SHOPSMART AUTOS – CUSTOMER INFORMATION – AUGUST 31, 2021
INSIDE THE BATTLE BETWEEN DEALERS AND CAR MAKERS (PT.2) Vehicle allocation refers to the number of cars and the mix of models assigned to a franchise-holder. Stories abound of automakers foisting unpopular models on dealers as a condition of receiving the hottest-selling vehicles—it even happens at the top of the automotive food chain. The new FF has not been warmly received by Ferrari customers, and sources say dealers are being forced by the carmaker to take an FF with every batch of hot-selling 458s. Most state franchise laws prohibit such allocation coercion, but again, it is difficult to prove. In the relationship between dealers and factories, law collides head-on with reality. Most franchise laws favor dealers, as the regs are written at the state level, where dealers are politically more powerful than far-off factories. Even so, few dealers can afford an extended battle against a manufacturer’s large corporate legal department. The automakers don’t like litigation, either. A loss in court could set a precedent that would then apply to all dealerships in that state and perhaps elsewhere in the country. That’s why out-of-court settlements are the rule rather than the exception. If a manufacturer expects substantial regional sales growth, it can survey its local dealerships and then dictate that they expand their operations—showroom, service facilities, lots, everything—to meet the projected volume. The dealer might be less optimistic and reluctant to fork over the millions required to inflate his business by 50 or 100 percent. If, however, he is uncooperative, the factory might add another franchise nearby that will cut into his existing sales. If state laws prohibit that, the manufacturer can cut a portion of the dealer’s margins, relying on a clause in the franchise agreement that specifies the size of the dealership required by each market area. “Market area” being a somewhat nebulous concept, there is much room for disagreement. Additionally, factories have been known to get twitchy when their dealers own another store peddling a brand deemed undesirable or overly competitive, even if the second franchise is housed in a different building. It’s technically illegal for a manufacturer to do so, but adding a brand that the carmaker doesn’t like might trigger a clause in the franchise agreement that cuts a dealer’s margins. One dealer told us that the clause cost him $25,000 to $40,000 a month—enough to motivate him to sell the offending store.For all of the dancing that manufacturers demand, the benefits of being a car dealer have been steadily increasing for decades as profit allocations have shifted. To encourage dealers to comply with their wishes, manufacturers offer so-called “back-end” bonuses, whereby they cut the dealer a check after the sale. As one retired factory sales executive puts it, “In the old days, there might have been a $1000 margin on a $10,000 car, but the dealer only got $200 of it after the deal was done. Today, if the dealer is keeping the factory happy, he gets $500 for sure at the back end, and anything he makes on the deal is pure gravy.” Some manufacturers reward strong performance on customer-satisfaction surveys with a bonus of roughly three percent on each car sold, meaning those perfect scores can be worth $600 on a $20,000 car. Money, of course, has a way of keeping everyone happy. As one dealer puts it, “If a factory has a hot product line, the dealers will make a lot of money and the factories will get all the cooperation they want. But if the dealers aren’t making a profit, they’re not interested in factory brainstorms. In fact, the smart money will leave the franchise and invest elsewhere.” That, it seems, is what passes for a fair fight in the relationship between dealers and manufacturers.
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