DETROIT – Automaker incentive programs that prod car dealers to sell more vehicles – often at deep discounts at certain times to hit monthly numbers – are damaging the industry, the chairman of the National Automobile Dealers Assn. tells journalists here.

“Any dealer who’s had to deal with these programs can tell you that they are not only trust killers, they’re brand killers, too,” Mark Scarpelli, the trade group’s chief elected officer, tells the Automotive Press Assn.

“Not being able to offer two customers the same price on the exact same equipped vehicle, just because they came into the dealership on different days of the month, destroys consumer confidence,” he says. “Every dealer knows this.”

He takes particular aim at so-called stair-step incentive programs, which are all-or-nothing propositions – one reason most dealers disdain them, according to NADA polling of its membership.  

The programs pay dealers rising bonuses as they hit or exceed sales targets, but pay nothing if those targets are missed, even just slightly.

The practice often leads to deep discounting, particularly at the end of a month, as dealers strive to sell enough to collect their manufacturer bonuses.

In worst-case scenarios for dealers, they heavily discount units as the deadline nears, but still end up falling short of the goals. When that happens, dealers lose both ways: They’ve sold cars at a loss in pursuit of a bonus they end up not getting.

Automaker incentives have grown in importance as a dealer revenue stream. As profit margins have narrowed in the age of price transparency, dealers today make less money from buying a car at wholesale and selling it at retail.

Now, a primary source of revenue is the incentives automakers pay dealers for meeting manufacturer-set sales goals. The rub for dealers is not receiving money from those programs, but rather the stipulations that come with them.

Scarpelli refers to “factory creep,” or “the further attempts to exert more OEM control over dealership operations.”

NADA contends heavy-handed incentive programs can do all sorts of harm, from eroding demand to tainting brand loyalty. The trade group commissioned the Analysis Group to study the consequences of such initiatives.

The study found:

  • Stair-step incentives can increase sales in the short term, but that should not be confused with an increase in consumer demand or the value of a brand.  
  • Manufacturers that aggressively use stair-step programs risk damaging their brand in the long run and entering a death spiral of declining demand that eventually no amount of discounting can profitably overcome.

“On a new, lower demand curve, you only have two choices: You can sell fewer vehicles or you can further lower prices just to be able to sell the same amount you would have originally,” says Scarpelli, a second-generation metro Chicago dealer who early in his career worked as a General Motors field representative.

He tells APA members: “I am not going to go through the entire report with you today, because we have decided to share it with manufacturers first. We believe it is just that important. And we want to have constructive conversations with them about where we can go from here.”