As we anticipated, the 2010 census data has made its way through the manufacturers’ computer systems and has resulted in changes to many dealers’ areas of responsibility. Chrysler, Ford, Nissan and Toyota have already sent notices to dealers of changes to their assigned market territories. Almost all other major manufacturers, with the exception of General Motors, can be expected to send notices out to their dealer body in the near future. General Motors made significant changes to their dealers’ “Area of Primary Responsibility” and “Area of Geographic Sales and Service Advantage (AGSSA)” back in early 2010 once the fall-out from dealership terminations in the bankruptcy proceedings, and then the dealership reinstatements through arbitrations, had been finalized. Due to the significant loss of dealerships in the GM dealer network, GM could not wait until 2012 when the census data would be completed to assign open territory to remaining dealers. Because those changes were so significant, we don’t expect GM to have plans to make further wholesale changes to dealers’ assigned territories as a result of the 2010 census data. However, anything is possible with the manufacturers!
Why is a change in your assigned market area so important? An expansion or reduction in the size of your market area has an impact on a number of your dealership’s performance measurements.
What is a census tract?
A census tract is a geographic area, usually broken out into subdivisions within a county that are populated with between 2,500 and 8,000 people. The Census Bureau attempts to draw the census tract boundaries based upon homogenous characteristics of the population including demographics and living conditions. The greater the density of population within a county, the smaller the census tract. In contrast, a very large census tract delineates a rural, sparsely populated area.
How do manufacturers assign census tracts to dealership areas of responsibility?
Before looking at the consequences of a change in your area of responsibility it would be helpful to first review the reasons why these changes are made. Generally speaking, the manufacturers add census tracts to a dealer’s assigned territory as a result of an increase in population within the dealership’s market. This growth in population results in old census tracts being divided up and expanded into new census tracts. Manufacturers will also add census tracts in the situation where there has been a change in dealer locations within the market requiring a reassignment of existing census tracts (i.e. GM post-bankruptcy). On the other hand, a reduction in census tracts generally results from a contraction in population or the addition of dealers to the market.
Computers are used by the manufacturers to make changes to the assignment of census tracts by way of measurements from the geographic center of the census tract to the nearest dealership. Manufacturers claim that their employees review these census tract assignments before they are finalized to insure that subjective conditions in the market are taken into account. However, we have seen over the years a number of situations where a dealer is assigned a census tract that may be closest to him or her by air miles but a mountain or river stands between the census tract and the dealership. In addition to natural barriers, we are more likely to see an erroneous assignment of territory resulting from a failure by the manufacturer to appreciate the shopping patterns of a dealer’s market. In this instance, when a map of the road system in the dealer’s market is laid over the assignment of census tracts it becomes clear that residents of those census tracts are much more likely to travel to another same linemake dealership than the one to which the census tract is assigned due to travel time and convenience. The reverse can be true as well for a dealer who is losing a census tract because it is closer by air miles to another dealer but remains closer by drive time or drive distance to his or her dealership.
Practical effect of increase in assigned territory
Why should a dealer care about a change in his or her dealership’s assigned territory? First and foremost, a dealer receiving a notice of a material expansion of assigned territory can expect the dealership’s sales performance calculation to decline and planning volume guides to increase.
All major manufacturers judge their dealers’ sales performance as a percentage of the average sales penetration in the dealer’s state or region. This calculation takes the manufacturer’s average sales penetration in the state or region and applies that percentage to the dealer’s sales penetration in his or her assigned territory. The dealership’s sales volume is measured against the total number of same-segment vehicles sold in the dealership’s assigned territory. When a dealership’s assigned territory is expanded the number of total sales against which the dealership is being measured increases. Every census tract added to your assigned territory has in it a certain number of new vehicle registrations, which now get added to the number your actual sales are measured against. Hence, your dealership’s total sales (which don’t change based upon assigned territory) will now be measured against a greater number of total vehicle registrations resulting in a lower penetration percentage. By the simple click of a mouse, your manufacturer can redraw your assigned territory resulting in the dealership being an exceptional performer one day and a poor performer the very next!
