California Dealer Fights VW’s Plan for New Store

A dispute over adding a new Volkswagen dealership in the Inland Empire market of southwestern California creates an acid test over the touchy issue of how close same-brand dealers should be from each other.

Marybelle D. Archibald, an administrative law judge of the California New Motor Vehicle Board, has upheld VW of America’s plan to establish the new franchise, according to the board.

She remanded the case this month to the vehicle board, which now will decide if the auto maker can install a new store in Montclair, 8.5 miles (13.6 km) northwest of Ontario Volkswagen.

Ontario VW’s owners claim the proposed site for the additional store violates a state franchise law that bars auto makers from locating same-brand stores within 10 miles (16 km) of each other.

But such legislation typically includes exemptions for special circumstances.

“It is injurious to the public welfare for an additional franchise to be established,” Ontario VW says in legal filings. “The additional dealership would result in ruinous competition.”

The auto maker says it is missing a chance to sell more vehicles by not opening the new dealership on a well-traveled roadway. Ontario VW claims the “lost-opportunity” analysis is flawed.

VW, which has said it hopes to double U.S. sales within two years and increase them to 800,000 by 2018, finds the Montclair site appealing because it is along Interstate 10 and offers high visibility other area dealerships lack.

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“Volkswagen is extraordinarily concerned that from Indio to Santa Monica, not one Volkswagen dealership is on the I-10 freeway or visible from that freeway,” the company says in filings.

VW did not declare the point open or begin accepting applications until 2010, the auto maker says, “because the issue of available real estate hampered interest.”

Ontario VW principals Gary Sherman and Earl Reed say they repeatedly have told VW there is no need for an additional dealership in Montclair and that San Bernardino and Redlands in the Inland Empire cannot support two VW dealerships.

Sherman, who previously operated non-VW stores in Montclair, offered to operate a second VW store himself, having secured from the city of Montclair a sales tax credit of $1 million to upgrade one of his vacant dealership buildings into a second VW location. But that location isn’t on the freeway.

He also applied for a Hyundai franchise in nearby Loma Linda, but that deal has failed to materialize.

In the back-and-forth negotiations, Sherman became one of three applicants for the proposed second VW store. The others are Penske Auto Group and Metro Autogroup.

In her ruling, Judge Archibald says VW attorneys told her Sherman displayed a “lack of candor that rendered his testimony questionable.”

However, she says Sherman “testified truthfully” in explaining “that although another dealer had been selected, he thought he still could change Volkswagen’s mind, but wasn’t selected because VW wanted to be on the I-10 freeway.”

Archibald questions Sherman’s inconsistency though, saying, “It is imperative to remember the discrepancy between the Mr. Sherman who argues that Montclair will destroy Ontario VW, and the Mr. Sherman who confirmed to Volkswagen that he could make a Montclair dealership as good as Ontario VW.”

Sherman has been a VW dealer since 1995. His dealership is located in the Ontario Auto Center, a mall that includes Volkswagen’s primary competitive brands. He says he built the current facility in 2003.

Testimony in the proceedings disclosed that Ontario VW’s profit was $193,800 in 2008, $328,000 in 2009 and an estimated $230,000 to $240,000 for 2010.

Sherman as owner and Reed as general manager took a total salary of $238,194 for 2010, with Sherman adding a $100,000 personal bonus.

The value of the 45-employee Ontario VW dealership, according to Sherman, is about $11 million. This includes property value of $1 million, as well as fixtures, furniture and money loaned as operating capital.

VW witnesses testified that despite winning “Generation Best” awards in 2009 for meeting minimum Volkswagen standards in 2009, plus an Octagon award for exceeding eight standards, Ontario VW had not met sales expectation in recent years.