In this week’s Automotive News, one of the front-page stories is that Chrysler-Fiat has changed the system they’ve used to make sure that their Ram, Fiat, Jeep, and Chrysler dealers are doing the very best they can to satisfy the customer.

Under the old system – the system that Chrysler is killing – dealers were:

  • Held to a published standard, which admittedly included some arbitrary and useless requirements
  • Constantly measured and evaluated by the manufacturer
  • Financially rewarded for compliance
  • Financially penalized for non-compliance

Under the new system, known as “Customer Experience Initiate”, the dealers are:

  • No longer held to any standard
  • No longer financially incentivized
  • Still being measured and evaluated, but in a less rigorous way

If this new plan (which, by the way, was hatched by dealers) sounds like a step backward, it’s because it is. Dealers need structure. Otherwise, the lowest common denominator – be it an unscrupulous owner, a greedy dealership manager, or a sales staff that lacks accountability – will take over.

Why The System Will Fail

This system will fail because it makes a fundamentally false assumption about dealers. Here’s what Chrysler exec Mark Engelsdorfer had to say about the new system:

“If [dealers] perform at a higher level based on customer experience, [their] percentage of loyalty will grow, [their] percentage of service retention will grow, [and] with that will come a pretty substantial growth in [dealer] operating profit.”

In other words, dealers will focus on customer service because it’s in their long-term interest to do so.

Is this a logical statement? You bet. Should dealers run their business in this manner? Absolutely. Will Chrysler dealers adopt this model en masse? Unlikely. The reasons:

  • Most dealers compensate their staff on profit. As a result, their staff will readily sacrifice long-term customer satisfaction for short-term gains.
  • Most dealers have a lot of management churn. It’s rare for a general sales manager or general manager to stay in one store for more than a couple of years…and these managers know this as well as anyone. Therefore, what’s their incentive to build long-term business? Why should the GM or GSM put forth additional effort to build something that they’ll never benefit from? Why help the “next guy”?
  • Many dealership owners lack a long-term focus. In my experience, many dealership owners think just as much in the short term as their staff. They’re not thinking about profits in 2, 5, or 10 years…they’re thinking about profits this month or this year. Corporate owners are no different than independents in this regard either – it’s a fundamental problem that afflicts a lot of American businesses.
Unless this system has some sort of significant, short-term financial component (a reward or a penalty of some kind), dealers won’t make customer service a point of focus. My proof? What Mark Egelsdorfer said about customer service has been true for decades, yet it wasn’t until manufacturers started rewarding dealers for good behavior in the 90’s the the industry started to improve.

But Toyota Does It

As I said, a group of Chrysler dealers came up with this system. While the dealers wanted to keep the financial reward portion of the system – and that definitely would have helped this system work better – I suspect the justification for this new arrangement is that Toyota has a similar program. “Toyota does it,” is an answer to just about any argument in the auto industry, and it’s likely that Chrysler dealers held up Toyota’s solid customer satisfaction ratings as proof that the new toothless “Customer Experience Initiative” would generate positive results.

Of course, the problem here is that Chrysler-Fiat isn’t Toyota. Toyota, for example, has about a dozen products that sell nearly as quickly as they arrive at the dealership. Therefore, Toyota can manipulate their dealers into doing what they want by controlling allocation. If a Toyota dealer “volunteers” to build a new facility, Toyota will “volunteer” to give that dealer a few hundred extra vehicles – “additional allocation,” in Toyota speak – to help defray the costs of the investment.

Instead of a carrot and stick, you have a bribe: Toyota says “We’ll give you more cars to sell if you invest,” and it works because Toyota has numerous hot sellers (Camry, Corolla, Prius, Rav4, Tacoma, etc.). The opposite works too…when Toyota dealership customer satisfaction scores fall, allocation dries up. Toyota starts re-routing cars to other dealers in the same market that are performing at a higher level. After a few months, Toyota dealers with poor customer satisfaction scores are staring at tepid sales as well as in-market competitors stealing sales. It’s a recipe for disaster, so Toyota dealers learn to respond to customer satisfaction scores aggressively.

Chrysler, on the other hand, might not have one hot-seller, let alone half a dozen. Chrysler can’t entice dealers with additional allocation until they improve their track record and start churning out a line of vehicle successes. Additionally, Chrysler has 6,000 or so dealers compared to Toyota’s 1,300. All things being equal, the typical Chrysler, Fiat, Jeep, or Ram dealer is selling less than 25% of the volume that a Toyota dealer is selling…which means Toyota dealers are more profitable…which means it’s easier for a Toyota dealer to make investments in systems that improve customer satisfaction. A large metro area Toyota dealer, for example, can give customers free omelettes, lattes, and massages because the cost of doing so is a small fraction of total revenue. A typical Chrysler dealer, on the other hand, can’t offer more than donuts and coffee, because these ultra-premium services that really impress customers are a large percentage of revenue…small dealers just can’t afford to do all the little things.

Bottom Line: In terms of customer satisfaction, Chrysler-Fiat dealers have nowhere to go but up. As a result, this program won’t have any positive or negative  impact in the short term. However, as the economy continues to heat up, Chrysler will miss out on a opportunity to grab market share. Instead of using a carrot-and-stick system to encourage dealers to invest profits in the future – and grow share in the long run – dealers will be left to their own devices…they’ll do what they always do. Make a quick buck and worry about the consequences later.

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