In addition to a direct negative affect upon the dealership’s sales calculation, an increase in the dealership’s assigned territory will result in an increase in the dealership’s planning volume for expected sales and minimum facility guidelines. As the number of total vehicle registrations (Units in Operation) and the overall population of your assigned territory increases with the addition of census tracts, the manufacturer’s formulas for planning volume and facility guidelines will generate increases accordingly. Increases in planning volume result in larger required minimum floorplan lines and larger required minimum working capital as well as larger required minimum facility space guidelines including more customer parking, more inventory parking, more showroom and indoor vehicle display space, more parts storage space and more service stalls. A failure to meet minimum facility guidelines is considered by the manufacturer a default under your dealer sales and service agreement.
Practical effect of reduction in assigned territory
All else being equal then a dealership would rather have its assigned territory reduced, taking pressure off the sales performance calculation, than have their territory expanded. However, all else is not equal. A reduction in assigned territory has its own downsides. First, a reduction in territory means that the dealership no longer enjoys the benefit of direct marketing or warranty recalls from the manufacturer to the customers residing in the census tracts removed. The manufacturers’ communications with customers typically references the “preferred” dealer to be contacted by the customer for more information on the product or services mentioned in the manufacturer communication. Likewise, the manufacturer’s website will most often direct customers to the dealership which has been assigned the area within which the customer resides.
A second and potentially greater concern with a large reduction in territory is the possibility of a new dealership being added to the market. Often times, manufacturers will take census tracts from the dealers in the market and set them aside as a “study area.” More often than not the study area is ultimately assigned to a new dealership being added to the market. If you are in one of the few states which still define a dealer’s protected relevant market area by the manufacturer’s assigned territory for your dealership as versus an objective mileage standard, the reduction in assigned territory could result in the loss of the right to protest the addition of a new dealership into your market.
What is a dealer to do in response to an adverse change in area of responsibility?
It is imperative that dealers pay close attention to any notice received from the manufacturer which informs you of a change in your area of responsibility. Dealers receiving such a notice should insure that they receive a map, not just a listing of census tract numbers, which allows you to compare your old territory to your proposed new territory. In comparing these maps, dealers should ask the question “where are the residents of this census tract most likely to shop for the purchase of a new vehicle and for service of their vehicle?” If a dealer finds that certain census tracts being removed from the dealership’s territory should remain with the dealership or certain census tracts are being added to the dealership’s territory which should be in another dealership’s assigned territory then it is imperative that the dealership communicate this to the manufacturer. This written communication should include a detailed description of the reasons for the dealer’s objection to the proposed change in territory along with a request that the proposed change not be made. More often than not, the manufacturer will refuse to reverse the proposed addition or deletion of census tracts but what is more critical is that the dealership is on record objecting to the change. Being “on record” will allow the dealer to point back to the change in territory as the reason for any adverse change in sales performance or in opposing a future new point.
In most notices of proposed changes to the dealership’s area of responsibility, manufacturers provide the dealer with a time period in which to submit comment on the proposed changes. Dealers should take full advantage of this opportunity. If the manufacturer does not reverse the changes as requested by the dealer, then in many states the dealer has a statutory right to protest the adverse change under the franchise laws. In such a protest, the burden is on the manufacturer to demonstrate that its proposed changes to the dealership’s assigned territory are reasonable. In a protest proceeding, the dealership will have the opportunity to demonstrate that the addition or reduction census tracts to the dealership’s assigned territory is unreasonable due to one or more of the factors addressed above.
As we have discussed so often in this article, the moral of the story is that the dealer must be proactive and responsive to a notice from the manufacturer that the dealership’s area of responsibility is being changed. Don’t assume the manufacturer is going to correctly and fairly change your area of responsibility based upon the new 2010 census data. Instead, protect the investment you have made in your dealership by taking a few minutes to study the before and after maps of your assigned territory and then contacting experienced motor vehicle franchise counsel to further pursue any concerns you have. A proactive approach could save you many hundreds of thousands of dollars in required facility expansion or in legal fees fighting over a future allegation of sales performance deficiency.