Chicago Automobile Trade Association

NADA chairman calls some manufacturer incentive programs 'brand killers'

October 20, 2017
The chairman of the National Automobile Dealers Association this month criticized automakers’ use of so-called stair-step bonus programs, calling them harmful to U.S. auto dealers, to consumer confidence, and to brand loyalty.
In an Oct. 10 speech in Detroit, NADA Chairman Mark Scarpelli said the practice results in "wild discrepancies and fluctuations" in vehicle prices between different dealers, as well as a lack of consistency, transparency, and explanation that lead directly to a lack of trust in auto dealers and in vehicle brands.
"In a world where customers rightfully expect fairness and transparency in price," Scarpelli asked, "why do so many manufacturers still deploy unfair marketing strategies that produce huge discrepancies in price between various customers — discrepancies that aren’t transparent, that can’t be explained rationally, and that run afoul of everything our customers really care about?"
He added: "These stair-step incentive programs are trust killers. ... They are not only trust killers, but they are brand killers, too."
Stair-step bonuses are paid out to dealers on an escalating scale as they hit progressively higher sales targets. Dealers who fall short of targets receive nothing.
In the past, dealers and dealer groups have criticized Fiat Chrysler Automobiles, Nissan Motor Co. and Ford Motor Co. for using stair-step programs. The NADA commissioned a study into automakers’ stair-step programs by Boston-based consultancy Analysis Group, Scarpelli said, whose results it will share with automakers and use them as the basis for discussion.
Scarpelli said consumers don’t understand the discrepancies in pricing because they are between manufacturers and dealers. "But let me tell you what consumers do see. For shoppers of brands that use stair-step incentive programs, they see large discrepancies in price for the same or similar vehicles across different dealers. Or worse, at the same dealer, but at different points in time.
"Or even worse still, a discount applied to a vehicle they don’t want, but that can’t be applied to a vehicle they do want."
The NADA, a trade association that represents about 16,500 auto dealers, has an influential presence in Washington, built largely on dealers’ engagement with and support for local members of Congress.
Scarpelli’s speech comes at a time when major automakers and their dealers are coming off a strong run in U.S. new-vehicle sales that lasted from the end of the Great Recession and culminated in record sales of 17.55 million units in 2016.
This year’s sales figures are expected to dip slightly, putting pressure on carmakers and their dealers to sell off high levels of inventory.
"You have a (stair-step) program designed to increase sales volume," Scarpelli said. "But you achieve higher volume only by lowering prices. So you aren’t creating new demand, you’re just dropping to a lower point on the demand curve.
"But because you’ve done so in a way that erodes desire for your brand, you’ve actually created less demand — you’ve created a new, lower demand curve. And on a new, lower demand curve, you only have two choices: You can sell fewer vehicles or you can further lower prices just to be able to sell the same amount you would have originally."
The Analysis Group called the practice a "death spiral." The company’s findings, in part:
• Stair-step programs can increase sales volume in the short run while simultaneously decreasing demand.
• However, an increase in sales due to an aggressive stair-step program should not be confused with an increase in either consumer demand or the value of the manufacturer’s brand.
• In fact, manufacturers who use stair-step programs aggressively risk damaging their brand in the long run and entering a death-spiral of declining demand that eventually no amount of discounting can profitably overcome.
At a time the industry likely finds itself in the middle of a "lengthier sales plateau," Scarpelli said, it is critical for dealers and manufacturers to work together.
In his speech, Scarpelli also cited rising concerns from auto dealers about "increasing attempts by their manufacturer partners to run their stores" and mandate investments in expensive — and possibly unnecessary — facility upgrades.
He said, "At the end of the day, all that these programs are really doing is eroding the entrepreneurial spirit and so much of the decision-making about what it takes to run a modern auto dealership successfully."


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