Some dealers who found themselves with wind-down letters from GM or rejection notices from Chrysler learned later of the franchisor’s claim that the action was based on the dealer’s sales ineffectiveness. As dealers know, franchisors use complex statistical calculations to set the sales objectives of dealers and to measure dealers’ performance against those objectives.
Most manufacturers judge a dealer based on its ability to sell vehicles in its primary market area compared to the manufacturers’ overall percentage of sales in the state, in the region, or nationally. Whether a dealer is more or less sales effective in its territory than dealers in the comparison area is the test by which manufacturers judge whether a dealer is doing the sales job required by the dealer sales and service agreement.
As a rule of thumb, the larger a primary market area, the more difficult it is to be sales effective. That is because the dealer’s geographic sales advantage is seldom more than fifteen to twenty minutes travel time to the dealership. This translates to a several miles in metro markets and longer distances in non-metro markets. Dealers are unlikely to have a geographic advantage over competing dealers in zip codes or census tracts outside this zone. The area of geographic sales advantage can also be affected by the layout of roads in the area, the population distribution in the area, and demographics in the area.
According to any franchisor, its calculations are based on straightforward statistical calculations that are unassailable. Nonsense. Manufacturer’s statistical calculations of sales effectiveness are only as sound as the assumptions on which they are built. The most critical factor in any sales effectiveness calculation is the geographic area for which the dealer is responsible for sales. Some manufacturers call this the primary market area. Others call it the area of geographic sales and service advantage. Whatever the label, the area is supposed to be the geographical territory in which the dealer has a sales advantage. Some manufacturers, in metro markets, make several dealers responsible for the entire metro area but assign separate sales share objectives based heavily upon the location of the dealer and the size of the area within the metro area where the dealer should have an advantage.
Whatever measure is used by the manufacturer, the definition of the area in which the dealer is supposed to have a sales advantage is critical. If that area is misdefined, then the calculations used by the franchisors’ statisticians to measure sales effectiveness will be flawed.
Whether a dealer is challenging a wind-down or rejection in arbitration, or defending against termination because of alleged sales ineffectiveness, or contesting the franchisors’ calculations about incentives earned by the dealership, challenges to the primary market area defined by the franchisor should not await a dispute. A dealer should be aware of its primary market area. It should be confident that the primary market area adequately reflects the area in which it has a sales advantage. If the area is misdefined, a dealer should challenge it and be prepared to restate the challenge each time there is a redefinition of the area.
What should you do?
Review your PMA. What is your primary market area as defined by the franchisor? You have probably been given a map which shows your primary market area based upon census tracts or zip codes. For franchisors that do their calculations based on market share in a metro area, you probably have been given that calculation based upon assumptions drawn from the location of your dealership. Do you have an advantage in every geographic area assigned to you? Are there areas assigned to you that are remote? If you have areas for which you believe you should not be responsible, challenge the PMA with your franchisor.
Consider geographic and demographic factors. Are there geographic and demographic factors that impact your PMA? Are you responsible for geographic areas that are separated by natural boundaries such as a river or a mountain? Are you responsible for areas that may appear to be proximate to your dealership but that are not appropriately yours because of traffic patterns? Are you responsible for areas where demographic factors may not favor you such as a college town with buyers who prefer import vehicles if you are a domestic dealer or a town with a supplier to a domestic manufacturer if you are an import dealer? Understand the demographic and geographic issues in your PMA and seek appropriate adjustments if those issues cut against your ability to sell vehicles in the areas assigned.
Where are your sales? You probably receive sales distribution maps from your manufacturer showing where you sell vehicles, or you may make your own map. Review that map carefully. Do you have clusters of sales in some areas and not in others? Investigate that. If it is the result of some flaw in your marketing efforts, you can change that. However, if it is the result of some issue in the area in which you are not achieving sales, investigate whether you should seek a change to your PMA.
Review notifications of change. Manufacturers regularly provide notifications of change concerning the dealer’s primary market area. What does that notification do to the area in which you are responsible? Do you have advantage in newly assigned areas? If you have areas removed in which you have advantage, why were they removed? Is it part of the manufacturer’s process of the potentially creating a new open point? Understand the reasons for the change and challenge any change that is contrary to your interests.