Hey, I'll Arbitrate Dealer Cases

Historically dealers maintained huge inventories propped up by liberal financing, pressure from auto makers and a belief that profits from elsewhere could overcome cost of excess. Historically, that worked. Dealers profited from operations, the sale of the dealership and appreciating real estate values. Manufacturers profited from escalation in vehicle prices, skyrocketing volumes and a dealer network

Historically dealers maintained huge inventories propped up by liberal financing, pressure from auto makers and a belief that profits from elsewhere could overcome cost of excess.

Historically, that worked. Dealers profited from operations, the sale of the dealership and appreciating real estate values.

Manufacturers profited from escalation in vehicle prices, skyrocketing volumes and a dealer network willing to lose money on new cars for the right to wrap a franchise banner around the rest of the store.

The car business made most players wealthy, regardless of how unfairly the pie was divided. So, state and federal governments focused on employment (favoring unions and working people) and consumer legislation (favoring voters' interests).

There was little return on worrying about dealers or manufacturers, although state franchise laws corrected some imbalance between OEMs and dealers.

Before the new millennium, all these things appeared static in the car business. Even the ranking of players was well settled. Japanese manufacturers owned the standard for automotive quality. Captive finance companies led the way for dealership financing and retail incentives. And the unions were the political force uniting American workers.

All of that functioned against a background of state laws that seemed to insure that there would forever be a tug of war between a few import dealers with newer facilities pitched against a lot of older domestic franchised competitors.

This was fueled by an abundant appetite of lenders for financing retail deals.

Heading into the second decade of the new millennium, however, many of these “truths” were being challenged.

  • Recalls and public hearings were lobbing credible doubts at our certainty that Japanese manufacturing meant quality and integrity.
  • The spinoff of captive finance companies had exposed real levels of risk.
  • Bankruptcy was wrenching control of dealer rights from state legislatures.

Ominous as it sounded, there was something promising about allowing the buying public to decide with their wallets who would survive and who would not.

Playing to this, General Motors announced that it was prepared for competition: “Let the best product win.”

But domestic manufacturers were not about to allow their dealers to live that dream. Dealers daring to offer customers too broad a brand selection were shut down, regardless of whether they were profitably selling volume to an adoring customer base.

Without states to protect them or banks to fuel them, dealers hunkered down with a new respect for learning how to spell a-r-b-i-t-r-a-t-i-o-n.

Looking tothe next decade, here are a few of my predictions:

  • Dealers will not stock inventory that loses money on hopes of making it up on more popular models or service opportunities.
  • Lenders will likely require that floor plan lines be fully collateralized by dealership assets without reliance on manufacturer “guarantees.”
  • Manufacturer programs will only be acceptable if they are supported by new-car profit margins.

In the nearer term, I expect to be reading about what dealers facing arbitration will be considering. If state law is not there to protect dealers, arbitration will be the last way for seeing that good dealers get what they are entitled to.

The question of whether reinstatement is adequate compensation for an unfair termination depends on whether dealership can successfully reopen.

There can be no lasting benefit to reinstatement unless manufacturers are required to sustain the franchise with adequate product and warranty support.

And for those dealers already staring down the arbitration barrel and wondering what to expect, here's a little story.

I called to offer my services as an arbitrator explaining that I was impartial, knowledgeable, fair, had years of automotive experience, and was a licensed attorney.

My offer was dismissed out of hand.

Peter Brandow is an auto-retailing veteran.

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