Factory Facilities Programs: NADA Report Phase 2 in Summary

NADA recently completed its research project regarding factory facilities programs, and, using a case study approach, it reconfirmed many of the findings of Phase 1. However, Phase 2 also focused on “the dealership of the future.” It outlined the historical progression of the modern dealership and made several suggestions for OEMs and dealerships moving forward.

A Quick Overview of Phase 1

Phase 1 included 75 brief interviews with OEMs, dealers, and some industry experts. Perhaps the most significant finding that Phase 1 concluded was that there is no real way to link facility upgrades and customer shopping behavior. While one would assume that having a nice facility would increase sales, there is no hard data to support this assumption. Glenn A. Mercer, author of the NADA reports, explains, “We cannot say, with any conviction that a showroom that has gone 10 years since an upgrade will draw fewer customers and sales that one that was redone 5 years ago, and if we think it does draw more customers, we cannot say how many.”

Phase 1 explained the three types of investments. Expansion involves a physical expansion, including, for example, the entire store, show room, or repair bays. Modernization requires upgrading the dealership’s interior to comply with modern standards. The most contested, however, is standardization. Standardization involves changes, which can occasionally be major, to ensure that the dealership looks similar to all of the other dealerships of the same brand. Mercer sums up Phase 1 for us in one sentence: “Renovating a dilapidated store pays off, and while one should not expect much of a return from maintenance spending, service expansion can pay off well, whereas modernization investments tend to depend on how much assistance the OEM offers, and standardization spending is almost always a pure deadweight loss.”

Phase 2: Reinforcing Phase I

Phase 2 involved 35 in-depth interviews with dealers and experts, which is a much smaller sample size than Phase 1. Some dealers shared exactly how much the OEM required them to invest and explained what kind of return that investment generated, if any. While the information is helpful, the entire report urges the reader to refrain from generalizing from their case-study approach. For example, the report lists several dealerships that showed no change in sales from significant investments, but also lists a few that showed improvement in sales. The report groups them by type, including, rural domestic, urban domestic, urban Asian, and public chain, just to name a few. Results vary significantly even within these groups. What works for one type of dealership may not work for another. For example, one dealer points out, “In a rural area, the pace of lie if a bit slower, and so I see much less return on things like quick-service lanes, waiting-area Wi-Fi, etc. But perhaps that will change.”

One OEM shared some details about their image program, and the report outlines that data. This OEM, whose name was not disclosed, explained that customer satisfaction generally increased after the dealer completed the program. Since this OEM focused on expansion, not just modernization, growth goals were consistently obtained. This OEM explained that while absolute dollars went up following the program, the profitability percentages did not increase significantly. However, over time those percentages have had a tendency to increase. Overall, then, the results are positive for this brand, but increasing the return percentages takes some time.

The case studies in Phase 2 reinforce what Phase 1 had already told us: There are generally disappointing returns on investments for imaging programs. Phase 2 explains the two exceptions, however. The first is where the dealership was in serious disrepair before the imaging program: When the dilapidated dealership is modernized and expanded, then there are generally positive results. The second exception involves expanding the service areas. This exception is likely the result of the relatively low cost of adding an additional service bay and the higher profit margins on parts and labor.

Phase 2: Focusing on the Future

Phase 1 discussed the dealership of the future in general terms, but Phase 2 dives in to consider the changing environment of automotive dealerships. Phase 2 explains that dealers are concerned that the current imaging programs are developing dealerships of today instead of investing in the dealerships of the future. Phase 2 points out that dealerships of today are highly regulated, and involve “planning guides that go right down to the level of furniture design, floor tile and carpet specification, and even the look of stationery, landscaping, and bathroom fixtures.”

Any focus on growth, the report explains, is more on the online dealership of the future instead of the physical dealership. Generally, the plans for the physical dealership only extend five or ten years. After outlining the development of the auto-dealer industry as a whole, the NADA report makes modest recommendations, instead of dramatic industry overhauls. The NADA report suggests that dealerships should be on the lookout for the following trends:

1. Rising Customer Expectations: Dealership design needs to be flexible enough to adapt to constantly changing expectations. The ability to change the dealership quickly and at low cost will be extremely important.

2. Personalization of Shopping Experience: The process of buying a car, not just the vehicle itself, needs to be personalized. Some segments of the sales processes could be streamlined to fit a younger and more technologically savvy audience.

3. Customers Seeking an Easier Experience: Consider all of your options for making the buying process more convenient for your customer. The NADA report states that 100% home delivery is not out of the question.

4. Technology May Displace Physical Assets: As technology increases and becomes more required than optional, dealership inventory may sharply decrease. Always consider your expansion requirements with technology changes in mind.

5. The Internet Increases the Manufacturer’s Ability to Reach Customers: Dealers may need to get creative to compete with their own OEM’s online presence. This can take place online, but may also mean that dealers should physically get in front of their customers; think shopping malls and demonstrator outlets.

6. The Total Ownership Experience: As vehicles tend to have many of the same features, customers are looking at other things that may set the vehicle apart, such as the dealership itself and service packages. Creating a strong image and support mechanisms for your customer will be essential.

7. Change Is Fast: Overall, dealers should keep in mind that changes in our technology-driven society today are happening much faster than historical changes. Dealers need to be able to not only adapt, but also adapt much more quickly than previous decades.

The Phase 2 report also urges dealers to take lessons from Apple. First, the Apple stores are not very standardized on the outside, and only slightly more so on the inside. They have a low cost interior that is extremely flexible. Apple stores are, by design, always crowded; something that a large showroom may not be able to achieve. To the average consumer, a crowed store shows that the brand is popular and reassures them that they have made the right purchasing choice. Lastly, the Phase 2 report invites dealers to consider the Tesla stores, which are on high-traffic, high-cost urban real estate with service facilities located off-sight.

Overall, Phase 2 confirms Phase 1, and urges dealers and OEMs to be creative and forward-thinking in their requirements. To see both reports visit the NADA website here. If you have further questions on how this report and its predictions may impact the legal requirements for your dealership, contact Arenson Law Group, PC, at 319-363-8199, and we will be happy to discuss your legal needs.