2019 saw U.S. new vehicle sales of just over 17 million units. While that was 200,000 units shy of 2018, it exceeded the NADA prediction of 16.8 million annual sales. The continuing consistency of the market is the good news for dealers, but the bad news is the many challenges dealers face.
But what year has not started with challenges for dealers? In 2009, dealers faced an existential crisis when credit markets dried up and annual new vehicle sales fell to just over 10 million units. Even when the market began to recover, increasing regulatory burdens threatened to shackle the general economy, causing consumer uneasiness about substantial investments in new vehicles. When the market finally recovered, dealers faced problems with franchisors who no longer saw it as advantageous to be industrial giants but wanted to be mobility companies, or high tech companies, or alternative propulsion companies to enhance value in the eyes of Wall Street. Regardless of the label, the franchisor evolution came with increasing franchisor control over dealers and experiments in limited distribution of alternative vehicles without general dealer involvement.
2020 dawns as has every year for dealers. There are challenges, but dealers have been remarkably resilient. They have shown the ability to evolve and become proficient in the latest technologies, processes, and strategies, as long as they are given the opportunity and the time to adapt.
Here are some of the critical challenges dealers face as we start the new decade.
Cyber Challenges – The Biggest Issue of the ‘20s?
With the pace of cyber developments, dealers might face cyber issues about which we cannot even now speculate. But there are critical cyber issues about which dealers must now be concerned.
1. Cyber Crime: Cyber criminals continue to develop technologies to foil those intent on stopping them. Increasingly, dealers are targets of the efforts of these criminals since dealers arrange finances and leases for expensive products. Their computer systems provide fertile opportunities for hackers and cyber thieves. We have repeatedly warned about emphasis on and staff training in the importance of cyber security. The need for vigilance will only increase in the new decade. Work with your DMS provider and your CRM provider to be sure you have the most up-to-date security. Train personnel about the dangers of hackers and other criminals. Be sure they understand and use classic precautions such as security for passwords, refusing emails from unknown senders, not clicking on links even when their job requires them to accept emails from unknown sources, and not surfing the web on the dealership system. Critically, the biggest potential for theft continues to be from hackers who take up residence in your system waiting for a transaction to hijack. Never accept emailed wire instructions without verifying them with a known person or at a known phone number.
2. Data Protection: California dealers have been struggling with a state data protection law, effective January 1, 2020, that will drastically change the way they manage customer information. Dealers in other states are likely to see legislation with similar requirements. Even without state legislation, the Federal Trade Commission is considering an amendment to its Information Safeguards Rule that will dramatically increase the expenses of dealers in protecting customer information collected and maintained electronically. Protecting customer information must be a dealership priority. Start by giving attention to your existing Information Safeguards plan to be sure it is properly updated and top of mind for your employees.
3. Social Media: Your employees are using social media for your dealership. You cannot look at that as free advertising. It has the potential to damage your dealership. The problem: salespeople are using social media to advertise prices, payments, and offers without proper disclosures and disclaimers. Regulators see social media posts as opportunities for penalizing dealerships. Lawyers see them as opportunities for lawsuits. Offers that are unavailable because of undisclosed limitations can ruin your image with consumers. The answer? Have a social media policy. The goal should be to direct prospects to the dealership’s website where advertising with proper disclosures and disclaimers is done and to develop prospects into customers through the dealership’s appointment system.
Franchise Challenges – Who Controls Your Dealership?
Tesla and other relatively new entrants believe themselves to be clever because they are working around the burdens of the franchise system. Burdens??? Traditional franchisors understand the secret that apparently some new entrants do not. A vehicle manufacturer can save billions by requiring their franchisees to invest in retail distribution that franchisors control through incentives, allocations, and good old fashioned coercion. Doing just what they please – controlling dealer operations without investment where it suits them, or circumventing dealers where it fits their agendas – appear to be increasingly common methods of doing business by some franchisors. How does a dealer cope? Above all, support your federal and state dealer associations whose job it is to make sure playing fields are level.
4. Maintaining the Role of Franchisees in Vehicle Distribution: Manufacturers are experimenting with alternative methods of distribution. Tesla and Rivian wish to avoid franchisees. Peer-to-Peer programs and ridesharing are painted as a convenience for individual vehicle owners to avoid vehicle downtime, but certain franchisors will seek to subvert these into an alternative means of distribution and ownership. Some manufacturers dream of having fleets of autonomous vehicles that simply pick up riders who go about their daily travels. Companies are pouring billions of dollars into experiments for marketing and distribution that will not involve dealers. The futility of those is evident. Manufacturers have been notoriously unsuccessful in retail distribution, and dealers have always risen to the challenges to their role in retailing. Dealers will continue to evolve and adapt, provided they are given the time and opportunity to do so. Dealers must understand the challenges to the business and support dealer associations protecting their roles in it. Participation in industry events to educate lawmakers and regulators is more important than ever.
