FRANCHISE SYSTEM IS ALIVE AND KICKING

“Focus on core competencies. Let the dealers be dealers, and let the factories be factories.”

REMEMBER A FEW YEARS BACK WHEN FRANCHISED dealers seemed like an endangered species?

Some seers predicted that Internet car-buying services would turn dealers into little more than deliverers of vehicles sold on-line by someone else. Oh yeah, dealers would keep the privilege of servicing those dot-cars when something went wrong.

Then some auto executives started grumbling that the industry's distribution system was too costly and had to get leaner. Dealers thought that meant they were going to be put on a forced crash diet.

And how about Ford's and GM's plans to buy into dealerships? That turned out to be a great idea, didn't it? But before it crash-landed, it made a lot of dealers nervous.

Dealers are not only still going strong, but revised thinking is they're here to stay.

That was the general consensus of a panel discussion — called “The Franchise System: Obsolete or Not?” — at the Automotive News World Congress in Detroit.

Most of the panelists said it's not that the franchise system is so bad. Rather, they faulted the manufacturers' system of pushing unpopular vehicles into the marketplace, and then expecting dealers to move them with profit-draining rebates and cash incentives.

The industry needs to evolve from a “push” to a “pull” system, whereby the pull of market demands dictates vehicle production volumes, says panelist Gary Lapidus, vice president and senior analyst for Goldman, Sachs & Co.

“Automakers are piling up inventories and selling cheap,” he says.

That cushions manufacturing costs because auto factories are money pits when they operate below their production capacities. But the “push” system hurts profits in the end, says Mr. Lapidus.

“It's hard to maintain value when you sell cars that no one ordered in the first place,” he says. “The way the industry sells those vehicles is with incentives and rebates to induce consumers to take ‘brown bananas.’”

He wonders if “buy one, get one free” is next.

Panelist Chris Denove, a J.D. Power and Associates' partner, says he's irked when asked if the franchise system will survive.

“It implies that it's not healthy already,” he says.

Dealers still feel threatened by outside forces, but they are more confident in themselves than before, according to a J.D. Power survey.

By a two-to-one margin surveyed dealers think the factories are trying to get rid of them.

But 90% of those dealers feel the franchise system will be unchanged during the next 10 years, says Mr. Denove.

Nor do dealers feel as threatened by the Internet as they once did.

“I strongly believe the Internet is not going to replace dealers,” says Mr. Denove.

Adds fellow panelist William Lovejoy, GM's vice president of sales, service and marketing:

“In the beginning, dealers feared the Internet … Now they've put their heads out of the foxhole, and they think the firing has stopped.”

The question of whether the franchise system will survive is premised on the mistaken belief that dealers can't or won't adapt to change.

But they have, quite deftly. When customer satisfaction became an issue, dealers went to great lengths to make their stores consumer friendly. When the Internet referral services popped up, dealers started doing their own brand of e-tailing. Now 82% of dealers have their own websites.

Fritz Hitchcock, who owns seven California dealerships, is an example of a dealer who stays thoroughly modern.

Two years ago, only 5% of his prospects and 1% of sales came from the dealerships' fledging web site.

Now, each of Mr. Hitchcock's stores has a dedicated Internet staff. Today, 50% of the stores' prospects and 8% of sales come from the web site.

Still, Mr. Hitchcock is not veering off into cyberspace. Instead he's just using it as yet another way of doing business.

He adds, “Brick and mortar dealers don't look as antiquated as we did four or five years ago when (manufacturers) were talking about taking costs out of the distribution system.

“Dealers thought they were talking about us.”

He offers advice to the industry in general and to manufacturers in particular:

“Factories have enough on their plate without getting involved in our business. Focus on core competencies. Let the dealers be dealers, and let the factories be factories. Central planning is not the way to go.”

Mr. Hitchcock says that because dealers are highly entrepreneurial, it's natural for them to feel threatened by outside forces.

But because of that entrepreneurial spirit, “they know that if they are to survive, they must adapt to changes,” he says.

Change they have, especially in the last few years. That's why so many industry people and analysts have stopped writing their obituaries.

Steve Finlay is editor of Ward's Dealer Business. His e-mail address is: [email protected]