Three Reasons Dealers Are Unhappy Amid A Strong Market

(AutoSuccess magazine’s blog published a post from me today. I thought I’d share it here, too.)

I found myself asking why dealers might be unhappy, despite a new vehicle market that has, and continues to be, quite strong.

The question follows an Automotive News article about the recent Dealer Attitude Survey conducted by the National Automobile Dealers Association (NADA). The headline: “Despite Growth, Some Grumble.”

The survey queries dealer attitudes about the value of their franchises, as well as factory policies and people. If the survey results were a test, dealers collectively gave their factory partners a “B-.” Dealers also graded 20 of the 32 franchises surveyed as a “C” or worse.

If one of my sons brought home a report card with these kind of grades, there would be a reckoning. For the industry, the survey results suggest a sizable disconnect between dealers and their factory partners.

The article aptly notes that factories fare worse when they lack the right product, in the right places, at the right time. Dealers invest their family fortunes in their dealerships, and trust their factory partners to get it right with the product.

But I wondered what the survey results suggest about issues other than products. I believe there are three areas that, if better addressed by factories, would lessen the current level of dealer-to-factory dissatisfaction:

Inventory: If you ask dealers whether they can consistently get the cars they want from the factory, you get a mix of answers. Some can only request what they’d like. Others order the cars they want with little or no guarantee they’ll get them. Too often, it seems, dealers end up with vehicles they didn’t necessarily want or need.

At its root, the problem owes to factory desires to control vehicle production and distribution on their terms. But these terms don’t necessarily serve the needs of dealers or their local buyers.

The challenge for factories is to more closely align their vehicle production and distribution practices with dealer choice and desire. Of course, they can’t make every requested vehicle. But I suspect even small improvements to link new vehicle supply/demand would improve dealer sentiments.

Facility Investments: Factories continue to require dealers to make sizable investments in facilities on prime retail locations. These requirements come despite the reality that today’s buyers shop physical stores less frequently. A relatively strong new vehicle market tends to mask the burden facility requirements create for dealer profitability. Yet, I suspect some of the dealer dissatisfaction in NADA’s survey owes to a nagging fear I share with many dealers: How will these investments make sense when new vehicle sales diminish, and dealers must shift an ever-greater share of resources to offer the more efficient, e-enabled vehicle purchase process buyers want?

Below-the-Line Money: You also get a mixed reaction when you ask dealers whether they like the stair-step incentive programs and other below-the-line money factories now provide to drive sales volume and, in some cases, offset the dealer’s facility investment. For some dealers, earning this money becomes a chief part their new vehicle retail strategy, creating scenarios where volume-based dealers can effectively under-cut competitor pricing and retail vehicles well below invoice.

I recognize it would be difficult for factories to eliminate these programs, given they’ve become an operational standard in the industry. Still, there’s little doubt that some of the NADA survey dissatisfaction owes to the contribution, albeit indirect, that factories make to the “race to the bottom” dealers complain about.

A final point about the NADA survey data: This year, dealers gave an average grade of “B” to the 10 best-scoring factories — the same grade they gave to the top 10 in 2011. The parity comes despite projections that dealers will sell four million more new vehicles this year than five years ago — a sign, I believe, that factories have some work to do.