Upgrade programs that auto makers require of Canadian and U.S. car dealers don't generate high enough returns to justify the millions of dollars dealers spend, says a new study of an issue that has become a key area of disagreement between car companies and those who sell their vehicles.
The latest examination of auto maker "image" programs, which involve expanding facilities or renovating them to meet standards set by the companies, will buttress dealers' views that the programs are too costly and have little impact on sales or market share.
"What we have learned so far … is that the burden of image-program-driven facility investments is significant for dealers; and that as far as we can tell, the impact on actual customer behaviour is minimal," says the study, prepared for the U.S. National Automobile Dealers Association (NADA) and the Canadian Automobile Dealers Association.
U.S. dealers have become vocal critics of image programs in recent years.
But the programs are helping to spark a transformation of automotive retailing in Canada because many dealers who own a single outlet, faced with costs of $1-million or more to upgrade their stores, are selling out to large dealership groups, propelling a consolidation.
"Our survey of Canadian dealers indicated a different tone to factory relations: a dealer in Canada faced with an onerous image program seemed to us more likely to sell the store in question, whereas in the U.S.A. there was more of a tendency to 'stand and fight,'" the study says.
It says Canadian and U.S. dealers spend between $10-billion (U.S.) and $15-billion annually, mainly at the behest of the auto makers, which have rules for the physical appearances of their dealerships that often go as far as setting out what kind of carpet or tile to use on a showroom floor.
In recent weeks, large Canadian dealer groups have snapped up stores in Grande Prairie, Alta., and bedroom communities outside Toronto.
"When the facility upgrade must be done, it triggers the dealer to get real about selling," one Alberta-based dealer said in an interview.
A dealer making between $1-million (Canadian) and $1.5-million a year staring at a renovation cost of $8-million realizes he will never get his money back and becomes more open to selling, the dealer said.
The study says covering an investment of $1-million by a dealership requires an immediate increase in new car sales of about 60 vehicles a year when the costs of borrowing and the profit margins on new cars are taken into account.
"And remember that these figures are the amounts needed just to recover the investment – not to earn any positive return on it."
Among 27 case studies in both countries ranging from an investment of about $400,000 to one of more than $20-million, the study found the highest returns on investments came from reconstruction of dilapidated stores.
One unidentified dealer who sold vehicles made by an Asia-based manufacturer spent $2.5-million and found little impact.
"Now we're overbuilt, we have no idea when we will ever fill this store," the study quoted the dealer as saying.
The study urges auto makers and dealer associations to work together to establish guidelines that will satisfy the companies' needs for modern and attractive stores, but at reduced cost.
If they don't work together, "we may find the North American auto retailing industry landscape littered with more and more empty, overbuilt, and unsustainable buildings, reminiscent of the half-empty shopping malls that now litter our landscape," it concludes.