Toyota dealers balk at upgrades
Factory says undersized stores can't cope, but retailers see little incentive to make costly changes
Mark Rechtin Automotive News March 17, 2008 - 12:01 am ET
LOS ANGELES - Toyota dealers, under pressure to spend millions to renovate their stores, say the automaker is asking too much and offering too little incentive to expand and upgrade.
Toyota is threatening not to renew franchise agreements on older stores. In some cases it is giving only token two-month extensions to dealers who are slow to enlarge their dealerships and adopt the company's Image USA II architectural plan.
The pressure has exposed some cracks in the usual solidarity between Toyota and its retailers.
"They give you short-term contracts until you are in compliance with what they want you to do," said a Toyota dealer who spoke on the condition of anonymity. "They are going after everyone with what they want."
Dealers must expand showroom size and add service bays based on planned sales volume and units in operation in their market areas. Architectural upgrades include a "portal" that frames the large front doors of the dealership and changes in facility layout, furniture and fixtures.
Toyota executives say undersized dealerships can't cope with the deluge of sales and service customers - the result of increasing market share and the growing number of Toyotas in operation. Since
2000, the number of Toyotas on the road has soared from 15 million to 22 million, while, the dealership count has remained around 1,225. In that time, annual sales per dealer have soared from 1,264 to 1,870 new vehicles."Toyota has high expectations of our dealers in our facility standards," said Jim Lentz, president of Toyota Motor Sales U.S.A. "It's that discussion between dealers and us where we don't always agree with each other."
Toyota says it is offering better allocation of hot models to get dealers to build larger stores and adopt the Image USA II plan. Toyota's long-standing "turn and earn" system remains in place, but dealers who comply can choose how they want the extra product to be delivered - all at once or gradually. But during a recession, increased vehicle allocation is not much of a carrot. Combined Toyota brand and Scion sales in January and February were down 1.9 percent compared with the first two months of 2007. Brands such as Mazda and Kia offer dealers cash per car to build new stores or renovate existing ones.
"More cars are the last thing I need," said one California dealer, who spoke on the condition of anonymity. "Every dealer I've talked to has stopped all plans for expansion.
"The whole facility plan is really flawed. Every dealer has his own unique issues, but Toyota is taking this national viewpoint and applying it to everyone."
The dealer said Toyota is especially inflexible with urban dealers, who have the hardest time meeting the company's architectural and footprint requirements. About 220 dealers have completed Image USA II renovations, said Ernest Bastien, Toyota Division's vice president of retail market development. An additional 200 are expected to be completed in 2008, and the company hopes about 900 will be done by the end of 2010. The Image II plan was introduced in 2004.
But the recession is putting a crimp in capital spending on new or redesigned stores, dealers say. A mild redesign can cost $2 million, while a store tear-down can run from $5 million to $15 million. Relocating to a new piece of land can tack on an additional $10 million to $20 million in costs. "There's never a good time to do a facility modification," Lentz said. "It doesn't matter if it's two, five or 10 years from now; it will be more expensive than it is today."
Not-so-veiled threats
Toyota's U.S. sales arm in Torrance, Calif., has started to use franchise renewal to persuade dealers to get with the program. Last summer, the company began exerting pressure on dealers with older facilities by extending their franchise agreements for just two years instead of the usual six. Now some Toyota regions are giving only two-month extensions.
"Toyota is definitely being more aggressive," said a Southeast Toyota dealer who spoke on the condition of anonymity.
One of the targets is Bruce Limbaugh, owner of Limbaugh Toyota-Scion, a small urban dealer in Birmingham, Ala. His six-year franchise agreement comes due in December.
Although Limbaugh is talking with Toyota architect Gensler & Associates about a redesign, that's not good enough. If Limbaugh doesn't have the finished architectural plans in hand by December, Toyota will extend his franchise agreement for just six months.
"No question the pressure is there," Limbaugh said. "But every manufacturer has facility requirements. I just wish there were more incentive than product that's there anyway."
Lentz said a store's condition is only one of many factors that can lead to "provisional" renewal. Others are working capital, customer service ratings and sales performance.
Toyota's Bastien said the automaker has never canceled anyone for failure to upgrade. He said an old store would not be reason enough to start a termination.
"Facilities would only be part of a larger discussion where something more serious is at stake," he said.
The real carrot
Some dealers are miffed that Toyota is asking for new facilities just a few years after the previous push for a different look. Image USA I was rolled out in the mid- to late 1990s, but some dealers only got around to completing the renovation early in this decade.
"We just did an Image USA I program, and now they don't like the old image," the Southeast Toyota dealer said. "They're saying they want us to spend $1.5 million to do the new Image II program. GM and other brands offer contests and interest-free financing for their facility program to help you out, but Toyota doesn't offer any of that."
Toyota says the real carrot is better financial results. Dealers who have completed Image USA II renovations have reported higher sales, higher grosses, quicker days to turn and increased owner and sales staff loyalty, Lentz said.
"Is the dealer's rent up? Sure, it is," he said. "But profits are also up."
One dealer who is enthusiastic about his expanded store is Bob LaRiche, dealer principal at LaRiche Toyota in Findlay, a small town in northwest Ohio. The converted Volkswagen store, built in 1964, had room for two display cars and six service bays. Now the showroom will fit eight cars, while the service bay will have 14 stalls.
LaRiche said the pressure to renovate didn't come so much from Toyota as from other dealers who were also renovating.
LaRiche is happy to receive more cars, expecting an immediate new-car sales bump of 50 to 80 vehicles a month. But he was irked by Toyota's strictness in executing Image USA II architecture.
"It's frustrating in that they want it to be their way," LaRiche said. "For a small dealer, it's hard just coming up with the capital. But if you don't follow what they say, they won't sign off."