A few months ago I had a post on stair-step incentives. These are incentive schemes that car manufacturers offer dealers that essentially pay rebates on cars that have been sold once sales cross a specified threshold. In that post, I noted that these schemes had the potential to skew competition in local markets:
If you and I own competing dealerships across town, I have a serious leg up on you if I am the first to reach a threshold. I can price more competitively since I know that I am guaranteed to get a rebate while you are still striving to make the threshold. Note this makes everything all that more sensitive to how individual dealer thresholds are set. If mine were skewed low while yours were too high, it’s game over and I eat your lunch.
Obviously, from a dealer’s perspective, this is an issue. Dealers don’t necessarily know how car makers set their targets. They, for example, may be basing targets on national trends that may not apply locally. Further dealers may be facing challenges that the automakers don’t know (e.g., a top sales person just left). Even if a dealer knows how his target was set, he may not know what the target is for a neighboring dealer of the same brand or what is happening with a competing brand. Hence, he could be blind sided when a competing dealer reaches her threshold and starts pricing very aggressively. Is there an easy answer to this dealer’s conundrum?
Enter the New Hampshire state legislature.
From Automotive News we learn (GM kills N.H. dealer incentives, Sept 30).
The new law requires automakers to give dealers advance, written details about their incentive programs, including how they calculated each dealer’s sales target, and to disclose the targets of all dealers in the state.
“Dealers want to know that the manufacturer isn’t simply throwing a dart at a board” to set their targets, said Peter McNamara, president of the New Hampshire Automobile Dealers Association, which lobbied for the law. “If there is a good rationale for why one dealership has a 50-unit objective and another has 25, why not disclose it?”
The law in question is the “Auto Dealer Bill of Rights”, which according to New Hampshire Magazine, passed the state legislature overwhelmingly – 338-30 in the house and the 21-2 in the senate. (Aside: Ponder those numbers a bit. Over three hundred people go to vote on this in the NH house. That’s a crazy big number but it’s what you get when you have the third largest legislative body in the English-speaking world.)
One can see how this addresses a dealer’s concerns. It certainly limits manufacturer discretion and would likely force a car maker to post a one-size fits all formula based on general data as well as recent sales performance of a dealership. The result might well be targets that are either low hanging fruit for everyone or laughably high for everyone. In either case, dealers get a level playing field. Not too surprisingly, Granite State dealers opted for government intervention in the market over a live-free-or-die stance and supported the law.
And then GM pulled the plug.
GM told its 24 New Hampshire dealers last week that it “will not offer any new dealer sales programs” in the state, including so-called stair-step programs or other contests that reward dealers for hitting factory-set sales targets. GM says the law would restrict its ability to quickly respond to changes in the market, such as fresh incentives from a competitor.
Now whether GM actually believes that it can’t be sufficiently responsive or it is simply leery of getting roped into endless lawsuits, this hurts consumers. If dealers would have passed on some of their stair-step rebates to customers, then Chevy buyers are now going to pay higher prices.
More generally, there is a question of whether forcing disclosure of dealer incentives helps consumers or merely pads dealer pockets. My intuition is the latter. A dealer’s primary concern is being roped into a game they cannot win — that is, pursuing a target that is ultimately unattainable. If dealers can now see everyone’s target, they can better estimate their chance of reaching their objectives. If a given target was low-hanging fruit without full disclosure, it likely still is with it. However, if a more challenging target goes from being a stretch to a being impossible once information is disclosed, then a dealer will not pursue it and customer will lose out.