Dealers Fear They'll Feel Profit Pinches

LAS VEGAS Like nearly all dealers attending the National Automobile Dealers Assn. convention here last month, Robert L. Beadle was in a great mood. We've had five straight year of good business, says the president of Beadle Ford-Chrysler, in Bowdle, SD, north of Pierre. The mood was joyous throughout the convention parties, from one end of the sprawling exposition to the other and for the most part,

Maynard M. Gordon

March 1, 2004

7 Min Read
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LAS VEGAS — Like nearly all dealers attending the National Automobile Dealers Assn. convention here last month, Robert L. Beadle was in a great mood.

“We've had five straight year of good business,” says the president of Beadle Ford-Chrysler, in Bowdle, SD, north of Pierre.

The mood was joyous throughout the convention parties, from one end of the sprawling exposition to the other and for the most part, even in the “make” meetings that often engender heated discussions between franchisers and franchisees.

But beneath the upbeat financial results for 2003, voiced in the boom atmosphere of America's fastest-growing city, concerns for the future were on the minds of metro retailers, principals and members of public and private dealer groups, and “country” stores like Beadle Ford-Chrysler.

One cited area of controversy is continuing automaker takeaways, especially in the lucrative F&I sector, centering on dealer reserve and warranty rate reimbursements.

Another concern includes stiffened factory policies on dual franchising and limitation of new franchises to “selected” stores.

A third area, voiced in the addresses of the outgoing and incoming NADA chairmen centered on customer satisfaction surveys that dealers say are flawed and outdated.

Overarching the specific factory-dealer issues was a threat to the validity of the franchise system itself as survey specialist J.D. Power III's 2003 call for all-brand new-car superstores like that pioneered in Manchester, England. Power's claim that the franchise system is anti-consumer and costly was rebuffed by 2003 NADA Chairman Alan C. Starling in his farewell speech.

Starling, without mentioning Power by name, said “he was either biased or just failed to do his homework.”

“Starling should have been tougher on Power in his address,” declares GM dealer Toby Wells of Southern Pines, NC, son of former NADA chairman Harold Wells. “The franchise system is good for consumers. Power, of all people, is the last person in the world who should be shooting at us.”

Convention rumors that an all-brand super-mart is being planned by a big dealer group in a major market only kept the flames lit among conventioneers.

“This issue isn't dead,” says a general manager of a state dealer association, who asked not to be identified. “We're looking at amending our franchise law to make sure it can't happen, because it would be the death knell for our small dealers and maybe some of our biggest ones.”

Of more immediate concern were the financial takeaways threatened for 2004, ranging from NADA chief economist Paul Taylor's forecast of Federal Reserve Board interest-rate increases after the U.S. presidential election to GMAC's agreement in a minority rate-bias federal district court suit in Nashville, TN, to reduce dealer reserves on auto loans to 2.5% on contracts up to 60 months and 2% thereafter.

“There's no question that the new-vehicle sales increases to nearly 17 million units a year would be set back if the interest rates go back up,” says Taylor. “Zero loans, and even those in the 1% and 2% levels, would become a thing of the past — maybe even before the Fed acts, if the likelihood of action is there.”

GMAC's concession, in a long-standing class action suit alleging rate “kiting” for loans to African-Americans and Hispanics, alerted dealers to the prospect of a cutback in reserve profits along industry-wide lines.

Nissan's captive lending arm, Nissan Acceptance, made a similar settlement last year, setting a 3% rate ceiling on loans. GMAC's agreement to a 2.5% cap surprised dealers who expected the Nissan deal to set a pattern .

Some dealers put their own surcharge caps on loans.

“We've capped it at 2%,” says John Bergstrom, CEO of a 26-store dealership group in Wisconsin with annual sales of $650 million.

John F. Smith, General Motor Corp.'s group vice-president for vehicle sales, service and marketing, says, “Consumers should know competing rates and be able to bargain with F&I managers.”

The trend towards disclosure of loan reserve markups gained momentum when Toyota Credit and NADA issued statements of support in early February. Toyota Financial Services said it was inserting disclosure requirements in all Toyota Lexus and Scion loan contracts.

