The National Automobile Dealers Association (NADA) last year released the initial findings of its study of the challenges associated with OEM factory image programs – the set of rules that govern the way branded dealerships are constructed and decorated.

Dealership owners have long chafed at the high cost and what they perceive as the micromanaging approach OEMs have taken with these programs, and for good reason. The initial study found that there was very little proof of the economic benefit of the upgrades and standardization that characterizes most of these initiatives.

In February, NADA released "Factory Facilities Programs: Phase 2," a follow-up study from industry consultant Glenn Mercer that more closely analyzed the return on investment of the factory image programs.

The general findings of the second phase (which included a number of in-depth case studies) confirmed Mercer's earlier findings. Expansion of the dealership (particularly the service department) can pay off, but modernization efforts may be harder to justify. Standardization programs, on the other hand, appear to have little or no benefit to dealers.

"We're requesting that auto manufacturers redouble their efforts to provide dealers with better business cases before investing in facility upgrades, and especially, to ease off on standardization demands that seem very hard to justify," Mercer said during the NADA Convention and Expo in Orlando in February.

"The one-size-fits-all approach is just plain wrong. There is incredible diversity among dealers," added NADA chairman Bill Underriner, who operates Buick, Honda, Hyundai, and Volvo dealerships in Montana. "Rigid standards often raise costs and produce little return." 

High Cost, Little Payoff

The reason dealers complain so much about image programs is that they are extremely costly, often requiring millions of dollars in investment with very little concrete return. In fact, many facility upgrades can lead to higher property taxes, higher insurance, higher maintenance costs, and even additional staffing costs. Based on the NADA study's figures, a $1 million overhaul of a showroom would require an instant and constant "bump" in new car sales of about 60 units annually, a tall order for most dealerships even under the best economic conditions.

While the value of most modernization and standardization efforts was questionable for dealers at best, one area of investment did have a definite payoff: expanding the service department, either by adding physical bays or extending operating hours to accommodate higher volumes. Calculating the potential value of these expansions was relatively straightforward, and most dealers see options like operating for longer hours as a way to fight back against the inherent convenience advantage that aftermarket service providers offer.

In fact, the NADA study looked at ways to improve both the customer experience and the dealership's bottom line through new service options like satellite service, shared service facilities, pick-up and drop-off shuttles and even driveway retrieval.

However, expansion requests from OEMs in general were met with skepticism by the dealers surveyed. According to the report:

"In brief, we found OEM forecasts for expansion requirements first, were generally too high or too optimistic; and second, that they were too frequently changed to be useful planning guides; third, we saw that in planning expansion requirements OEMs often did not take into account capacity-boosting techniques such as 24/7 bay service bay operation; and fourth, when it came to showroom expansion we could not identify strong business cases as to how and why this would pay off."

Modernization efforts could be improved by better defining the value of modernization at the dealership level, and finding ways to reduce the cost overruns caused by OEM control of remodeling via their facility programs. According to some estimates, OEM requirements (like specifying specific tile suppliers) add 20 to 30 percent more cost to these projects than if dealers had more freedom to manage the process on their own.

While there have been surveys that show the quality of a facility (like having a comfortable lounge area for customers to wait in) can improve overall customer satisfaction, Mercer points out that there is very little evidence such things have any impact on customer behavior.

"When a fast-food restaurant puts in a second drive-through window, sales go up," Mercer writes. "When a dealer puts in a nice waiting lounge, customer satisfaction goes up – but does service retention go up? Does the average RO increase? Does fixed coverage improve? Of course a customer will prefer a comfortable to an uncomfortable lounge – but does a more comfortable lounge change his or her shopping behavior? The answers to this kind of question seem to be lacking in the automotive retailing industry."

Unbundling Service and Sales

The new study also includes a look at the "Dealership of the Future," a forecast of what a dealership may look like in 2025. While the general franchise model probably won't change much, Mercer indicates that dealers and OEMs may want to divert more facility spending from sales to service, since fixed-ops has many more opportunities to build on the customer relationship than the sales department. Service and parts are also responsible for a much larger share of dealer profits than they used to be, so that targeted investment might make more sense moving forward.

One likely trend will be the gradual separation of the service operation from the physical sales floor. Increased migration of vehicle owners to urban areas could force dealers to revisit the idea of the classic downtown store, with vehicle inventories and service operations located on cheaper real estate in other locations.

"Our conclusion is that the dealership system will fundamentally remain intact in 2025, but there is the possibility for much more efficient design of facilities, for example by moving support functions offsite, and by using new format approaches to grow service volumes," Mercer says.

He expects to see a range of options to emerge in the service department, including the expansion of all makes/models strategies, more express service offerings, pick-up and drop-off services, extended shop hours, improved waiting areas, shuttles, satellite service facilities in more convenient locations, touchscreen terminals for unattended service drop off, and even driveway service for some repairs.

Mercer added that current spending trends (which involve massive construction and rebuilding of stores in order to standardize features) may be missing the point, and will result in increased dealer resistance. "As customer needs and behaviors continue to shift, we urge automakers and dealers to get more creative in addressing those changes, especially in service work, and that automakers become more flexible in approving low-cost ways to implement these ideas," he said at the NADA event. "We cannot afford to tear down and rebuild the store every time the brand imaging shifts."

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