June 2012 SDADA Column

Our NADA summer board conference was a very good meeting with open and free dialogue among directors. Upon hearing the directors' concerns, NADA chairman Bill Underiner decided to appoint a task force that will push for changes in manufacturers' facility renovation programs and incentives that lead to perceived two-tier pricing.

I was very pleased when Chairman Underiner appointed me to serve on this task force. As you know, I am particularly sensitive to the treatment of smaller, rural dealers as it relates to those two areas. I will be viewing the proceedings of this task force from that standpoint.

This task force will challenge General Motors to find a way to offer dealers, especially smaller dealers, some options to comply with reasonable standards at a cost effective price. I will be looking for a way for GM to ask ALL of its dealers to help build their brand but not require the same "elements" of every dealer, regardless of size, market or geography. I am not naive enough to think that will be an easy task.

I analyze these issues in a bit more depth on my blog. I would love to hear your feedback. Please let me know what you think.

Some Manufacturer Stair-Step Programs Are a ‘Cancer in the Industry’ 

I hope you saw NADA Chairman Bill Underiner’s open letter in Automotive News earlier this month. In it, he takes the manufacturers to task regarding their multi-level pricing schemes and their effect on the retail automobile industry.

NADA has had a long-standing position in support of a level playing field, meaning lawful, equal and fair treatment by a manufacturer for all dealers, both large and small. Unfortunately, history shows that, at times, manufacturers’ incentive pricing programs create short-term incentives that favor the larger, more urban dealerships to the detriment of the smaller, more rural dealerships. 

Recent history also shows that the long-term effects of discriminatory programs are to marginalize the smaller dealers and place them at a competitive disadvantage in their marketplace.

These programs also have a tendency to cause confusion among consumers and dealers as to the actual dealer cost of vehicles. This leads to consumer doubt and mistrust that reduces the value of the manufacturer’s brand. It also undercuts the goodwill between consumer and dealer. This is certainly not good business for either the OEM or the dealer.

Dealers of all sizes have recognized the inherent unfairness of a manufacturer’s discriminatory pricing that tilts the playing field in favor of some dealers. For example, Earl Hesterberg, CEO of Group 1 Automotive, emphasized the perniciousness of these stair-step programs as recently as May 21 in Automotive News, where he characterized them as “… a cancer in the industry that isn’t good for dealers or customers.”

The fact is, manufacturers can unfairly create real competitive disadvantages for some dealers and cause real customer confusion and dissatisfaction in the marketplace.

The best way to maintain a level playing field is for factories to focus on what they usually do so well: build quality cars and trucks and avoid disparate treatment of their dealers that can limit their ability to compete. Let all dealers do what they do best: vigorously compete in pricing, service and otherwise for the customer’s business.

NADA to Appeal Court Decision on FTC’s Risk-Based Pricing Rule D.C.
District Court upholds FTC interpretation concerning the scope of the Risk-Based Pricing Rule

The U.S. District Court for the District of Columbia on May 22 granted the Federal Trade Commission’s motion for summary judgment against an action brought by NADA that challenged the agency’s broad interpretation of the scope of the federal Risk-Based Pricing Rule.

The law that the rule implements (section 311 of the FACT Act) applies to persons who, among other requirements, “use” a credit report in particular credit transactions. The FTC issued an interpretation in July 2011 stating that dealers engaged in three-party vehicle financing transactions who do not obtain, receive or review a credit report nevertheless “use” a credit report based on the finance source’s use of a credit report and therefore are responsible for complying with the Risk-Based Pricing Rule’s notice requirement.

Believing this interpretation to be flawed, unnecessary and burdensome to many dealers by requiring them to purchase credit reports for no purpose other than to comply with the Risk Based Pricing Rule, NADA subsequently initiated this challenge.

In its complaint, NADA argued that Congress never intended the word “use” to extend to this subgroup of dealers and that the FTC lacked authority to issue such an interpretation. Although the court found that the statute is capable of supporting NADA’s interpretation, it held that the FTC possessed authority to issue its interpretation and that its interpretation is reasonable.

Regardless of which party prevailed at the district court level, NADA anticipated that the other party would appeal the District Court decision to the D.C. Circuit Court of Appeals. NADA will now direct its outside counsel to commence the appeal.

Fireworks, Featherbones, Family and... FREEDOM

As Independence Day fast approaches, I look forward to our annual family festival. I have always loved the 4th of July. But when our oldest was born on the Fourth (during the re-dedication of the Statue of Liberty in 1986), this day took on a new significance. Our July holiday is filled with tradition and is a day I truly look forward to as it brings our family back together.

We have always made the Fourth of July a huge celebration. We celebrate a family birthday, our country's birthday and the apex of summer. Our day is filled with activities from morning until night; we love to cram as much fun as possible into the holiday. 

