Are recent sales deficiency letters part of a larger plan for terminations?
Over the week, a number of our General Motors dealer clients have received letters from their respective brand vice presidents alleging that the dealership is not reaching its required Retail Sales Index of 100. The letters include reference to the dealership’s RSI performance through June, 2012 as compared to RSI performance for year-end 2011. General Motors strongly urges the dealership to improve its sales and market strategies and, ultimately, warns that the dealership’s “chronic poor performance is simply unacceptable.”
These letters are being sent in addition to the quarterly sales performance reports, which gauge dealers’ sales performance against RSI as “satisfactory,” “unsatisfactory” or “needs significant improvement.” GM appears to be targeting dealers of all brands, which are performing below a certain RSI level with these sales deficiency warnings. The rumor is that the bottom twenty-five (25%) of dealers in each state received one of these warning letters.
As these sales deficiency letters may be part of a process being implemented by GM to take further action against alleged poor performers, dealers receiving the letter should take care to promptly respond to the letter in writing. As I have discussed repeatedly in this column, dealers who receive written communications from their manufacturer alleging a failure to meet the dealership’s sales performance obligations must respond in order to prevent the manufacturer from creating a one-sided paper trail.
Dealers should include in their response all material factors, which may be preventing the dealership from performing at an RSI of 100. We know from our efforts to assist GM dealers in responding to the quarterly sales performance reports mentioned above (and discussed previously in this column),that these factors may include (i) a faulty re-assignment of the dealership’s AGSSA in 2011 following major changes to the GM dealer network in 2010; (ii) a lack of available new vehicle inventory; (iii) ongoing EBE facility upgrade construction; or (iv) any other unique market issues that are negatively impacting sales performance.
Apart from these dealer-specific factors, dealers should include in their response reference to the unfairness of being compared to dealers in other parts of the state, which may have very different market conditions and demographics. Dealers should also address the inherent unfairness of the use of an “average” to measure RSI. It is mathematically impossible for all dealers to be at or above average. Instead, there are always going to be dealers performing below 100% RSI and if those dealers are eliminated, there will be a whole new set that fall below the “average,” as that number is readjusted amongst the remaining dealers.
General Motors has made it clear through its various initiatives that it desires to shift its dealer body away from smaller, family-owned operations to larger dealer groups with alleged access to larger amounts of capital to invest in things like Essential Brand Elements-compliant facilities. General Motors’ plan may also include another attempt to reduce the total number of dealers in its dealer network, however, recent add-point notices put this assumption into question. The issuance of this form sales deficiency letter to a specific group of dealers could indicate that a plan has been put into place by General Motors to push allegedly under-performing dealers out of the dealer network.
Manufacturers have used allegations of poor sales performance and threats of termination in the past as a way of pressuring dealers to sell their store. Dealers should stand up to these allegations and threats as every state in the union has franchise laws which protect dealers from unwarranted terminations. With most dealers in the throes of completing an Essential Brand Elements-compliant facility, General Motors will have a very difficult time meeting its burden of establishing good cause for a termination in the face of such a major capital commitment by the dealer. Some states go further than requiring the manufacturer demonstrate good cause by requiring that the manufacturer first utilize a “reasonable” sales performance measurement before being permitted to proceed with an allegation of a breach of the dealer agreement. Other states specifically prohibit a termination based upon a failure to sell a specific number of new vehicles.
General Motors is likely testing the waters to see which dealers will quickly buckle under the pressure from allegations of poor sales performance and threats of termination, so as to accomplish their goal of replacing these dealers with what General Motors believes to be more sophisticated and well-capitalized operators. Don’t be the proverbial low-hanging fruit! Respond aggressively to General Motors’ sales deficiency letters, along with the quarterly sales performance reports, with a detailed description of those factors which are out of your control but are nonetheless adversely impacting your dealership’s sales performance and ask General Motors to take those factors into account in using a more appropriate measurement of the dealers sales performance.
Vehicle allocation challenges in the wake of Sandy
We have all seen the pictures on the nightly news of the devastation suffered by some dealers in New Jersey and New York. In some cases, entire inventories were wiped out by flood waters. Estimates of the total number of new vehicles lost to the storm from dealer’s inventory and manufacturer supplies held at port have ranged from 15,000 to 30,000.
Obviously, the dealers, which lost most or all of their inventory are in desperate need of replacement inventory and, hopefully, the manufacturers will come through with new vehicles for these dealers in short order. Another very serious concern getting less attention is the question of what will be the source of these replacement vehicles? Based upon a conversation with a New Jersey Chevrolet dealer who was not directly affected by the storm, it looks like General Motors, for one, is drawing the replacement vehicles from only its dealers located in the Northeast region. This approach does not seem at all fair considering that the other dealers in the Northeast region should not be disproportionately penalized in comparison to dealers in other parts of the country. If manufacturer take a few vehicles from each dealer’s expected allocation across the country, the impact on any given dealer is minimal and the end result is the same – replacement vehicles are supplied to those dealers devastated by Superstorm Sandy.
Other manufacturers may also be planning the same approach to reloading storm-damaged dealers with new vehicle inventory. If so, I would encourage dealers in the Northeast to complain strongly that taking vehicles out of the allocation pipeline of only dealers in the Northeast is entirely unfair and unnecessary. Moreover, the relatively unaffected dealers in the Northeast will be subject to a huge demand for new vehicles from storm victims who lost their vehicle in the storm. In anything, additional vehicles should be diverted to ALL dealers in the storm-affected areas, both those who suffered inventory loss and those that did not, in order to capitalize on the uniquely high demand for new vehicles, which will be experienced over the next several weeks.
Dealers who are able to meet this demand will not only increase revenues but will increase their sales performance under the manufacturer’s measurement system. Dealers who are not able to meet this high demand will not only lose the opportunity to generate additional revenue but will also see a decline in their sales performance measurement.