Franchise Trends – What’s Old is New Again
By Jason T. Allen
The years that followed the COVID pandemic were undoubtedly very different for dealers than the years that preceded it. That was true not only on the retail side of the business with the customer, but it was also true for automotive manufacturers in how they related to their dealers. During those years, the normal barrage of factory letters to dealers regarding sales performance, facility demands, in-person dealership audits, stair-step incentives and other things slowed substantially.
Now that the pandemic era obstacles have largely subsided, dealers are faced with a business environment that looks more like the pre-pandemic levels (but with higher interest rates), and likewise, we are seeing the factories return to the playbook they used before the pandemic. So, what does this mean for dealers in their relationship with the manufacturer? It means that dealers should be prepared for this increased factory activity to continue. The good news is that dealers have navigated these demands previously, many state laws provide protections, and some state laws have been enhanced to provide further protection. Oftentimes, the state law may significantly limit (or outright prohibit) the demand the factory has made. The bad news is the demands are likely to keep coming, and dealers will need to respond and avail themselves of their law to successfully push-back.
Sales performance letters and facility demands are the two most obvious areas where the factories have ramped up demands recently. These look very similar to what the factories were doing before the pandemic. On both fronts, dealers should take these demands seriously, while at the same time evaluating what their state law says about the factory’s ability to enforce the demands. For example, the factory does not send sales performance letters just to send them, or as a friendly reminder. Those letters are being sent to create a record, and they can lead to a notice of default or notice of termination. Dealers should focus on the content of those letters, their specific market circumstances and respond accordingly. Creating a real-time detailed record of why the dealer disagrees with the factory’s performance measurement is important to push back on these threats and can help to stop further action. Likewise, many state laws prohibit performance measurements that do not account for local market factors that may influence the performance calculation (think import bias if you are a domestic dealer in a metropolitan market). So, that too should be considered when preparing a response.
Similarly, on the facilities front, during the pandemic when it seemed like the whole world was conducting business virtually, the facility demands that were commonplace seemed to be paused. They too are back. Some manufacturers (Hyundai, VW and Subaru) are being particularly aggressive with facility demands, and going as far as to declare dealers in breach of their dealer agreement if they do not agree to commit to immediate upgrades. While the dealer agreement may require “adequate” facilities that meet the brand standards, many state laws limit those requirements to what is economically feasible. Some even include a requirement that the manufacturer show how it is feasible and agree to provide additional allocation to help with the investment. Also, many states have what is referred to as a facility “grandfather” provision, which prohibits requiring a substantial change in the facility if such a change has been made in the recent past – this time-frame can vary state by state, but 10 years is a good rule of thumb. Dealers should evaluate these requests seriously and in the context of what their state law permits on facility requirements to determine whether any change can be required.
In-person audits are another area where there has been a significant uptick in factory activity. These were commonplace before the pandemic, and now they are back. In addition to the best business practices of record-keeping, claim submission, etc. dealers should always consult their state law to identify the permissible scope of the audit, look-back period and reasons permitted for a charge back. It is not uncommon for the factory to request to audit information beyond what the state law permits and to propose charge backs which are outside the basis permitted by state law.
Finally, in the decade leading up to the Pandemic, EV’s were a huge topic for the industry. In particular, those that were dubbed “market disruptors”. They have not gone away, and now legacy manufacturers have joined the fray, such as VW/Scout’s announcement. So, the pressure is being applied on multiple fronts. But, like with the above items, dealers have options in many states to push back on these efforts and enforce their state laws.
So, what can dealers take away from the trends that have shifted away from the Pandemic era relationship back to the more traditional way of business where the factory demands are seemingly non-stop? The simple answer is dealers will have to be prepared to address these demands in much the same way they did before the pandemic. That includes staying focused on evaluating and responding to the demands in real-time and, as part of that, evaluating what the state law says about the factory’s demand. The good news is the laws are in place, and many have been strengthened, so a dealer facing these demands has resources available to help blunt the demands, but will need to effectively deploy those in response to the factory.
We strongly recommend that dealers share any factory demands and similar correspondence received with their experienced motor vehicle dealer attorney for advice on their state law and an appropriate response.