July 4, 2010

The day usually begins with the traditional posting of the flag on the front yard family flag pole. We don't always fly the flag but we do on the Fourth. It seems like a great way to set the tone for the celebration to follow.

My wife usually pulls the ice cream maker down from the attic before breakfast. We received this appliance as a wedding gift (some 29 years ago) and it has reliably churned the ice cream ever since then. She often makes two flavors - plain vanilla and some exotic "Ben & Jerry's"-type flavor. I always opt for the vanilla no matter how tempting option two sounds. Her vanilla ice cream is the best and it is goes well with cupcakes or cake to celebrate our daughter's birthday!

There is usually some family fireworks involved. As the kids have grown older, there is less of that. But since fireworks are legal in South Dakota, there are plenty of fireworks stands and the prices are pretty competitive. The front yard fireworks seem to bring out the kid in everyone. No anthill is safe when the Knust fireworks infantry opens fire! I have vivid memories of my father lighting fireworks with his five and six year-old grandsons and sprinting away from the pending explosion as if he was running the 40-yard dash at the NFL combines. I hadn't seen him run in 25 years!!!

"Krawdaddy" 

Because we live on a beautiful reservoir of the Missouri River (Lake Francis Case), boating has always been a traditional part of our Fourth of July celebration. We have had several boats through the years, but we had a 65 foot pontoon boat for ten fun-filled summers. If those ten Fourth of July celebrations on "The Krawdaddy" were the only ten times we had used that boat, it would have been worth the investment. We usually had 5-6 families with us on the river all afternoon before heading to the slip in the early evening to cook on the grill. After dinner and cleanup, it would be time to watch the community fireworks display from the top deck of "The Krawdaddy".

Our days on the river are now on our sailboat. "The BlewJay" offers a new angle on boating fun on the Fourth. We spend several hours on the water, usually in shifts, before returning home for the family Fourth of July cook out.

I have always enjoyed preparing a special cocktail for the Fourth. Whether margaritas or sangria or vodka lemonade prepared in volume or mint juleps fashioned individually, it is fun to prepare a special summer cocktail that is refreshing and relaxing. On occasion, there has been an extraordinary amount of relaxation!

It's time for the feast!

Perhaps my favorite Fourth of July tradition is to fire up the grill. We always have extended family, family friends and/or our kids' college friends celebrating with us. I enjoy cooking for a large group and especially enjoy grilling and smoking food. For years, the menu has included smoked featherbones and burgers as the main course. I usually smoke 15-20 pounds of featherbones in the days leading up to the holiday. Depending on the mood of my assistant chef, the accompaniments may include corn on the cob, baked beans, potato salad, watermelon and other delicious summer delectables.

Finally, we sit on our backyard patio overlooking the town and river and watching the community fireworks display. Because we live at the extreme western edge of the Central time zone, our fireworks don't usually start until after 10:00 pm. Often set to music, it is a fine show. On a calm night, you get the extra effect of the fireworks' reflection on the water. There is nothing like a fireworks display over water.

Our view of fireworks with an assist from Mother Nature.

By this time of the evening, mosquito repellent may be a very important part of the holiday festivities. If it has been a wet early summer, the aroma of sunsceen is replaced by the scent of Deep Woods OFF.

So each year on the Fourth, our celebration includes fireworks, featherbones and family. But let us never forget the most important part of our celebration - FREEDOM. Without it, there would not be a celebration.

If the Shoe Doesn't Fit...

Our NADA summer board conference was a very good meeting with open and free dialogue among directors. Upon hearing the directors' concerns, NADA chairman Bill Underiner decided to appoint a task force that will push for changes in manufacturers' facility renovation programs and incentives that lead to perceived two-tier pricing. 

I was very pleased when Chairman Underiner appointed me to serve on this task force. If you have visited this space before, you know that I am particularly sensitive to the treatment of smaller, rural dealers as it relates to those two areas. I will be viewing the proceedings of this task force from that standpoint.

This task force will challenge General Motors to find a way to offer dealers, especially smaller dealers, some options to comply with reasonable standards at a cost effective price. I will be looking for a way for GM to ask ALL of its dealers to help build their brand but not require the same "elements" of every dealer, regardless of size, market or geography. I am not naive enough to think that will be an easy task.

I had a dealer friend ask me if I thought General Motors should abolish the Essential Brand Elements (EBE) program and wondered what I thought they should do with those who have already made a commitment. I think that is a great question and I believe it is one that the task force had better be prepared to deal with.

There are serious questions about the role of a showroom facility in the rural setting and the importance  the customer places on that. It is becoming less a factor in the buying process as the customer goes a long way into that process in our virtual showroom - our web sites. I question whether ANYBODY at GM has thought hard and long about that.

