Which Is It?

If you happened to be around in the early 1920s, you might say the headlines in Detroit probably were not much different than they were the last six months of 2006 — an automotive manufacturer forcing its dealer body to take inventory it could not possibly sell.

Back then, it was Ford Motor Co. who, in a display of arrogance with its “crossroads” policy, threatened its dealers with opening competing stores in their vicinity if they did not accomplish their monthly sales numbers and continue ordering increased inventory.

Last year, Chrysler dealers found themselves in a similar situation, although, perhaps not as harsh. At least Chrysler Group's management was not threatening to open competing dealerships.

But one dealer council member, who was one of many dealers complaining to Ward's about Chrysler's inventory problems, asked to keep his name out of a story for fear of having his franchise yanked from him.

It has been 109 years since H.O. Keller, selling Wintons, opened the first franchise-car dealership but the events at Chrysler last year reveal the industry still has work to do in the area of manufacturer-dealer relationships.

The problem is that there is no easy answer. Most dealers Ward's talked to for this story admit it comes down to culture, personality, communication and how the OEM views the dealer.

New Hampshire dealer and former National Automobile Dealer Assn. chairman Paul Hollaway says the relationship depends on the manufacturer and on the personality of the OEM executive interfacing with the dealers.

Often it is an up-and-down relationship.

Most dealers keep their fingers crossed hoping their manufacturers treat them as valuable business partners rather than as employees to order around.

Meanwhile, some manufacturers — not all, but some — keep their fingers crossed behind their backs with a wink when talking about how important their dealer body is.

Earl Hesterberg, President and CEO of Group 1 Automotive Inc., a dealership chain, says it is an issue of culture. His perspective is unique, having been on the OEM side with Ford and Nissan Corp. and now as a dealer.

“If you're an OEM and are surprised by issues your dealers have, that's an indication you're not communicating enough with them,” he says.

Since dealers first began contracting with manufacturers to sell their vehicles, the relationship has been bumpy with periods of calm burst by sudden explosions of manufacturer stupidity.

The issues have varied through the years and often have made their way into the court system and even Congress. During the 1950s dealers of all brands rebelled against manufacturer policies that pulled their franchises from them if they refused to order “proper” levels of inventory.

The dealers won a big battle in the 1950s when Congress passed a bill known as the Dealer's Day in Court giving dealers the right to sue their manufacturer in Federal court.

Since then, dealers have successfully pushed for state legislation that protects their franchises. In 2002, dealers fought and won passage of a bill banning mandatory arbitration in OEM contracts.

In the late 1990s, both General Motors Corp. and Ford experimented with buying dealerships and competing with their own dealers.

GM backed off quickly following the outcry of its dealers and even sent GM CEO Jack Smith to the National Automobile Dealers Assn. convention in 2000 to meet with dealers and announce it was dropping its plans to buy stores.

Ford, meanwhile, proved to be more stubborn going through with its plan to buy and run several stores. The plan was a dismal failure and short-lived, however, as Ford executives learned just how much they did not know about retailing cars.

Both companies enticed popular executives — William Lovejoy for GM and James O'Connor for Ford, to put off retirement to help repair their dealer relationships.

But having to rely on personalities rather than the culture at the OEM to repair or maintain good relations with the dealers is an indication an auto maker's perspective of its dealers is out of kilter.

Ken Gilman, the CEO and president of the Asbury Automotive Group dealership chain, says manufacturers have to decide what kind of relationship they want with their dealers.

That really is the question, he says. And it all comes back to profitability. OEMs that want a profitable dealer body typically are going to have good — and in many cases, great — relationships with their dealers, Gilman says.

The benefits of having profitable dealers extends beyond just having a nice warm and fuzzy relationship with them, it also means operations at the manufacturer level will be healthy and profitable, Gilman argues.

Toyota Motor Co. is the example industry experts cite when talking about a manufacturer that knows how to treat its dealers.

“Lexus and Toyota are the only two divisions I know who really work to listen to their dealers and consider them to be true partners,” says the CEO of one dealer group.

Imports have had their share of problems also, but generally get a free pass from their dealers.

John Hawkins, owner of the Great Metro Autogroup in Montclair, CA, and the incoming chairman of the American International Automobile Dealers Assn. says the relationship import dealers have with their manufacturers is different than the one domestic dealers have with theirs.

“The imports seem to listen better to their dealers,” he says.

This is not about some dealers getting their feelings hurt and then whining about how they are treated. The real problems arise when the manufacturer makes a decision or implements a program that can adversely affect the dealers' businesses — even to the point of forcing them to either sell or close the store.

What made the Chrysler situation so frustrating for its dealers last year is that they recognized early in 2006 that the manufacturer was not only building too many vehicles, the trim levels also were out of whack. They warned Chrysler management, but those entreaties fell on deaf ears.

Joe Eberhardt, then Chrysler's vice president-sales and service, responded by trying to force dealers to continue ordering vehicles even while the lots were crammed. Meanwhile, interests rates increased, raising the amount dealers were paying to stock the extra vehicles.