5. Performance Measures and Threats: Despite overwhelming evidence that the systems franchisors use to measure sales and CSI performance are deficient, manufacturers continue to use them and are even increasing the importance to dealers by tying incentives and the ability to obtain new dealerships to them. If your performance measures are deficient, especially if you are receiving threatening letters from your franchisor, do not wait until you are losing incentives or you are having trouble getting approved for a new dealership. Challenge alleged performance deficiencies in writing. If your franchisor says you are deficient in sales effectiveness, look into it. Are you getting enough of the right vehicles? Is your primary market area properly defined so you are not stuck having to penetrate markets where you do not have an advantage? Are there factors -- geographic or demographic issues, brand or vehicle type prejudices, traffic or work travel difficulties -- that affect your ability to meet sales goals? Ask for a review of the sales performance measures applied to your dealership. If that is denied, use your franchisor’s internal appeal method and even consider challenging through your state process. Don’t accept a lousy CSI rating. Manufacturer CSI systems are designed to meet manufacturer goals, not to truly measure customer satisfaction. If you are being threatened with poor CSI ratings, don’t be afraid to challenge the statistical validity of the CSI system.
6. Retail Reimbursement for Labor and Parts: Virginia provides protections for dealers’ rights to fair payments for performing warranty repairs. Dealers are entitled to reimbursement at retail for labor and parts. As we will discuss, one of the primary challenges in a full employment economy is retention of your work force. You must be in a position to properly pay your technicians. They must not seek to avoid warranty work because of deficient compensation. If you are not receiving proper compensation for warranty labor and parts, request it under your state law so you can pay your employees properly for that work.
7. Audits: Some dealers are inordinately concerned that exercising their rights to proper compensation will lead to increased audits. Many franchisors audit no matter what a dealer does. Be prepared for audits. Virginia has laws protecting dealers in audits. Know your rights. Understand how far back a manufacturer can go in challenging you. Know the standard a manufacturer must meet to process a chargeback. Be prepared to challenge the manufacturer in any audit process. Be there for the opening of the audit to understand its scope. Be there for the closing to challenge the auditor’s findings. Use the franchisor’s internal audit appeal process. Use the state provided method for challenging the impropriety of the manufacturer’s proposed chargebacks. The franchisor may not process the chargeback as long as you are challenging the propriety of it through internal and state-provided processes.
8. Succession in Unexpected Circumstances: For years, the issue of who will take over the dealership if the dealer dies or becomes incapacitated was one for estate planning. It still is, but it is now a critical franchise issue. Franchisors want to know who will take over in the event a dealer is disabled or dies. Do not wait for an unfortunate event followed by franchisor pressure to sell the dealership. Have in place a succession plan. Apply for designation of, and have your franchisor approve, a successor.
9. Proper Sales Reporting: How careful are you in reporting the sales of new vehicles to your franchisor? For years, Fiat Chrysler inflated its sales, and when caught it tried to make the fall out a dealer problem by challenging dealer submissions for incentives it originally encouraged. Recently, the federal government challenged BMW over reporting as sold vehicles placed into dealer loaner service. BMW is not alone in reporting loaners, demonstrators, or similar type designations as sold vehicles. For years, dealers have seen manufacturers push dealers to speed sales reports or report vehicles as sold even though they weren’t so that franchisor employees could gain accolades for the region or honors for the brand. Be candid in your reporting. If you are being asked by a manufacturer representative to speed or falsely report vehicles as sold, get those requests in writing.
Compliance – Still a Priority
The Trump years have seen shifts in the federal agencies involved in your business, but little reduction in oversight. The CFPB, which tried to change the industry even though it was never supposed to interfere in your business, has been defanged (at least until there is a new administration in Washington). But that doesn’t mean that oversight has subsided. At the federal level, the Federal Trade Commission is as active as ever, and the Department of Justice has the power to take enforcement actions on credit and lease matters even where the CFPB has backed off. State enforcement agencies, state regulatory agencies, state attorneys general, and private attorneys all wish to affect how you do business.
10. Candor in Your Dealings: Regulators increasingly allege some dealer employees misstate customer income. When obtaining personal information from customers, get a statement of the customer’s income in the customer’s own handwriting. Be sure downpayments are properly reflected in deal paperwork and are collected. Properly describe the model or equipment of used cars sold to customers. Trade values should not be artificially inflated. Consumer advocates contend that customers are damaged when sold more expensive vehicles than they can afford because of improper acts that distort their ability to repay. Train employees to be straightforward in their dealings with consumers and to properly document them.
11. Fair Lending and Voluntary Protection Products: The CFPB may no longer be challenging dealer reserve policies and practices. That doesn’t mean they are not subject to review. Even before the CFPB was formed, there were unfair lending cases brought by private attorneys and the U.S. Department of Justice. Consumer zealots regularly challenge dealer practices in selling Voluntary Protection Products. Have a Fair Lending policy. The NADA template is a useful and workable tool that can enhance and stabilize finance reserve. The days of pricing voluntary protection products differently for different customers are over. Consider the NADA program on voluntary protection products to help your F&I department earn and keep your VPP dollars.
