Dealership (factory) image problem

Jan. 1, 2020
Owners have increasingly complained about the cost of these dealership factory programs, arguing that they receive very little (if any) return on their substantial investments.

Over the past decade, automotive OEMs have increasingly expanded what are known as "factory image" programs: requirements that franchise dealers have to follow regarding the size and appearance of their dealerships. These programs dictate (often in highly specific ways) how owners should expand or construct dealerships, usually at a fairly high cost to the dealership. Owners have increasingly complained about the cost of these programs, arguing that they receive very little (if any) return on their substantial investments.

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Last year, the National Automobile Dealers Association (NADA) hired consultant Glenn Mercer to conduct a study of the challenges associated with factory image programs, and gather data about their relative effectiveness in terms of increasing sales and profitability. NADA released the results of the study earlier this year. The verdict: dealers support the concept of facility programs, but are dubious of their economic benefits; OEMs have very little proof of their effectiveness; and both sides need to do a better job of working together to ensure that facilities are modern and attractive, but also keeping costs down.

Mercer's report also found some surprising benefits that these programs can have in the service department, and looking ahead, predicts that dealership fixed-ops departments will receive more investment as the industry adjusts to the new realities of service-based profits, older vehicles and Internet sales.

Little agreement on value
While everyone involved in the industry agrees that customers should be able to shop at clean, modern and brand-supportive facilities, there is significant disagreement about the details of these programs. Most programs can be broken down into three components: expansion, modernization and standardization.

Expansion was the least controversial because its impact was the easiest to measure — dealerships doing a certain amount of volume require a certain amount of space. However, these requirements are frequently driven by over-enthusiastic (and often incorrect) sales forecasts.

"Our interviewees were almost unanimous in their view that OEM sales volume or [units in operation] forecasts tended to change too frequently, bouncing up and down from year to year, or even more frequently than that," the report notes. "Excessively frequent changes to forecasts can cause costly waste (e.g. by overbuilding or, conversely, by having to rip up and enlarge under-built facilities)."

The service department was another area where there are disagreements over square footage. Faced with the increasing need to service more vehicles (and more older vehicles), dealers have found other ways to increase capacity without actually breaking ground and adding bays. For one, many have extended their service hours, or set up satellite facilities (like quick lube lanes).

OEMs base their square footage requirements around units in operation and more traditional operating hours, and dealers believe the existing formulas are outmoded.

"With later pickup and drop-off hours, longer operating hours and loaner cars, you can pack more jobs into that bay than the traditional formula (based on units in operation) would allow for," Mercer says. "This is one area where we have good numbers, so when there is a disagreement, the dealers and OEM are at least throwing real numbers at each other, rather than vague concepts about supporting the brand."

Modernization generated more controversy, because its benefits are largely unquantified. According to Mercer, OEMs must do a better job of demonstrating the value of these upgrades to dealers, while loosening design specs that increase costs with no corresponding increase in customer value. In fact, over-specifying in these programs (for example, requiring dealers to purchase floor tile from a particular vendor) may add as much as 20 or 30 percent to the cost of the upgrades, compared to what the dealers might be able to do if allowed to select their own suppliers, etc.

"The OEMs and dealers both have to clean up their acts here," Mercer says. "There are two main problems: over specification and under qualification."

For over specification, many OEM programs have extraordinarily detailed requirements that suck up incredible amounts of time and money between both the dealer and OEM to ensure compliance. As for underqualfication, Mercer says some of the programs allow for only a handful of "approved" vendors. "The dealers are asking, 'Why are there so few vendors qualified to supply me with chairs?' or ‘Why is there no on in the eastern hemisphere that can supply this floor tile?' Some OEMs are detail-minded to the point of obsessiveness," Mercer says.

Standardization involved the most head-butting between dealers and OEMs. Dealership owners want more flexibility in the look of the facility. Dealers also claim a certain amount of size bias in these programs, which tend to favor larger dealers with bigger checkbooks. Other dealers have resisted the OEM design specs that create what they sometimes refer to as "GarageMahals" that will be obsolete in a few years. As more purchases move online, for instance, dealers may need less office space.

Even the OEMs were not entirely clear on the value of the programs. "Out of the 12 OEMs I spoke to, probably 11 did not have what I would call a comprehensive handle or view of exactly what the payoff was, beyond assertions about supporting the brand," Mercer says.

There were some unexpected benefits to modernization efforts: for example, improved employee morale. Store upgrades can help attract, retain and motivate staff, and that improved morale can also improve customer satisfaction scores. In Mercer's report, he notes that "the impact seemed especially powerful in the service area."

"Dealerships have extremely high turnover in employees," Mercer says. "I found anecdotal evidence that improved working conditions would help attract and retain employees. Nobody thought that the impact was huge, but the dealers were all pleasantly surprised after they had made these upgrades. I consistently heard dealers saying, 'The customers haven't been commenting about the faculty, but the employees really like it.'"

In the future, in fact, more emphasis may be on the service department since that area of the facility offers far more customer touchpoints than the showroom; the customer only has to buy the car once, but they have to get the oil changed every 5,000 miles. The dealership of the future may have a significantly smaller showroom and sales office, with a much more comfortable service area with more bays and longer operating hours.

"Dealers don't want to build these giant facilities that are overdone," Mercer says. "Service is becoming a larger part of the dealership, so therefore it should be demanding a larger part of the spend. Once you make the showroom nice, what do you do? There are all sorts of improvements you can make in the service area."

Further, there may be more attempts to unbundle the service and sales departments. Existing law in most states requires that service facilities be co-located with sales facilities. That's one reason that start-up car companies have had so much trouble trying to shake-up the dealership model; they are prohibited by statute from tinkering with the formula too much.

"Dealers keep adding bays, and at some point the tail wags the dog," Mercer says. "If I have a small showroom and all these service bays, maybe we should locate those bays on some lower-cost real estate. At some point we might see an attempt at this in some state, but it's not happening yet."

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