I personally believe that General Motors has every right to expect ALL dealers, big and small, rural and metro, to have a clean, welcoming facility that projects a strong brand image for the manufacturer that they represent. There is more than one way to do that. I don't think that necessarily means a renovation every 5-6 years. I certainly do not believe that it should be part of a marketing program.

As far as EBE is concerned, I think there is a place for the program. I believe the requirements are far too stringent for smaller dealers and the economics of both the investment and the reimbursement program set forth by GM do not work for smaller volume dealers. When you have such large number and wide spectrum of dealers, it seems that at least three levels of participation would be warranted.

Does it make sense that the exact same program requirements (showroom tile, a $5,000+ greeters stand, complete glass on three sides of the showroom, etc.) would work equally well for a Chevrolet dealer in a rural community selling ten to twelve new Chevrolet vehicles each month and a metro dealer selling a thousand new vehicles per month? Does it make sense that a showroom facility in a northern climate with cold winter wind and snow be the same as one that resides in the sun belt? 

General Motors tells the dealers that it is a "voluntary" program. If you are not in compliance, however, you will missed out on the EBE quarterly payment of between $500 and $750 per vehicle. This in a business where the customers will walk over $50!! 

EBE is not a voluntary program. The greater your sales volume, the better it seems to work for you. I know dealers who are telling their people to build whatever it is that GM wants, just keep the EBE payments coming in. I have talked to other dealers who, if they project their EBE payments out through the end of the program, they won't amount to half the costs they are being asked to incur to make their facility compliant.

Not every foot does fit in a size 10 shoe. In fact, in this case, not everyone wears a size 20 shoe! If you do, the EBE program fits pretty well. But if you don't, you end up buying a lot more shoe than you need and the shoe is to be priced according to its size!

Spending Millions on Mullions

In my last update, I indicated that I had asked General Motors for three exceptions on my EBE plan. I asked for an exception on the gray tile that GM required when I built versus the gray tile they are now asking for. The actual response from the "Ivory Tower" was "Request denied because tile appears to be too dark compared to program spec tiles". My zone manager told me that he convinced "them" to grant the tile exception request though I must sign a letter that, in part, specifies: 

"However, we anticipate this tile may need to be replaced 5-10 years in the future due to wear, overall condition, etc. If and when Chevrolet deems the tile condition is no longer acceptable, Dealer agrees to replace the existing tile with the program tile. Please counter-sign below to affirm you understand and accept this conditional exception approval."

Well, I have not signed the letter (surprise, surprise!). I'm not sure that automobile dealerships will even have showrooms in 5-10 years. Ask executives at Best Buy or Barnes & Noble what color their floor covering will be in 5-10 years. The bricks and mortar business model for all retail space is untenable. That is part of the problem with the GM EBE program - no consideration has been given to what the dealership will look like and how it will function in 5-10 years. Shouldn't we be investing in plans that move us that direction?!

I asked for an exception on the the window frames that GM required in their Image 2000 program (and for which I paid about 30% more money) when I built the facility. They are currently a "General Motors blue", but now GM wants a silver color. Their response was "Request denied, blue mullions are too far a departure from the required silver mullions. Mullions can be painted or capped to meet the color requirements."

 That tile appears to be too dark compared to program spec tiles!!!

I know of a dealer who got an exception for BROWN mullions! Apparently "General Motors blue" mullions are a more radical departure from the color scheme than is the BROWN!!! This brings to light a deeper problem with the program. It would seem that there should be some consistency with the exceptions. It is either the right color or it isn't. If it isn't, then exceptions will be granted for all or none. There is a lack of transparency that breeds mistrust. I have re-sent that request for exception, letting them know that I was aware of the dealer with brown mullions. I am looking forward to their response!

My third exception request was regarding this whole notion of my office being a customer "touch point" and thus requiring the color scheme, wall prints and furniture set forth by GM. I received a familiar response: "Request denied. Dealers office located right off showroom floor considered customer touch point. Car front desk not in line with furniture spec." (Some of my friends were very nervous to hear that GM considered my office a touch point! ;o)

Let me translate the corporate speak in that response: "This (1964 Chevrolet Impala) desk is too unique for any dealership. We want "cookie cutter" dealerships that completely remove any sense of dealer branding. If customers saw this desk, they might remember it and the dealership in which it sat. We want the boring furniture and wall prints we have chosen for EVERY Chevrolet store in America!"

Glenn Mercer, in NADA Facility Image Study presentation, said that GM boastfully says they are approving approximately 85% of the exception requests. If that is so (and my case would show that to be quite high), perhaps the standards are a bit too stringent. Perhaps if they would relax their standards some, this whole back and forth game could be avoided. But then they would not have a stranglehold on the power, would they?

More to come...