Dealer Group To Study Automaker Image ProgramsBy Michelle Krebs October 21, 2011
The National Automobile Dealers Association (NADA) has launched a study to determine whether automaker-mandated programs to upgrade dealership facilities generate any return on investment for dealers in the form of increased new-vehicle sales or improved customer satisfaction. Each year, dealers collectively invest billions of dollars in facility upgrades, much of it mandated by the auto manufacturers, NADA Chairman Stephen W. Wade (above) told the Automotive Press Association in Detroit on Thursday. These costs have a significant impact on dealer balance sheets, in many cases severely straining them and in some cases even persuading a dealer to leave the business rather than commit such large sums.
Wade said surprisingly little hard evidence exists to quantify the return on investment either to the automaker or to the dealer, which is leading to widespread frustration with manufacturer facility-image programs. Generally absent are solid economic arguments such as, updated stores sell X more cars for every one million dollars invested, or Customer Satisfaction Index scores soar when a facility is upgraded, he said. Asked what the goal would be for return on investment for factory-required upgrades, Wade quipped: Wed like to seen any return on investment. He implied that some of the manufacturers demands are outrageous, not just requiring, for instance, that floor tiles in dealerships be gray but be a particular shade of gray. Image programs are typically justified on qualitative grounds such as the store image must support the brand, or customers expect all our stores to offer a similar look and feel, he said, adding that dealers are tired of hearing the McDonalds Golden Arches analogy from manufacturers and need to see more quantitative evaluation of their investments.
To come up with objective data, NADA has hired Glenn Mercer, a former partner with consulting firm McKinsey and Company (and an occasional contributor to AutoObserver.com), to produce a report by year-end that looks at factors that drive return on investment of facility programs, both positive and negatives. The study will include confidential interviews with industry experts, including dealers, factory representatives, attorneys, accountants, brokers experienced in dealer finances and valuations, dealership architects, academic economists who focus on auto retailing even car buyers. The examination also will look at facility standards for other retailing industries, including restaurant franchises and hotel chains.
Wade added that tightening credit has made it difficult for dealers to obtain financing for facility upgrades at the same time that the value of dealers, which are single-purpose facilities, has dropped by as much as 50 percent. In the past, dealers could borrow 80 to 90 percent of the total cost of a dealership upgrade; he said loan-to-value ratio has dropped to 50 to 60 percent. Its darned hard to get the money, Wade said.
Dealer Sales Outlook
Wade said the economy is expected to support sales this year of close to 13 million vehicles. Paul Taylor, the NADAs chief economist, is officially forecasting 12.7 million vehicles sold in 2011. We expect a great fourth quarter for mid-sized and small cars and CUVs. American businesses should be back in the market, buying pickups and vans. And truck-based SUVs are selling well, he said.
For 2012, NADAs Taylor remains reasonably optimistic about the economy, which continues to grow at a modest rate, said Wade, but the association that represents some 16,000 dealers is concerned about the European debt crisis and the U.S. deficit. To that end, NADA has not zeroed in on a specific U.S.-market sales forecast for 2012, but is offering a broad range from 12.5 million to 13.5 million units, though Wade expressed personal confidence that 2012 sales will be higher than 2011s. This year has brought a renewed sense of optimism and a feeling that we are once again headed in the right direction, he said.