The Japanese earthquake and tsunami have rocked the automotive world. Honda has reported, at the time of this writing, that it is still not able to manufacturer the Fit small car, the CR-V crossover and the Acura TSX sedan. Toyota announced that it will resume only limited production of its hybrid models manufactured in its Japanese plants, including the popular Prius model, and it also expects reduced production schedules for its U.S. and Canadian plants. Mazda has informed dealers that there are as many as seven models built in Japan that dealers may not be able to order for some time. Nissan announced that it has shuttered its V-6 engine plant in Japan and several other non-Japanese manufacturers have announced an expected shortage of certain critical vehicle components.
So, where does this leave dealers who were, over the past several months, beginning to see sales approach pre-recession levels? To be clear, there is no provision in your Dealer Sales and Service Agreement or state franchise laws to which we can point that would allow you to demand additional allocation of vehicles. Instead, most Dealer Sales and Service Agreements, as well as state franchise laws, specifically exempt manufacturers from providing a sufficient supply of vehicles if, due to circumstances out of the dealer’s control, vehicles are simply not available. Clearly, that is the case for any manufacturer impacted by the Japanese earthquake and tsunami. This situation, however, raises a much more subtle concern for dealers – that is manufacturer representative’s tendency to play favorites when product is limited.
When it comes to playing favorites on allocation, there are significant protections under both Dealer Sales and Service Agreements and state franchise laws. Most Dealer Agreements contain a requirement that the manufacturer provide a sufficient supply and mix of vehicles to dealers. Most state franchise laws go a step further by requiring manufacturers to distribute vehicles to dealers in a fair and equitable manner.
The more vehicles become limited over the next weeks and months, the more ripe the situation will become for manufacturer representatives, who have significant discretion over a portion of new car inventory within their region, to favor some dealers over others. With significant incentives and market share at risk, I would expect the most influential dealers to apply tremendous pressure to receive additional allocation from their regional representatives. I would likewise expect many of those manufacturer representatives to give in to the pressure.
Dealers on the losing end of the battle for allocation will need to do all they can to monitor the allocation of competitors in their markets. If you see dealers receiving an inordinate amount of product, it is critical that you document your concerns to your manufacturer representative in as much detail as possible. If the situation is not corrected after the favoritism is exposed then dealers must turn to their Dealer Agreement and state franchise laws for relief. Dealers will have a right to bring a claim against their manufacturer for a failure to adequately and fairly allocate product resulting in lost sales and service revenue. Dealers in this situation should be careful to record all lost new car sales resulting from the unavailability of the vehicle sought by the dealership’s customers. The total lost revenues associated with the sale of a new vehicle from the dealership’s other profit centers (F & I, trade-in and service) can then be extrapolated from the dealership’s historic financial statements.
Dealers whose manufacturers are expected to experience significant reductions in certain model vehicles must be vigilant to insure they are being treated fairly in the allocation process. Any dealer who suspects other dealers are being favored should contact an experienced motor vehicle franchise attorney to determine what specific relief is available within the applicable Dealer Agreement and state motor vehicle franchise laws.
Surprising Changes in Dealer’s Areas of Responsibility
As I reported previously in this column, both General Motors and BMW recently gave dealers notice of changes to their areas of responsibility. BMW notified dealers at the end of January that effective January 1st (got to love the retroactive application), their assignment of territory was being altered based upon new market studies. GM, on the other hand, was kind enough to give dealers 30 days to respond to notice that their territory, known as “Area of Primary Responsibility,” was being altered.
What was surprising about the GM changes to dealer’s APR was that there were as many dealers that lost territory as gained territory. That wasn’t supposed to happen. Ultimately, GM eliminated approximately 500 dealerships as a result of its bankruptcy proceedings. Even though there were a number of dealerships reinstated due to the federal Dealer Arbitration Act, the net effect was that hundreds of stores were permanently closed. Of course, some of those franchises were awarded to other existing GM dealers but no new dealerships were opened as a result. So, with all this consolidation, one would expect lots of freed up territory that must be divvied out to existing dealers’ APRs. That’s not what happened! Instead, many dealers had territory removed from their APR.
Most dealers understand that gaining territory in their area of responsibility is generally not a good thing. Additional territory means that your sales performance is now being judged against a larger number of industry registrations which, all else being equal, will cause your sales penetration to go down. Obviously, an increase in territory is something that should be studied closely and challenged if unwarranted, but what about a decrease in assigned territory?
In some circumstances, a decrease in assigned territory can be harmful to a dealer as well. Depending on the territory, if a dealer has made a substantial investment in marketing to customers in that area, and the dealer is sufficiently penetrating that area, then it may be in the dealer’s best interest to challenge the removal of that territory. When territory is removed, the residents of that area will receive marketing and recall mailings directing those residents to a different “preferred” dealership.
Additionally, the loss of the territory and the resulting direct mail pieces will likely cause confusion among the customer base and potentially raise questions about the status of the store that formerly serviced the lost territory. Also, direct mail that provides a preferred dealer can and will likely send some of the customers in that territory to another dealer. Consequently, the above factors could likely result in lost repeat customers, less residual sales and service business, and ultimately lower sales and service revenue.
Accordingly, dealers that have a net loss in territory would be wise to look very closely at the specific territory that will be removed as well as the customer base within that territory and attempt to determine the impact on the dealership from the removal of the territory from their area of responsibility. If it looks like the loss of territory will cause significant damage, the dealer should convey their concerns to the manufacturer in writing.
Many of our GM dealers have given GM notice of their concern with both the addition and removal of territory to their APRs. GM has acknowledged those concerns and promised to incorporate them into its final assignment of territory. Whether or not GM truly takes into consideration the dealer’s position on the proposed change in APR remains to be seen. Whatever the result, however, it is very important for the dealer to take that first step and document his or her concern with the change in territory just in case there further action necessary in the future.