Existing dealerships should not sit on the sidelines
As of last week, Kia Motors America has again announced that it intends to add new dealerships across the U.S. In particular, Kia appears to be focused on the “top 10” metropolitan markets in the U.S. However, we are aware that Kia, as well as Hyundai, Volkswagen and Audi, has proposed adding new dealerships in varying size markets across the country.
Aren’t these the same manufacturers that are having a difficult time supplying their existing dealers with a sufficient supply of vehicles? Without additional production capacity, won’t a new dealership simply cannibalize existing dealers’ sales? The answer to these questions is yes and yes. Then why does a manufacturer claim that additional dealership representation is needed? Because the manufacturers are under the hope that additional dealerships will cause a net increase in aggregate sales within the market. Although this wish will likely come true, the benefit of an incremental increase in total market share does not outweigh the negative impact upon the existing dealers!
Add points are the classic example of where the economic interests of dealers and manufacturers diverge. The addition of a new dealership into an already well-represented market will serve to cannibalize sales that the existing dealers would have otherwise captured, in turn, making it very difficult for the existing dealers, as well as the new dealer, to be profitable. The unnecessary additional competition will force dealers to sell at lower than desirable prices. In comparison, from the manufacturer’s standpoint, if the addition of that new dealership generates just a few additional vehicle sales into the market on an aggregate basis then the manufacturer has increased its revenue. For this reason, it is very difficult for the manufacturer to accept an otherwise common-sense business case that an additional dealership in the market is not only unnecessary but will be harmful to existing dealers. Of course, if the manufacturers truly cared about dealers’ profitability they would make their decision by first analyzing the effect the new point will have on the bottom line of existing dealers. Our experience, however, is that the manufacturers do not perform such an analysis but instead hold on to the tired, old mantra that a new dealership will increase all dealers’ sales in the market due to greater product exposure and customer convenience.
So what can an existing dealer do when presented with a manufacturer market study which alleges that the market is being underserved? Dealers of all linemakes need to remember that almost every state’s motor vehicle franchise laws provide a right for existing dealers to challenge a proposed new point. Those provisions typically require a manufacturer to give notice to existing dealers of a proposed new dealership location in their area and further provide existing dealers the right to protest the addition of another dealership into the market.
Because the manufacturers’ and dealers’ interest are so diverse in this area, dealers must seriously consider taking advantage of the right to challenge the proposed addition of a new point into their market. State franchise laws generally require the hearing officer or judge to take into consideration not only the benefit to consumers (convenience) but the harm to existing dealers. As a result, if the protesting dealer has, for example, recently upgraded his or her facility then a strong argument can be made that the loss of revenue, which will result from the new dealership will be particularly threatening to the existing dealer’s financial viability. Likewise, if the existing dealers in the market are selling their expected number of vehicles under the manufacturer’s own sales performance formula, and there has not been a significant change in population, then the existing dealer has a strong case against establishment of an additional franchise in the market.
Unlike other types of “litigation” against the manufacturers, an add point protest is typically administrative in nature and, as a result, is not viewed by the manufacturer as a particularly aggressive move by an existing dealer. Instead, we have found that manufacturers accept, albeit begrudgingly, that the protesting dealer is protecting his or her investment in their dealership business. We have further found that the vast majority of add point challenges are settled with the manufacturer offering the dealer some significant benefit (cash, an LOI for another point, advertising assistance, facility assistance, etc., etc.) in exchange for an agreement to allow the new dealership. In other cases, the dealer and manufacturer agree to postpone the proposed addition of the new dealership while, yet, in other cases each side agrees to disagree and the challenge goes to a final hearing.
Dealers should keep in mind that because the protest prevents or “stays” the addition of the new point until a final determination on the protest is made, an add point protest is one of the few legal disputes that goes a long way in paying for itself. For every month the new dealership is prevented from opening, the existing dealer(s) avoids the loss of revenue associated with the unnecessary competition from a new dealership in the market.
Whatever the situation, existing dealers who receive a notice of a proposed new dealership point for their market should not waste the hard-fought rights provided under state franchise laws if they believe in good faith that the new point will do more harm than good.