the horizon. So, even if you assume the manufacturers’ always rosy sales forecasts are accurate, they don’t appear to be able to supply a sufficient number of vehicles to justify the expense of a remodeled and expanded facility.
With these kinds of forecasts, no businessperson would voluntarily choose to spend money to change a perfectly good facility when little or no return on that investment is expected. In speaking with our dealer clients regarding manufacturer facility upgrade pressure, the first thing we ask is “without the manufacturer’s pressure is a facility renovation something you would consider?” In most, but not all, instances the dealer’s response is “absolutely not.” That response should be the starting point in the dealer’s discussions with the manufacturer. I have written numerous times in this column about the process we use to assist dealers in pushing back against unwarranted facility demands. This process always begins with an economic and financial analysis of the dealer’s expected return on investment in the facility changes.
In addition to repeatedly documenting for the manufacturer the lack of expected return on the requested facility renovations, dealers should be communicating their concerns to dealer council members who, in many cases, have significant influence over the manufacturer’s decisions. Dealers need to arm their council members with as many examples as possible of the expected cost of a facility upgrade versus the little to no expected return on that investment.
GM dealers have pushed back against the Essential Brand Elements facility requirements since the inception of the program in the summer of 2010. The dealers we have advised have provided their GM representative, and in some cases their dealer council members, with detailed analysis of the cost of the changes to their facility, the difficulty in convincing lending institutions that the investment is a good risk, the continuing poor economic outlook in their market and nationally, the severe lack of vehicle allocation and, ultimately, an analysis of the lack of any material return on the cost of renovating the dealership facility. When dealers provide this kind of detailed information to the manufacturer and their dealer council representatives it can be a powerful tool in reducing or slowing the manufacturers’ facility image demands.
Many of you may have heard that the National Automobile Dealer Association has commissioned a study to review the costs and benefits to dealers and manufacturers of facility image programs. We hope to provide information from our experience with this issue and look forward to the study results.
Don’t pursue ownership changes without experienced legal assistance
In the last few months, we have been contacted by two large, privately held dealership groups that were pursuing internal ownership changes. Both groups were passing ownership down from the organization’s founder on to the next generation of dealer operators. Although both groups would be considered very sophisticated dealer organizations, they were having great difficulty obtaining approval from their manufacturers for these desired changes. We have seen this situation over and over again.
The problem is not with the dealership group; it is with the manufacturer. Unfortunately, most manufacturers simply don’t the respect dealers’ requests for an ownership change. Whether intentionally avoiding dealers requests or as a result of having too much on their plate, we have seen manufacturers allow a dealer’s ownership change request languish for months. What many dealers don’t know is that most state franchise laws require the manufacturer to respond to an ownership change request within a specific period of or the request is automatically approved.
It is money well spent to utilize an experienced franchise lawyer to assist with obtaining approval of an internal ownership change – especially if complicated estate planning mechanisms are also part of the proposed change. Once the manufacturer realizes that legal counsel is involved the request seems to garner increased attention. Experienced legal counsel will know what information the manufacturer needs to more quickly process the request. Likewise, the manufacturer will not feel quite as comfortable attempting to delay the approval process by asking over and over again for “additional information.” For those manufacturers that do ask for additional information, experienced motor vehicle franchise counsel will know what is reasonable and what requests need to be politely rejected as unreasonable.