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Tuesday, April 5, 2011

Dealers Push Back

Emboldened by recent healthy profits and the prospects of a recovering economy, auto manufacturers are pressuring their surviving dealers, at least the ones that have survived arbitrary terminations and recession, to upgrade their facilities. This, at a time when Dealers are desperately trying to repair their balance sheets and reconstruct relationships with their bankers after a bloody few years of just trying to “hang on.” Dealers have enough problems dealing with recalcitrant banks just to maintain reasonable floor plan lines and capital loans without having to ask for facility renovation money. Perhaps after a few years of recovery and bolstering their balance sheets, Dealers might be in a better position to entertain the idea of facility upgrades. And for the ones who can get financing or have cash, does it or will it make economic sense given current trends?
Manufacturer’s demands and requests are often supported by “focus groups” where consumers are asked what value they put on a dealers facility. Everyone seems to like a nice clean facility. Let’s face it, shiny granite, marble and wood DO make an impression. So do boutique expresso bars, nail salons, shoe shine stations, and other “foo-foo” features. The problem is, as much as consumers like these things, a growing number aren’t willing to pay for them. The consumer thinks the value of their business is the 35K they just paid for a new vehicle, not the $2k the Dealer retains out of which they pay their expenses.
Increasingly, consumers care less and les about fancy facilities as their PC and monitor tend to be their showroom of choice. While a facility on a high traffic piece of property might bring consumers in to take a sales person’s time to answer questions and take a demo drive, the negotiation is much more likely to take place “on line” these days. This IS the “new normal.” This is where high overhead becomes a disadvantage. As one consumer said to a Dealer friend, “I can’t drive your overhead, why would I want to pay for it?” This same Dealer, who shall remain nameless, is being pushed by his manufacturer to erect an elaborate sign to replace the one that existed when that manufacture terminated his franchise. Having regained his franchise through arbitration the OEM just can’t understand that the old sign was “grand fathered” and the new one has to meet CURRENT city code. The sign is a small part in a major push to “encourage” the Dealer to invest more in an already impressive facility. But this is just another day in the life of a dealer.
Dale Pollak, chairman of vAuto, is right when he wrote in a recent article that there is no need for dealers to do warranty and repair work on a high dollar piece of property. Is the added convenience worth the extra overhead?
The retail auto business is trending in such a direction that Dealers need to be more conscious of overhead costs than ever before. Manufacturers need to “get a clue.” If their Dealer can’t compete because of unnecessarily high overhead mandated by the manufacturer, it becomes increasingly difficult to find another investor Dealer for that point.
And as the Internet provides a more efficient market for each new generation of consumers, high cost facilities become even more of an albatross. In other words, expect the current trend away from “in showroom” negotiation to “online” negotiation to accelerate.
Manufacturers and some Dealers seem to ignoring a demographic fact. Consumers my age tend to put a lot of value on relationships, proximity, and convenience. But younger consumers are different. They have never known life without the Internet. They feel empowered by it. They are much more likely to use the “Taj Mahal,” high overhead dealer for information and service and warranty work, but to use the Internet for negotiation. They will travel for the cheapest price. I wish this weren’t so, but it is what it is.
As such, we’re in virgin territory in the retail auto industry. The new “book” is still being written. Manufacturers cling to commonly held dogma, as do many Dealers. But the future will only be loosely based on old models. The day is coming when Dealers will have to bid for a consumer’s business on line!
The pre-owned business will most likely increase in relative profit importance in tomorrow’s dealership. Warranty income will probably continue to dwindle due to the increased quality of vehicles. Financing and after market income is under the scrutiny of Elizabeth Warren and federal bureaucrats.
The future will belong to those Dealers who are prepared for it, and not encumbered by yesterday’s standards.
So when the manufacturer comes calling Dealers may need to learn how to, “Just say NO!”
Written by David Ruggles for Auto Finance News