As new-vehicle sales decline, a growing number of Canadian auto dealers are balking at stair-step incentive programs, blaming them for damaging long-term profitability.
“You may get the money that month or that quarter, but it costs you in the long run. It costs you at year-end. It’s not a fun game to play,” said Michael Wyant, COO of the western Canada-based Wyant Group, which has Fiat Chrysler, Ford, Hyundai, Mercedes-Benz and Audi stores.
The programs automakers employ to incentivize dealers to be aggressive on new-vehicle sales vary from brand to brand. Those structured as stair-step plans generally offer lucrative bonuses to dealers for hitting increasingly higher sales targets.
While the Canadian new-vehicle market soared to new heights earlier this decade, targets were attainable for many retailers. Some became dependent on those bonuses for much of their revenue, said dealers interviewed by Automotive News Canada.
But as sales begin to decline, many dealers are finding it harder to hit those targets, causing some stores to either miss out on crucial revenue or consider undertaking questionable tactics to reach them. And dealers often order extra vehicles and boost marketing spending to hit them, making it costly to fall short of targets.
“They just fundamentally don’t work in a difficult marketplace,” said Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. “When the market is growing, they work, and they work very well. They really do get dealers to become very aggressive. The amount of money at stake can be huge, and so it really motivates dealers to go after it. Unfortunately, they only were able to reach the stair step without altering sales techniques in a good market, not a bad market.”
Fiat Chrysler Automobiles, Nissan, Ford and Hyundai declined requests from Automotive News Canada to comment on their dealer incentive programs, some of which are structured as stair-steps. A Mercedes-Benz Canada spokesman wrote in an email that the brand’s “sales programs are developed based on market requirements. We work closely with our retail partners to ensure our offers are competitive and fair to all involved.”
For some dealers, missing targets means squeezing more dollars from their fixed operations, finance and insurance and used-cars departments. And many said meeting those targets, especially in a softening market, is difficult, leading some to heavily incentivize vehicles to the point where retention values are damaged.
Others elect to “pre-punch” their vehicles, wherein dealers register new vehicles as loaners, thus counting them as sold. Those vehicles are often then sold on the used-vehicle lot with extremely low mileage.
“We’ve had some issues at year end with some of our stores where guys were playing the game with the manufacturer and chasing the target and not managing their sales processes more effectively,” Wyant said. “And all of a sudden, we’ve got 30 or 40 pre-punched luxury cars in stock at the end of the year. And for a small dealership, that’s a lot of cars.”
Ryan Tessier, general manager of Drumheller Chrysler in Alberta, said punched vehicles can dilute brand value and increase competition between a dealership and another store that is selling the same vehicle at a significant discount.
“You get the dealer groups who punch them, and then they’d sell it to a Hyundai store or a Mitsubishi store,” Tessier said. “And then not only are we competing with other Chrysler stores, but we’re competing with off-make dealers as well, selling used trucks with less than 100 kilometres on them. So that has been a big grievance for a lot of Chrysler dealers, and Chrysler has taken our concerns about that to heart. ... There aren’t as many as there used to be to pre-punch these things.”
Punched vehicles might not be eligible for financing or leasing once they’re back on the market, Wyant said.
“It can be worth 15 to 20 per cent less because [the vehicle] doesn’t have rate support,” he said. “So those are the decisions you make as a dealer. Do you pre-punch something to hit a number, knowing it’s going to cost us X amount on that car, but we’re going to gain so much more for the month?”
SHORT TERM, SHORTSIGHTED
Sometimes, dealers and automakers can become so caught up in hitting short-term targets that they lose sight of the long-term health of their business, said Shahin Alizadeh, CEO of Downtown Auto Group in Toronto. Slapping major incentives on a new vehicle so it can be sold more easily up front will hurt dealerships when those vehicles come back in a few years, Alizadeh said, because the vehicle is starting at a lower value than it ought to.
That means the dealership could get less money for it when trying to sell it as a used vehicle, and customers could lose faith in a brand’s ability to retain values.
“I’ve always said you establish the value of your used cars at the time you transact it, not at the time the car comes back,” Alizadeh said. “To me, that’s the bigger concern, regardless of whether the [stair-step] concept works from a profit standpoint.
“If your vehicle retains only 30 per cent of its value versus another brand that retains 50 per cent, guess what Next time, you’re going to think twice about buying the car that started out at the same price,” but lost more of its value, he said.
Richard Rivard, dealer principal at Leduc ChryslerDodge-Jeep-Ram in Alberta, said his store generally finds FCA’s stair-step program manageable and has been able to avoid punching vehicles to meet targets. But Rivard finds incentive programs to be “overly complicated” and urged automakers to adjust vehicle prices according to market conditions.
“I think that’s it in a nutshell,” he said. “Make it easier for the customer to understand, and make sure that they’re aware that the price reflected is a direct reflection of the market. That puts everyone on the same playing field, and in the end, it’s good for the consumer.”
RETARGETING IN TIGHT TIMES
Some automakers are starting to ease up on targets as the economy slows, said Tessier, the Alberta Chrysler dealer.
“For the most part, I’ve seen them pull back on a lot of their targets,” he said. “With some of these months with the economy and how it stalls out, the targets are still so far out of reach that it’s going to be hard to get there.
“I don’t think that’s by design by FCA. They think this is an attainable target for a dealer if he really pushes, and then the economy that month is n good and vehicles aren’t selling, and then the target becomes unattainable.
Wyant lauded Ford and Audi for having effective incentive programs, because they do not allow dealers to punch vehicles and are generally more flexible with targets.
Audi does not “set your target and then forget it,” Wyant said. “If the ma ket goes sideways or if for some reason supply goes sideways and it’s their fault — certification issues, all these things manufactures seem to be dealing with these days — they’ll go back and adjust because dealers are being affect ed by something that’s outside of their control. A program like that, which is sensible for the dealers, I think is fair
Michael Currie, general manager at Steele Hyundai in Halifax, said the automaker responded to dealers’ concerns.
“Hyundai as a manufacturer is a little more collaborative, and they generally pair us up or set our targets compared with other similar-sized dealers Currie said.
John White, president of the Canadian Automobile Dealers Association, said his group does not g involved in stair-step conflicts between automakers and dealers. But any program must be “fair, manageable, equitable [and] achievable,” White said.
“The [automaker], to me, needs to b able to justify what the target is with scientific fact and data, as opposed to pulling something out of the air. And everybody has a different model, whether they use sales effectiveness or market share. But it can be random selection.”
One FCA dealer in Alberta who asked not to be identified said dealers in his region have “started to group together” to press FCA to change its sales practices. But as of now, it can b “very tough” for dealers and the automaker to be on the same page.
“There’s a big disconnect,” he said “between the dealer and the manufacturers.”