Responding to Unsatisfactory Sales Performance Termination Threats
Paul R. Norman | 04.05.19
From the motor vehicle manufacturer’s perspective, sales performance is the NUMBER ONE duty of its franchised dealers. Every manufacturer uses essentially the same metric to measure their dealers’ sales performance. Under this metric, competitive registrations in an assigned territory (e.g., APR) multiplied by the brand’s market share in a wider area (e.g., state or region) equals a dealer’s “expected sales” or “minimum sales requirement.” In most cases, expected sales are determined on a model by model basis and then aggregated to compute the dealer’s total expected sales for a particular performance period. Although it has long been rejected by the courts and state agencies, manufacturers still adhere to the position that any dealer whose actual sales do not equal or exceed its expected sales is in breach of its dealer agreement and subject to possible termination.
Actual terminations for unsatisfactory sales performance are rare, but they can occur. While the standard sales performance metric described above has been held to be unreasonable in more than one recent case, dealers should take unsatisfactory sales performance allegations seriously. Here are some steps a dealers should take if it receives a letter or other communication from a manufacturer alleging unsatisfactory sales performance.
Evaluate the risk of termination
Manufacturers rarely threaten termination when they first communicate their dissatisfaction with a dealer’s sales performance. Initial communications often read as friendly offers to assist the dealer in improving sales. However, if sales as a percentage of expected sales don’t increase over time, the tone of the manufacturer’s letters may become much more negative. A letter giving the dealer formal notice that it is in material breach of the dealer agreement and must cure the breach by a date certain is a strong indication that the manufacturer is seriously considering termination if sales performance does not significantly improve. Accordingly, the tone and content of the communication should be carefully scrutinized. If it indicates a high risk that the manufacturer is seriously considering termination, a dealer’s response should be immediate and aggressive.
Another factor to be weighed in evaluating the risk of termination is how far below expected sales are a dealer’s actual sales, both relative to 100% expected sales and in relation to the manufacturer’s selected comparison group. The lower the dealer’s percentage, or the lower the dealer’s ranking relative to the comparison group, the greater the risk that the manufacturer may seek termination.
Evaluate the reasons actual sales are below expected sales
A dealer will not receive a sales performance termination threat unless its actual sales are below its expected sales. Even before a termination threat is received, a dealer selling below expected sales should consider the reasons this fact exists. Are these reasons within or outside the dealer’s control or both? Reasons within the dealer’s control should be promptly addressed within the bounds of reasonable business judgment. Reasons outside the dealer’s control should be pointed out in writing to the manufacturer along with a request, where appropriate, for an adjustment in the dealer’s expected sales.
Reasons within a dealer’s control
Reasons within a dealer’s control may include: (1) not enough new vehicle advertising; (2) charging noncompetitive prices; (3) inadequate sales staff or training; (4) low customer satisfaction; (4) underperforming sales management; (5) dualed sales force focusing on another brand; or (6) need for better facilities. If any of these reasons are arguably preventing the dealership from maximizing the sales potential for the manufacturer’s vehicles at the dealership’s location, they should be addressed. Even if increased sales do not offset the costs of correcting an operational deficiency, avoiding the costs and risks of fighting a termination battle with a manufacturer will benefit the dealer in the long run.
Reasons outside a dealer’s control
Reasons outside a dealer’s control may include:
- Misaligned APR. The dealer’s assigned territory is a key component of the manufacturer’s “expected sales” formula. If portions of that territory are not areas where its residents are most likely (all things being equal) to buy from the assigned dealer instead of from other same brand dealers, this should be pointed out in writing to the manufacturer and a request made to realign the APR. Reasons why a portion of the territory arguably shouldn’t be assigned to the dealer include: (1) its closer to other same brand dealers in terms of distance and/or drive time; (2) there are natural barriers (rivers, mountains) separating it from the dealer; (3) its residents have a demonstrated pattern of shopping in an area where another same brand dealer is located; and (4) its residents work in an area where another same brand dealer is located and more likely to shop in that area.
- Brand Preference. The manufacturers’ sales performance metric does not account for brand preferences differing between areas due to demographics (race, education, income) or other factors. Areas that have a strong union presence may tend to favor domestic over import brands. The existence of a particular manufacturer’s headquarters or other facility within an area (e.g., Harley-Davidson in Milwaukee) means that the brands of other manufacturers cannot be expected to capture the same market share in that area as in other parts of the state or region.
- Competitive Differences. Domestic brand dealers in metro areas will generally have lower sales percentages than domestic brand dealers in other parts of a state or region because there are a greater number of import dealers in metro areas than elsewhere. A higher ratio of competing dealerships in the dealer’s APR compared to other parts of the state or region will skew the sales performance metric against that dealer.
- Product Supply. The old adage that “you can’t sell what you don’t have” is relevant here. Dealers often think that they can’t use it as a defense against an unsatisfactory sales performance threat because the manufacturer offers them a large allocation of certain models. However, because expected sales normally are determined on a model by model basis, the test should be whether the dealer is being allocated enough vehicles to meet its expected sales in each model category. If a dealer has expected sales of 100 units in model category X and is only allocated 50 units to sell during the performance period, it doesn’t help that it could have received additional units in model category Y where it achieved its expected sales.
Respond to the Threat
Particularly when the tone of a manufacturer’s sales performance communications changes and becomes more threatening, the dealer should strongly consider an immediate response. The response should refute any allegation that the dealer is in breach of its dealer agreement and point out the inadequacies of the manufacturer’s sales performance metric in measuring true expected sales. It should cite the reasons outside the dealers control which cause the dealer’s actual sales to fall short of the expected sales determined by that metric. It should also include a business plan to address the reasons within the dealer’s control that may be causing the shortfall. It should invite the manufacturer to suggest other steps the dealer might consider to increase sales. The tone of the response should be one of cooperation and desire to maximize sales to the mutual benefit of both the dealer and the manufacturer, while also signaling the manufacturer that the dealer does not intend to simply abandon its franchise in face of a termination threat.
Understand your rights
A strong response to a manufacturer’s termination threats will often prevent it from sending an actual termination notice. However, if the worst happens, and you receive a termination notice, you have the right to challenge it in court or before a state agency. In Wisconsin, a timely filed complaint will force the manufacturer to continue treating the dealer the same as its other franchised dealers unless and until the appropriate state agency rules in the manufacturer’s favor. To prevail in a termination battle, the manufacturer must prove that the dealer is in material breach of a reasonable and necessary provision of the dealer agreement, that the reasons for the breach are within the dealer’s control, that the dealer received notice of the breach and a reasonable opportunity to cure it and that the decision to terminate was not discriminatory compared to similarly situated dealers (e.g., that the manufacturer had valid reasons for terminating the dealer in question while not terminating other dealers with similar or worse sales performance). If the dealer prevails, it has a cause of action against the manufacturer to recover its costs, including attorney fees.
Consult an experienced motor vehicle franchise attorney
Sales performance is the most common reason for a manufacturer’s termination notice. Consulting an experienced attorney as soon as a manufacturer begins to complain about your dealership’s sales performance — or any other alleged default of the dealer agreement — is important. Together you can decide on preventative steps aimed at ensuring that a termination threat does not become reality.
The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.