Mercer: Where is the data to support profit from image programs?


Opposition to OEM-mandated image programs has eased, but concerns remain. Glenn Mercer, the author of two reports on the wisdom of image programs, explains why.

With the Great Recession in full swing and profits low, the National Auto Dealers Association hired automotive analyst Glenn Mercer to examine the rationale behind image programs.

Mercer’s career resume includes two decades of advising car and truck OEMs on matters financial.

His two-part report saw the light of day at the NADA Conventions this year and last.  Both questioned the wisdom of the image programs. The second segment took a look at the Canadian situation.

What legwork did you do in Canada to get a grasp on the situation here?
With the help of the CADA, I got a list of two-dozen dealerships and spoke to two-thirds of the dealers on the phone and visited with the rest.
    It was a fairly representative sample: mass market and premium stores; urban and rural. Charles Seguin visited the rural stores while I visited the ones in Montreal and Toronto. One of the detailed case studies I did, however, was based on an Edmonton dealership.
    CADA also helped me gain an insight into the regulatory and contractual relationships here. Despite these differences, many of the issues are similar. And that drove the sample size.
What are the concerns?
First of all, ROI. Dealer wonders what they can expect. They want an answer. It needn’t be detailed, but they expect an answer as OEMs ask for more and more money. Gone are the days in the ’70s when OEMs demanded a sign on a post. Now, it’s “tear down your brick building and build the new one out of concrete and glass.”
    As the OEMs ask for more and more, the drumbeat of concern has been “Show us the business case as to why this will pay off!”
    Fast food chain franchisors can demonstrate to their franchisees what will happen to their business volume if they add one more drive-thru. It’s been difficult for OEMs to come up with something similar.
    The second concern is “Why should it cost so much? What is the connection to consumer behaviour? Dealers wonder “If you want us to go from blue to grey tiles, where’s the data to show consumers ever noticed?”
    The third is timing. Dealers ask “Can you give me some assurance that I won’t have to do this in the next few years when someone else gets promoted at the OEM and wants to change the program? Why do I have to do it so frequently?”
     Most dealers on both sides of the border understand the factories’ legitimate requests for stores that are clean, modern and support the brand image. There may be some who say no building ever sold cars. But there aren’t many except some rural dealers who wonder why they have to do anything when everyone knows they’re in the car business and have been dealing with them for generations.
    Most dealers understand the need for a store that is big enough to handle the customers they have and modern enough, not furnished with folding chairs from a high school gym.
Most agree that Toyota dealership should be red and Mazda dealerships blue.
    But when it comes to standardization beyond that, that’s the most contentious.

Many dealers believe that mandating the exact location of the reception desks, and other incredible details, is over-standardization. They think it’s born of laziness. They say it’s easier to check compliance that way instead of having to wrangle over details. There’s a need to account for local variations. A showroom in Arizona may not need to house as many cars as one in Labrador.
    The OEMs argue that standardization is necessary to appeal to customers who will be more willing to buy or pay more if they all look alike. If they have the data, they should show it. The Apple stores have basic standardization. But the buildings vary immensely. Brand image is strong enough to survive the variations in architecture.
    The cars are standardized. They carry the brand. So what’s the purpose for making showrooms and drive-thrus identical?

Are customers impressed?
We know that customers say they prefer a new facility to a dingy one. But the missing link is that we can’t bridge the gap from satisfaction to behaviour. Sure, they like the free snacks and the WiFi, but how does it translate into what they do? Does it mean they won’t haggle over that last $200. No OEM gave us the data to support that contention. We think it can be done and we encourage them to do.

What about the theory some dealers have that customers prefer a run-down facility because they think they’re going to get a better deal?
Show me the evidence and not just the anecdotes. We can’t run on anecdotes.
Your report says a lot can be learned from Tesla when it comes to dealership design.
Yes. We are purely focusing on the physical layout of the stores to see what ideas we can glean from Tesla. This report in no way serves as an endorsement or as a refutation of any Tesla strategy or business process.
    The stores are not large, expensive and inflexible facilities in a suburban automall. They’re relatively inexpensive facilities in a suburban mall. They have high square-foot cost but a low number of square feet and they are easy to modify and update over time. The graphics are low cost and easy to move around. The car carries the message. It’s a good model.

What about the design of European dealerships?
We are aware of them because the innovations are driven by the high cost of land and shortage of space. But we felt that looking at the European experience could muddle the issues.

Do you see any signs of flexibility on the OEM side?
Yes. Those that are weak  the second and third-tier OEMs, won’t say no to a dealer with a special request. They have no choice. And Ford’s U.S. image program announcement shows a heartening trend to flexibility. But I can’t see an across-the-board trend to flexibility. Some OEMs are absolutely committed to not only national, but international standardization.