No-Nonsense Dealers in Works

I've been writing for years about the distinctive personality of dealers and their inimitable relationships with the manufacturers that they serve.

The many ways car manufacturers express an inner belief that they might do better without a franchise network always catches my attention. In the same way, I find the willingness of so many dealers to lose money on the sales of new cars, equally fascinating.

If you question how that is so, you have only to ask the National Automobile Dealers Assn. to explain their statistics on how it costs the average dealer more than a dollar to generate a dollar of gross profit in the new-car department.

I can report to you that 20 Groups I attended consistently urged members to brace against that truth.

Of course, there are used cars, parts, service, finance and body works to ease the pain. But there is something noteworthy about a partnership between franchisor and franchisee that is based on such a flimsy deal.

I can only assume from the competition for dealerships and from my personal experience with dealers that the “high” of being a dealer is enough to overcome thin margins and high failure rates.

Interestingly, however, that thrill was, historically, made possible by the ease of entry afforded by giddy bankers who were willing to make floorplan, mortgage and capital loans while looking the other way with regard to the many of the risks impacting the value of collateral assets in franchised dealerships.

Contrast that with today's bankers who have been schooled on just how thin the dealer manufacturer bond is and therefore just how weak many dealer assets are. Lenders are no longer naive to the fragility of a franchisee with regard to what happens when a franchise goes bad.

This is further complicated when you consider the potential failure of both a dealer and a manufacturer. We have all witnessed the unwind of a great many agreements revoked through manufacturers' reorganizations under the shield of bankruptcy.

The now obvious fact is the auto maker-dealer agreement obligation to repurchase floorplanned new vehicles and to honor other dealer commitments has substantial holes.

First of all, new cars do not have to be repurchased for the full amount of the floorplan debt. That debt may be artificially buoyed by holdback, incentives and the like.

Less-obvious snags that eliminate an obligation by an auto maker to repurchase can be an aftermarket painted pinstripe, a few too many demo miles or minor lot damage.

In addition, OEMs right to charge back warranty and incentive payments and to then offset are other opportunities that manufacturers are not above.

In short, banks are no longer ignorant of the risk that floorplan and other dealership debt may be materially under-collateralized.

To overcome this, future dealers will need substantially greater capitalization and they will protect that capital with an intensity supported by greater risk intolerance than that of their predecessors.

This new breed will advertise less, contribute less to local charities, hire fewer people, take fewer trade risks and, in all likelihood, wow fewer customers.

Tomorrow's dealers will be fiscally responsible in the way that big companies are. Unfortunately, they will also be detached in the way of big companies.

Customers will feel that change. The future will be filled with dealerships managed by a starched philosophy. This might bode well for uniformity, but don't expect these dealers will defy all odds to support the manufacturer.

I don't suspect the more conservative dealer is the one who will take risks with inventory or follow unproven sales strategies. I predict that the future of automotive retailing will be as bland as a big box.

On the bright side, without a creative dealer network to lean on, manufacturers will have to do a better job of building what the public wants and designing and funding an ownership experience that is market driven.

Peter Brandow is a veteran of auto retailing.

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