Dealers Wear White Hats

“I'm concerned.” That's the answer I gave a friend in the zone office when he asked how I was.

I'm concerned that nobody is going long on domestic franchises. Investment bankers have already begun risk rating any dealership group too concentrated in domestics.

So, if you're a Toyota dealer everything is fine, save maybe that nagging question as to whether your showroom will be big enough in 2008, the year Toyota is predicted, by some, to become the world's No.1 auto maker.

On the domestic front, higher advertising cost-per-sale levels and more inventories are worrisome issues. For many Ford and GM dealers, the slippery slope has them wondering how long to hold on before even the equity in their real estate won't save them.

Unless you're producing the revenues of an import, chances are good that mortgage, floor plan and advertising costs exceed your new-car gross profit.

What's more, most manufacturers see little value to dealers other than their willingness to invest profit from new-vehicle sales into selling more new vehicles.

Other than for the cheap capital dealers provide, debates on whether to replace many dealers with factory-direct sales programs boil down to just two issues.

First, the number of laws and lawsuits that stand in the way.

Second, the importance of the “trade-in.” Most discussions get stuck on the first issue, ending with someone saying, “We can't get rid of enough dealers without paying them, and we can't afford the time or the money to pull that off.”

But thinning out the dealer ranks is not all that expensive. It takes a concentrated dose of economic pain applied with just enough precision to the right pressure points.

A tiered incentive set just high enough for a near miss, a series of “random” audits and charge-backs, an allocation skinny on popular models and onerous customer relations standards would probably suffice.

For years manufacturers have used these and similar tools to “upgrade” their dealer ranks. Upgrade is a positive term unless you're the dealer being upgraded.

I don't hold to the principle that dealers have avoided extinction because manufacturers have not found a pesticide potent enough to exterminate them. Nor do I think that their cheap capital and real estate convey enough benefit for popular brands to cling to them.

What makes dealers valuable is their unique ability to dispose of trade-ins at a fast pace at very high values. The used-car business is not what any manufacturer wants to tackle.

Trade-ins fuel new-product volume at a level that cannot be achieved otherwise. Think what would happen if customers had to handle their own trade-ins. Unless cars became disposable in 3- to 5-year increments, current sales of nearly 17 million vehicles a year would plummet.

Without dealers handling trade-ins to make way for new purchases, new-vehicle sales could drop precipitously. There is no sound way to calculate how low. No other industries remain in which the barter of used equipment plays such a prominent role.

Because it does not benefit them to acknowledge this, manufacturers limit their dealer interaction to beating the drum of what dealers owe them in terms of inventory investments, facility upgrades and customer satisfaction programs, despite the false hope that new-car departments offer.

Disheartening is that most new-car dealers fail to recognize just how significant their role is. Those of us who still love dealering know that when the folks we pass whisper in awe “car guy,” it implies we know how to handle used cars. After all, the new-car deal is an exercise in calculation, the used-car transaction is an exercise in appraisal, inventory selection and many other skills.

In the face of this wild-west show of volatile markets, uncertain returns, long hours and disrespect from some of our manufacturers, we car guys wear white hats and are willing to risk much on a horse trade.

Peter Brandow is a veteran dealer in Pennsylvania and New Jersey.