Making progress on the allocation front

In my April 2012 column in Dealer magazine, “Allocation – Where Have All the Vehicles Gone?” we talked about the challenges facing certain dealers with regard to receiving a fair and adequate allocation of new vehicles to meet their customer demands.  One horror story I shared was of an Audi dealer who had seven vehicles total on their lot with no more vehicles due from the manufacturer for two months.  Well, that situation is improving thanks to the work of BSM attorneys and a Judge who was not fooled by the funny math of the “turn and earn” allocation system.

In May, we went to court seeking an order from the judge to enforce the terms of the Dealer Agreement and state franchise protections, which requires Audi to allocate vehicles in a fair and equitable manner to its dealers. We presented the simple facts that the dealer had a planning volume of approximately 16 vehicles per month, but had its new vehicle inventory whittled down to less than 10 vehicles for the past several months, (including being completely without at least two models for six months), and at the time did not expect the delivery of any more vehicles for at least two more months!

Audi’s attorney, as expected, provided the Judge with a long dissertation on the virtues of the “turn and earn” allocation system concluding that, by definition, the system allocates vehicles in a fair manner. When pressed as to why the dealer had been provided with so few vehicles over the last several months, to include being completely deprived of certain models, Audi’s attorney simply stated that it must be because the dealer was not selling his inventory quick enough. This below regional average “turn rate,” Audi’s counsel explained, resulted in a reduction (to put it mildly) in the new vehicles earned by the dealer. The Judge then asked how a dealer was supposed to increase his turn rate when he was being provided virtually no cars to sell. Well, according to Audi’s attorney, the answer was simple – it could be found in – you guessed it – the omnipotent “turn and earn” formula. That’s right, it didn’t matter that the dealer had been completely without certain model vehicles for months on end, the dealer needed to figure out a way to turn the few cars he had faster. Oh, and to make the argument even more outrageous, Audi’s attorney suggested that our dealer could always purchase more cars from other dealers despite the fact that these vehicles are in extremely high demand resulting in no profit margin once the selling dealer is paid a premium for the vehicle!

In contrast to the algebra class being presented by Audi’s attorney, we continued to bring the Judge back to the reality of our client’s seven-vehicle inventory situation. The fact was that our client had lost the critical mass of inventory to attract customers to the store and without the hottest selling models in inventory, it had become impossible to increase the “turn rate” to anywhere near, let alone above the regional average.  Whether Audi had intentionally starved our client of product, as we contend, or simply applied its virtuous “turn and earn” system, the reality was that our dealer did not have enough new vehicle inventory to stay in business! The judge agreed.

The Judge ordered Audi to supply the dealer with an equivalent of a 60 day supply of vehicles and maintain that inventory level going forward to include replacing each vehicle sold with a substantially similar vehicle.  The judge did not accept that the “turn and earn” system was without fault.

The reason the “turn and earn” system is not flawless is the same reason that the manufacturers’ sales performance formula is flawed – the use of an average to measure performance. It is a mathematical certainty that there will be roughly one half of the dealers below the average and one half of the dealers above the average. With regard to allocation, once a dealer falls below the all-important regional average turn rate, their allocation is reduced and, if the turn rate is not increased very quickly, a further reduction in inventory will occur. When overall vehicle production is limited with a hot brand like Audi, the reduction in allocation of the new vehicle inventory can be severe and will begin a death spiral from which the dealer cannot recover. Under those circumstances, it is almost impossible for a dealer to recover from a temporary slip in turn rate. In contrast, for a brand with plentiful manufacturer vehicle production, a reduction in turn rate won’t result in a reduction in new vehicle allocation that will have as meaningful an impact on the dealership’s inventory because there are relatively more vehicles to be spread amongst the dealer network.

Dealers finding themselves in the “allocation death spiral” have protections in both their Dealer Agreement and most state motor vehicle franchise laws. All Dealer Agreements address vehicle allocation along the lines of the manufacturer “endeavoring” to allocate vehicles in a fair and equitable way amongst the dealer network and most state franchise protections require manufacturers to supply a reasonable number and mix of vehicles to their dealers. Using these provisions, a dealer whose business is being threatened by a lack of sufficient new vehicle inventory can find relief.

Chalk one more up to the good guys

Overcoming Ford’s attempted dismissal of Mercury termination claim

On another positive note, BSM attorneys have been successful in arguing against the dismissal of a claim for damages by a Lincoln Mercury dealer who lost his Mercury franchise as part of Ford’s unilateral discontinuance of the Mercury brand. Unlike many Mercury dealers around the country, our Mercury dealer client was extremely profitable and thus rejected Ford’s uniform buy-out offer, which was presented to Mercury dealers following the announced discontinuance of the brand. When Ford refused to recognize the future revenues our client was going to lose as a result of Ford’s termination of the brand, we brought suit under state motor vehicle franchise laws which prohibit a termination without good cause.

The dealer’s state franchise protections specifically provide that “good cause” for terminating a dealer does not include the discontinuance of an entire linemake by the manufacturer.  As a result, the dealer’s case is very strong and should involve primarily presenting a damage model which includes reliable lost revenue calculations from each dealership department projected forward in time for as long as it would be reasonable to assume that, but for Ford’s unilateral discontinuance of the linemake, the dealer would have continued to operate in good standing under his dealer agreement. Based upon our Mercury client’s long history of successful operations, we expect this to be a healthy number.