Rosenberg, CEO of Prime Motor Group in Westwood, Mass., spoke with Staff Reporter Larry P. Vellequette about Audi's product and dealer network. Here are edited excerpts.
Q: Audi has some familiar new leadership in new Audi of America President Mark Del Rosso, who started Dec. 1. What was the dealer reaction to his appointment to replace Scott Keogh after Keogh was named CEO of Volkswagen Group of America?
A: The Audi dealers — at least the ones that I know — are very happy to have Mark Del Rosso back. We're fortunate because we've got Scott Keogh now in charge of North America for Volkswagen and Audi, so he's still got his finger on the pulse of Audi, but now we have Mark Del Rosso, who was just the CEO of Bentley for a year, come back to where he belongs, which, I believe, is as president of Audi of America.
Mark is very passionate about the brand. He understands the brand, understands the dealers, he's committed to soliciting dealer input and he's very easy to communicate with. It's good to have someone in charge, still, that's extremely passionate, strategic and very retail-oriented.
In what ways?
Unlike some of the other German manufacturers, Audi's done a pretty good job setting themselves up over the previous three years to be able to accommodate the changes in the marketplace, especially as it relates to the shift to SUVs and crossovers. I think a lot of that has to do with when Mark was involved as well. Audi itself has been much more strategic in product development, offering derivatives on vehicles that are high demand and limited supply, so they are vehicles that dealers can maintain gross on, like the A5 Sportback and the new Q8. That's important.
I think dealers are excited when we talk about the product. Dealers are excited about the new product and the prospect of the e-tron arriving in dealerships soon. It's a whole new segment for us.
What are Audi dealers' biggest concerns?
Our biggest concern is quite frankly profit margins. Still. Unfortunately, and this is just my opinion, but I don't believe that we're going to be able to return to the days, at least in the near future, of high gross profit retention in new-vehicle sales, and used-vehicle margins are continuing to be compressed as well. And so the thing I like about Audi is that they are willing to work with the dealers to come up with new ways for us to try and retain an adequate profit level. That's becoming exceedingly difficult for a luxury brand in today's world.
With the Audis, and the Mercedes-Benzes and BMWs of the world, you're required to have this loaner fleet. My customers have certain expectations. Now we do pickup and delivery for service, and all these things cost a lot of money. We don't have those in our nonluxury dealerships: Toyota or Ford or Chevrolet or Honda. You don't have to maintain a similar fleet of loaner vehicles and do pickup and delivery. So that's obviously an issue.
When your new profit margins are compressed your used profit margins are compressed, we need to then look to service and parts to make our money. But when you're starting with that handicap of those extra expenses, it becomes more and more difficult. So we need to get more creative and figure out different ways to make money, and we've got to figure out ways to cut our costs.
The good news is that, at least with Audi, because the product cadence has been so good, and we do have those specialty vehicles — and lately there's been a shortage of supply in a bunch of different vehicles — that we've actually been able to improve our gross profit level. The new Q8 is doing very well for us. A lot of the S-series cars are doing well for us, and the new A6, A7, and A8 are all beautiful.
Personally, as a dealer, I would rather have one car too few than one car too many. That's what we struggle with, with all our manufacturers, but Audi especially, because we want to keep the factories going and have Audi be as profitable as it can be and earn a decent return on investment. But in order to do that, you have to move product. On the other hand, as dealers, we don't like there to be an excessive amount of product in the marketplace, because that leads to lower gross profit levels.
Let's talk about the changes coming in 2019 as the first of the battery-electric vehicles arrives. What does this coming product onslaught mean for dealers and how you're going to have to change your operations?
The only way we've had to change our operations is because the e-tron is not being sold like a conventional vehicle. So the customer actually places an order online, and then we get assigned the sale after the customer places the order and pays the deposit for the reservation.
So it's not traditional in terms of us getting a bunch of e-trons in stock to sell off of. Everything is being done on an online reservation system basis, similar to Tesla. The reason that they are handling it that way is, you have to take a look at the markets where Tesla is strong, where battery electric vehicles are strong, and that's where they need to concentrate that vehicle.
What do you think about this as a method to sell battery-electric vehicles?
As a dealer, I'm very excited, because we've lost business to Tesla and I believe the e-tron is more than competitive with Tesla in terms of its technology and its pricing. And we're excited to have an electric vehicle. Now what does that mean? I told you already that there are changes in the sales process, where it's an online order process, and then the customer reserves the vehicle, the vehicle gets delivered to our dealership, and then the customer basically can decide at that time whether or not they want the car. It's a reservation, not an actual order. That's an aspect that's different.
One other difference that we need to concern ourselves with is the fact that battery electric vehicles require significantly less maintenance. So while we may sell a Q5 at a very low margin because we have a lot of them in stock, at least I know that we've got a high retention factor in the service department, so I know I'll be generating gross profit off of that Q5 when I put that unit in operation.
With the e-tron and other battery-electric vehicles, that's where our model needs to change: We need to make money selling the vehicle, because we're going to derive significantly less revenue from fixed operations on that vehicle.
Do you think dealers realize that yet?
I think anyone with an Audi franchise is pretty sophisticated. Maybe I've been exposed to it a lot more, because I've been on dealer council for so long, but it's been pounded in my head by Audi that this is the way the business is changing and we need to adapt to that and figure it out together. Audi is big on figuring out what our future strategy is together.