Some dealers reported carrying inventory costing as much as $13 million, significantly higher than normal.

Eberhardt seemingly refused to listen and at times, dealers say he blamed them in meetings for not selling enough vehicles. He eventually was forced out in December, but by then the damage was far reaching.

The irony is that Chrysler last year seemed to understand the importance of having a strong dealer body and even brought in hundreds of top non-Chrysler retailers to Detroit to show off the brand and entice them into selling Chrysler vehicles.

But now, several of Chrysler's top alpha dealers (those selling Chrysler, Dodge and Jeep under one roof) tell Ward's privately they are trying to sell their stores, specifically because of the inventory woes of last year. Chrysler now is in danger of losing several top dealers, something that hurt the brand long term.

For the most part, it is Detroit's Big Three that tend to have the most problems in the dealer-manufacturer relationship.

“The Detroit Three, primarily, has had a history of on again-off again relationships with their dealers since before we were born,” Gilman says.

“Historically, there has been a sense of hubris in Detroit,” says dealership consultant Mark Rikess. “The philosophy was, ‘You're lucky to have our franchise.’ They never have consistently looked at dealers as being their business partners.”

Holloway remembers a conversation in which he told the GM sales and marketing vice president at the time, Ron Zarrella, that although trucks and SUVs then were selling like crazy, the market would come back to cars.

“He looked at me and said, ‘We know what we're doing,’” Holloway says.

Dealers, though, also know what they are doing and often understand the business better than the OEMs do. For example, it was Dodge dealers in 1963 and 1964, who convinced the auto maker to build the Dodge Charger, something management resisted for several years.

The vehicle proved to be a long-time hit.

And it was dealers who pushed for the inclusion of cup holders in vehicles.

Gilman, who has had disagreements with Ford in the past, says there seems to be a change for the better in recent months with the Dearborn auto maker.

Executives at the public dealer groups used to observe privately that top Ford executives never reached out to them to inquire about their businesses.

That is changing, though, as Ford's new CEO Alan Mulally reportedly met one on one with the top executive from one of the public dealer groups during the North American International Auto Show in Detroit this year.

The problem for Ford now is that many of its small to mid-level dealers wonder if there is a target on their backs as the auto maker struggles to bring its dealer body in line with drastic cuts in production.

In contrast, a prominent import dealer in California, says: “I don't have to worry about my store being closed.”

GM, for the most part, has had friendly relations with its dealers, going all the way back to Alfred P. Sloan's days as the auto maker's chief. When Ford was playing hardball with its dealers' inventory in the 1920s, Sloan was traveling the country in a railcar visiting with dealers learning about their businesses.

He even publicly pronounced on several occasions that GM would only build the cars customers were buying and not press its dealers to order extra inventory.

GM also was the first to establish a dealer council in 1934. It also created the current framework for dealer-OEM contracts used by all OEMs when it provided its dealers in 1956 five-year selling agreements that could not be terminated without cause.

Ed Williamson, a third-generation Miami dealer selling Cadillac, Hummer and Saturn believes the relationship with the OEM depends often on the size of the dealer and the retail network.

For example, Cadillac has 1,400 dealerships but management primarily concentrates on the top 300. Part of the reason is that 80% of the sales volume is generated by the top 250 stores, Williamson says, whose Cadillac franchise is fourth in the country.

“The top 100 stores have great access to the top management at GM,” Williamson says. “We talk to them all the time and they reach out to us with questions for our perspective. The smaller dealerships don't have that kind of access.”

Not having that access can affect the relationship negatively, experts say.

For now, says Holloway, “It comes down to whether the OEM looks at the dealer as being partners. If that's the case, the relationship will be good.”

A Textbook Case of Finding a Solution

Volvo dealers have not seen anything official, but they suspect parent firm Ford Motor Co. last year instructed Volvo Cars of North America LLC to find a way to recover one percentage point of the wholesale profit margin from its dealers.

What ensued may be a textbook case for how a manufacturer can work with the dealer body to find a solution palatable to both sides.

Dealers tell Ward's Volvo worked to take that point out of the 3% to 4% bonus dealers made with their customer satisfaction bonuses, which averaged out to $309 per vehicle.

Volvo denies that, however, saying the point was taken from the total available margin, which is about 6%.

The auto maker adopted Ford-owned Land Rover's 3% per vehicle base MSRP, which will allow dealers to earn back nearly all of the percentage point taken out the wholesale margin.

Volvo, along with a committee of 12 dealers, representing each of Volvo's four regions, including three members from the Retail Advisory Board, put together a new formula to determine customer-satisfaction index scores.

Instead of basing CSI bonuses on customer surveys, Volvo will pay dealers based on how well they follow the processes developed by management and the 12-dealer committee.

The new formula evaluates areas such as customer retention; appearance of the dealership; Internet processes, vehicle delivery and service department processes.

Volvo planned to start the program in July of last year, but the Retail Advisory Board convinced it to allow dealers time to get used to the new initiative. The program officially starts in the second quarter of this year.
— By Cliff Banks