Sales Based Stair-Step Incentives Grow

August 15, 2016

As new car sales start to slow, OEMs are turning more to aggressive sales-based stair-step incentives to continue to spur consumer demand.

Automotive News reports that dealers are treading carefully in this new environment of growing incentives.

Dealers have often voiced dislike of stair-step programs, which pay dealers escalating bonuses as they hit progressively higher sales targets, but pay nothing if sales fall short of the target. A survey this year by the National Automobile Dealers Association found that 64 percent of dealers who responded dislike stair-step incentives. The same percentage said stair-step programs disrupt the market.

Several dealers told Automotive News that they’re being very careful about when to reach for a stair-step target and when to retreat.

“We try to hit the targets,” said Karl Schmidt, CEO of Morrie’s Automotive Group in Minnetonka, Minn. “It’s a dangerous game. If you miss, it can be disastrous financially. We’ve hit and overachieved and we’ve missed at times. It’s not fun when you’ve sold 100 cars in a month and have no margin.”

“There have been more [sales] objectives that have been unattainable this year than this time last year,” said Vince Sheehy, president of Sheehy Auto Stores in Fairfax, Va.

Sheehy, who owns 23 dealerships selling nine brands, said, “We look at every store and each of the programs on an individual basis and depending on where we are halfway through the month, we make the decision to go for the number. Or if we think it’s unattainable, we don’t.”

AutoNation Inc. CEO Mike Jackson said the dealership group has declined to chase some stair-step incentives “because the targets are so irrational or so unreasonable that you have no choice but to pull back.” He cited as an example targets at some of AutoNation’s Ford stores for the third quarter that call for year-over-year gains of up to 40 percent.

“I don’t, in principle, have a problem with volume targets if they’re realistic and attainable. But when you’ve misjudged the market and you put out targets that are just not attainable and then you sprinkle it out there in a capricious arbitrary way, it really is disruptive in the marketplace,” he said. “And you’re going to have a lot of controversy with dealers.”

Jackson called out Fiat Chrysler, Ford and Nissan among automakers as the “extreme practitioners” of volume-based incentives and said the intensity of discussions between retailers and those companies is increasing.

But some dealers praise Ford’s program, saying it allows for a second chance. Mitch Walters, president of Friendship Family of Dealerships in Bristol, Tenn., said, “Ford has it down right, where if you don’t hit one month, you can hit it the next.”

Walters missed the Ford target by three vehicles in June, he said. But in July he hit that month’s target plus the three units missed in June to get bonus payouts for both months.

But Walters, who sells Ford, Volvo, Honda, Hyundai, and Chrysler-Dodge-Jeep-Ram, has mixed feelings about stair-step programs.

“I understand why the manufacturers do it. But boy, if the goal is not attainable, it’s a disaster,” said Walters. “If it’s attainable, it sure helps moves the iron.”

The results of NADA’s Stair-Step Survey, completed in March, were not brand specific, an NADA spokesman said. NADA took the findings from its one-time survey to various automakers for discussion around the main points that came through in respondents’ comments.

NADA said 64 percent of respondents said stair-step incentives disrupt the market and often hurt credibility.

Walters agreed, saying, “It’s kind of tough for the customer sometimes because at the end of the month, you make them a deal that’s reflective of a stair-step program and if they decide not to buy, they think that price carries forward to the next month, but you may not be able to make that price.”

Asbury Automotive Group Inc. COO David Hult said Asbury is going back and forth on whether to chase stair-step targets. Hult noted that “some of the domestics” have changed their programs this spring and summer and reduced the amount of money being dangled as an incentive.

The situation is much different from 2015, Asbury CEO Craig Monaghan said.

“Last year, there wasn’t a month that we didn’t have the attitude that we’re going to chase it and try to get it,” Monaghan said. “This year, it’s been far more of a topic, and it’s really been month by month.”