12. Advertising – Still the Main Focus: Advertising is your face to the public. Make sure it properly reflects you in a fair and legal way. The rules for advertising under the Truth in Lending Act and the Consumer Leasing Act are clear cut. If you use a trigger term, you must make follow on disclosures. A regulator that catches you violating these clear cut requirements can force you to accept more esoteric theories – such as various new definitions of practices they call bait and switch – as part of a settlement. FTC and and the Virginia Motor Vehicle Dealer Board expect advertised prices and offers to be available to all unless the limitations are clearly and conspicuously disclosed. If limitations make a price or offer unavailable to all, the advertisement must clearly and meaningfully disclose the terms customers must meet to obtain the advertised benefits.
Personnel Challenges
A dealership is only as successful as its employees make it. Be prepared to deal with personnel issues of the full employment economy of 2020.
13. Workforce Retention: It is harder than ever for dealers to find, recruit, develop and keep employees. Prospecting for new employees and recruiting should be ongoing activities by dealership managers. If they are happy with the service in a restaurant, or a clothing store, or at the dry cleaners, why not recruit those individuals? Have a training process in place. Have a development process to bring employees along. Pay them appropriately and have open communications so they can bring concerns to management.
14. Personnel Handbook: One of the key elements of any workforce retention program is a handbook. The handbook advises employees what they can expect. It lets them know how you view the role of the workforce in your business. The handbook also establishes standards by which employees must operate. When was the last time you reviewed your handbook? Silly Obama era prohibitions on handbook provisions about employee civility that resulted from torturous twisting of the right to communicate about work conditions under the National Labor Relations Act have been eliminated. You can now utilize common sense handbook provisions designed to maintain a professional workplace.
15. Background Checks: Background checks are more important than ever. Identity theft is not a problem just in your sales department. You must also be concerned about potential employees misrepresenting who they are. Check the identity of proposed employees. For those who handle money, be prepared to access credit reports and even do investigative background reports. If you are accessing credit reports and doing investigative background checks, be sure you comply with the law. It is not legal to have those authorized on an employment application. Authorization must be on a separate document that does nothing other than authorize a credit report and an investigative background check.
16. #MeToo and Pay Equity: You have reacted to the #MeToo movement in your dealership. You have a process for investigating and taking action on complaints of improper behavior. However, what are you doing about potential pay equity complaints? Many dealers use individually negotiated pay plans for managers. Do those pay plans result in wage disparities for female employees? Given the successful focus of the #MeToo movement on workplace behavior, the movement is now concentrating on other issues. Take the time to analyze whether employees are getting equal pay for equal work.
17. I-9 Compliance: The hottest issue of the Trump administration has been its stand against illegal immigration. For your business, that translates into compliance with Form I-9 requirements. Use the most current version of Form I-9 updated July 17, 2017 even though it shows it has expired. Follow the form instructions carefully. New employees should complete section 1 of Form I-9 on the first day of employment. Employees may choose the document for their identity (list B) and authorization to work in the U.S. (list C), or may provide a document that establishes both (list A). The employer must complete section 2 and maintain completed forms. Do regular audits of Forms I-9 to make sure you have them and they follow requirements.
Operations Issues
18. Supplier Agreements: Have a policy in place for reviewing and entering supplier agreements to protect the dealership from having supplier agreements that may burden it unnecessarily. What should you look for? If you have a dispute, be sure it will be adjudicated where you do business under the law of your state. Protect against agreements with unnecessarily long durations, and if you must have an agreement for a term, make sure at expiration it rolls over to a month-to-month renewal instead of an automatic renewal for another lengthy term. Know what you are getting by having performance standards your supplier must meet, and be sure it provides warranties. Because of the emphasis on data protection, a supplier with access to your customer data must agree to safeguard it and that it will only use your data for servicing your account. If there are provisions on indemnification or attorneys’ fees, make sure they are balanced so that both the supplier and you are indemnified and may be on the hook for attorneys’ fees if found liable.
19. Indirect Finance and Lease Agreements: If you do not finance or lease vehicles, you will not sell them. Besides your franchisor, your finance and lease sources are the most important suppliers to your dealership. Many indirect finance and lease sources have unfair and overreaching provisions in their agreements. Be prepared to identify those and negotiate them. Be sure payment of your reserve is appropriately stated. Do not be subject to unfair buyback requirements simply because a customer raises a dispute. Be sure representations and warranties about the customer’s identity or insurance coverages are fair.
20. Maintain Critical Documents: Where are your critical dealership documents? Do you even keep them? If you have a dispute with your franchisor, what are your rights? If you don’t have your dealer sales and service agreement, along with addenda and amendments, you will not know. If you have an issue over incentive or warranty reimbursement, the bulletins announcing incentive programs will be critical, as will your warranty manual. What about a dispute with a finance or lease source? Without your indirect credit or lease agreement, you will not know how to proceed. How about a dispute with a supplier, such as your computer vendor? If they are the keeper of your documents, don’t expect to know your rights if there is a dispute. Keep all critical documents in the general office. If part of your computer system is cloud based, make sure the documents are stored in the cloud. Have them stored as digital files you can keep in a safe place in your desk and at your home.