“The industry is moving in that direction,” say Toyota Financial spokeswoman Cheryl Burnett.

NADA is urging its members to tell F&I customers that loan rates may be negotiable and that dealers may retain a portion of the charges for arranging the financing. Seeking to alleviate dealer fears that interest-rate caps may be forthcoming, NADA spokesman David Hyatt says the association is not calling for further ceilings.

Dan Jarvis of Ford Credit says the captive lender “does not discriminate on ethnicity because we don't know the race of the customer in the approval process.”

Regardless, Ford Credit has also been sued for alleged loan rate bias, as have several other captive lenders, mostly in actions initiated by three Nashville attorneys.

Several GM dealers expressed concern that with GM, Nissan Acceptance and others capping rates, F&I profits will erode.

Most dealers scoff at a proposed flat fee of $150 for arranging a customer's auto loan.

“If we go from $1,200 to $150 for financing, the cost of the car will have to go up at the front end,” says Frederick (Fritz) Hitchcock, CEO of Hitchcock Automotive Resources, a 5-dealership group based in City of Industry, CA.

In a comparable effort to protect dealer profits, exacerbated by the pressure last year on new-vehicle grosses, Ford dealers united in asking factory leaders to restore the 1% dealer discount cut implemented when the Blue Oval certification program was initiated three years ago.

“I think Ford Division is committed we will get our margin returned to the pre-Blue Oval days,” says Ford Division National Dealer Council chairman Frank Rodriguez, owner of Greenway Ford, Greenway Chrysler-Dodge-Jeep and The Kia Store, Orlando, FL. “We'd rather have the money come back off-invoice, as they've been doing it, like in holdback, but I'm not sure they will.”

The Ford Dealers Alliance campaign for payment of warranty parts at retail — not wholesale — levels also was raised at Ford meetings in Las Vegas. Two major brands faced convention opposition on “cherry-picking” for new franchises or demanding that dealers drop competing franchises.

Toyota dealers, who have been denied the hot Scion franchise now rolling out across the country, complain they were being unfairly singled out — unlike archrival Honda stores, all of which are handling the Element SUV as youth market contender.

One such dealer says the Scion sections in Toyota dealerships “means it belongs with Toyotas, and conflicts with franchise law clauses that all of a brand's dealers are required to get all that brand's products.”

Several Toyota dealers predict Scion will be sold at all 1,203 Toyota dealerships when production reaches capacity levels.

“The last thing Toyota wants is a franchise lawsuit,” says a Pennsylvania Toyota dealer denied the youth-oriented franchise.

Taking heat at make meetings was Chrysler Group's demand that 196 of its top-volume dealers throw out non-competitive franchises by this June and become stand-alones by 2006.

The fear is that policy will filter down to smaller Chrysler Group dealers.

Also coming under fire was the auto maker's threat that non-compliers or any dealers failing to meet 85% of their assigned sales targets this year would lose their Five-Star status.

Chrysler Group CEO Dieter Zetsche told the dealers that 600,000 to 700,000 competitive vehicles are sold annually by Chrysler-Dodge-Jeep dealers and that 30% of its showrooms house non-Chrysler Group products.

“If we get that competition out of our showrooms, it is a significant opportunity for sales growth,” he asserted.

Beadle says that, although he won't be handed the Chrysler Group ultimatum to divest competing brands, he's concerned about it. He says it could ultimately affect dual franchises such as his own — as well as Ford Motor Co.'s Vice-Chairman Alan Gilmour's Chrysler Group-Ford-Lincoln-Mercury store run by a relative in St. Johnsbury, VT.

Convention attendees shared a widely-quoted financial oddity — their profits and returns on investment in the first years of the 21st century exceed those of the Big Three.

“It's a fact of dealer life,” says 2004 NADA Chairman Charley R. Smith, a Buick-Pontiac-GMC dealer in Hobbs, NM. “On the basis of ROI and profits against revenues, NADA members have outperformed the factories.”
— Steve Finlay contributed to this report.

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