Audi May Buy Back Franchises

It was a good year for Audi of America Inc., with sales up 8.5% and a record of 90,000 vehicle deliveries in 2006. Indications are that more good news awaits Audi this year. But while indicators point up for Audi, its dealer count may be headed down.

Audi has no formal plan to reduce dealerships. But a look at the dynamics makes it doubtful Volkswagen's luxury brand will finish this year with the same 267 U.S. dealerships it had at the start.

“Clearly, we do not need 267 dealers,” says Johan de Nysschen, executive vice president of Audi of America. “Does that mean that we're going to close down some dealers? No.”

But that doesn't mean that he won't buy back some franchises.

De Nysschen is a sharp auto executive when it comes to dealers. He understands Audi's success is linked to their success.

Since his arrival in the U.S. in late 2004, de Nysschen has been tinkering with Audi's dealer network, trying to make it easier and less expensive for dealers to do business with Audi and to increase their profits.

He created a competitive lease deal, promised to increase dealer margins while making the formula less complex and established a pilot inventory program designed to cut floor-plan costs.

He also is streamlining and bundling vehicle options to make ordering easier.

He established a goodwill fund so dealers can perform free select out-of-warranty repairs without getting permission from the German home office.

That can take up to two weeks. He's getting rid of some absurdities, too, such as Audi's insistence that measurements for dealership dimensions be in meters, a demand that increases construction costs.

“We need to do things that are more suitable for the U.S. environment, rather than look at our dealers as a province of Germany,” de Nysschen says.

“But in return I want our dealers to be engaged in the future of Audi,” he adds. “I want them to put their money where their mouth is. We can no longer have dealers holding back. If they don't want to participate in the future, I would like to buy their dealership back.”

Audi has 100 stand alone dealers. The other 167 are dual outlets or of multiple brands, mostly brand cousins Porsche and Volkswagen.

Many existing Audi dealers are in small markets. They wouldn't be there if Audi were rolling out a dealer network today. De Nysschen says he won't bother with them. He's going to push for exclusivity in markets where dealers can turn 500 annual sales.

That means building improved facilities. In the past, it was hard justifying an investment in Audi because the franchise struggled with profitability, says Jerry Nelson of Schneider Nelson Audi in West Long Beach, NJ.

But as sales go up Audi dealers find they can make money and even justify building new facilities. Nelson completed construction on separate buildings for his Land Rover and Porsche franchises in 2006. He converted his original facility to a stand-alone Audi store.

Last year, Nelson sold almost 500 Audis. This year he expects to sell 600 to 700.

He says it hurts the brand when some dealers treat Audi as “a stepchild in the corner of a showroom.”

“Audi doesn't need more dealers, they need better dealers,” says Nelson. “We need to sell more in the marketplace and low volume dealers need to be bought out by dealers who do have the volume.”

But in some cases it is: What comes first, investment or profit? The Howard Cooper Import Center in Ann Arbor, MI, is comprised of Audi, Honda, Porsche and Volkswagen franchises. The three German brands are housed under one roof.

“Audi volume is not that big, probably 150 cars annually,” says Howard Cooper. “You can't build buildings selling 20-30 cars a month.”

High-volume Audi sales are a challenge for Cooper. He's in an area — metropolitan Detroit — with three large Audi dealerships. And although he says he holds his own, attaining the critical sales mass to justify new facilities is daunting.

An Audi dealer since 1972, Cooper says: “We stayed with them through thick and thin, through the acceleration problems (publicized allegations that cars suddenly lurched forward) and the quality problems when they first came into the country, and we represented them well.”

Many low-volume Audi dealers could say the same thing.