I am curious to see how the reservation system will work in the long run. I don't know if it is a long term solution or not, but I'm optimistic. We have a significant amount of orders for the e-tron ourselves at our Audi dealership, and I'm hopeful that when we get a few in the market, that word-of-mouth will take hold. I'm hopeful that we'll conquest a lot of Tesla business — because I do feel that we have competitive advantages over Tesla — but I feel that we'll also be able to take people who are current Audi drivers and get them to support the evolution into battery-electric vehicles.
Will Audi have a competitive advantage in this area with its association with Silvercar and its existing loaner fleets? By being able to offer battery-electric vehicle buyers a traditional internal combustion engine as an occasional alternative?
Yes. In the case of Silvercar, I agree, and I think that was a very well-thought-out strategy to make that acquisition and the investment in Silvercar. I do think that gives Audi an advantage in terms of the loaner fleet. Dealers have used loaner fleets for years to get people to drive different vehicles when their vehicles have come in for service. That's an advantage that Audi has over other manufacturers I'm pretty sure we're going to do very well ourselves with the [Audi battery-electric vehicles].
Have there been any moves over the last year and looking forward into 2019 that are on the horizon to help Audi dealers' profitability?
We have a new margin program that the dealer council had a significant amount of input into. One of the biggest complaints that dealers had was the BPO, the Business Plan Objectives — basically, it is like a stair-step program, and that's been softened quite a bit. The dealers believe that these type of stair-step programs really cause a significant decrease in gross profit, because you have a store that's trying to hit their objective, and if they've got eight cars to go, they'll sell those eight cars no matter what the cost to hit that objective.
The problem is that everyone who is competing with them now has to go down to that level or lose the deal. And when you train your managers and your salespeople to take that deal at the end of a program period, it's pretty hard to jump off that treadmill the following day and not take that deal.
We feel that the new margin program will hopefully mitigate the impact of the stair-step programs, and we'll be able to raise our gross profit levels that way.
How does the modified BPO program work?
Up until 2019, you had something called a Business Plan Objective. You had it by the month, and by the quarter. You were responsible for hitting that business plan objective in order to get a piece of your invoice, or "trunk" money. The higher you achieved toward that objective, the more trunk money you got. So what it does is, it puts a real emphasis on pushing out volume for volume's sake. And if you've got eight or 10 cars to hit at the end of the program period, it becomes a bloodbath, and grosses just drop. And then it starts earlier and earlier, because people know it's going to be a bloodbath, so they start trying even earlier to hit that objective. It is a quick race to the bottom.
The new program basically tempers it. Every year, prior to 2019, Audi has asked for an increase in the BPO. That has been eliminated; there is no increase over 2018. And the objectives are much more attainable, and the impact of the BPO, therefore, is significantly less. Hopefully, dealers will still sell the same amount of cars, because you're still going to have the same amount of customers. We just won't have that impetus to really take huge losses on cars during the program period and at the end of the program period to obtain an objective.
You have a lot of brands in your group. Are there other issues going on right now that are specific to Audi?
No. We've had a lot of recalls. We just started being able to sell our 2018 A6s and A7s after a recall, and we had a used-car stop sale on those as well, due to various recalls and parts shortages.
Hopefully, we have most of that behind us.
It's been a problem, because we've got 2019 A6s in and now we've got 2018 A6s that we still have to sell. Audi's done a good job of incentivizing those vehicles. But it impacted new-car and used-car sales over the past couple of months.
We just started getting in new A4s and Q3s, because they were nonexistent for a period of time because of the emissions testing issues in Europe.
These are all issues that different manufacturers have, depending upon where they are in the product life cycle and where they are relative to stop sales. I'm hoping the worst is behind us in terms of recalls and stop sales now with Audi.
For the past couple of months, especially in October and November, we were relying mostly on Q5s. We had Q5s and really nothing else to sell. So it's good to start getting cars in inventory again that we can sell right now.
Did Audi adjust your sales targets?
They did. And in this case, it wasn't particularly as much about the BPO as it was about selling from an empty shelf. And don't forget: we had a lot of used cars in the stop sale as well; I think at one point, we had something like 30 used vehicles tied up that we couldn't sell.
What are rising interest rates doing to your clientele? Are they having an impact?
I don't see it having much of an impact yet. I think there will be an impact, because — especially at the nonluxury level — it will take certain models out of someone's potential consideration. As the interest rate goes up, you have people that have a budget of $300 a month for a car payment, and big swings in interest rates or swings of 200 basis points in interest rates certainly impact that payment, if you're financing $18,000 or whatever the average loan amount is on a nonluxury vehicle.
The concern that I have as an Audi dealer is the impact on floorplan. We've been making money on our floorplan for a long time, and we've built into our forecast this year the bumps in interest rates, and this is definitely impacting the bottom line and will continue to impact the bottom line.
Yet another squeeze point, right?
Yeah, that's the problem.
Some manufacturers give you your floorplan credit as a percentage of MSRP. That's what Audi does. So that only goes up when the price of cars goes up. Other manufacturers will actually give you a higher amount on the invoice, like some of the domestics, for a floorplan credit rather than just a percentage of the MSRP or the invoice. So it will have different impacts on different manufacturers, but for sure, dealers will make less money in 2019 because of higher interest rates.
We get hit from it on both sides: We get hit from it on the floorplan side, and eventually, if they go up enough, it certainly limits someone's ability to buy a new vehicle. Hopefully, they go into a used vehicle, and if they can't afford to get a used vehicle, hopefully they repair their car at the dealerships. But it doesn't always work that way.