When Nissan Plays Favorites, Dealership Buyers and Sellers Suffer
A recent article published by Automotive News about incentives Nissan pays "favored" dealers to acquire dealerships sheds light on an ongoing practice that has implications for the buy/sell market for Nissan and Infiniti dealerships. Citing evidence obtained during an open-point protest hearing in Florida, the article describes the incentives Nissan exclusively made available to a certain dealer who agreed to acquire the open point, which include additional cash payments if the dealer met a certain percentage of its retail sales effectiveness (market share).
Soon after the publication of this article, several Nissan dealers in Ohio filed a lawsuit in the United States District Court of the Northern District of Ohio, alleging that Nissan provided "secret" incentives to this very same dealer who purchased a Nissan dealership in the market. They allege further that Nissan failed to publish these incentives, or make them available to the rest of Nissan's dealers in Ohio. While it may take several years for the courts to determine whether these incentives violate the law, Nissan and Infiniti dealers, and prospective purchasers, are facing the consequences of Nissan's actions today and must consider the impact these actions will have on the market for these brands' dealerships.
Nissan's dealer network includes scores of single-point dealers who have represented its brands for many years. Nissan, citing concerns that it will never ascend to the top tier of brands such as Toyota, Lexus, Honda, Mercedes-Benz, and BMW by maintaining the status quo, adopted a two-prong approach to grow sales and share: aggressive stair-step programs, and targeted incentives paid to select dealers who it believes can significantly grow sales and share to help these dealers acquire additional Nissan dealerships.
It is important to note that the incentives for acquiring an existing dealership or filling an open point are not published, nor made available to all candidates. It has been my clients' experience that Nissan has certain dealers in a given geographic area that it has identified as its favored dealers, and will funnel the incentives to these individuals to acquire additional dealerships. The incentives help the prospective dealer offset his cost to acquire the dealership or open point, but place the existing dealer in a competitive disadvantage.
Many states prohibit manufacturers from engaging in price discrimination between dealers, or, as it's more commonly known, "two-tiered pricing." In states where two-tiered pricing is prohibited, manufacturers cannot offer incentives that would result in one dealer selling a vehicle for a lower price unless the aforementioned incentive is reasonably available to all dealers on an equal basis. This safe harbor allows manufacturers to offer incentives like stairsteps, which would otherwise violate price discrimination statutes.
With regard to Nissan's incentive, opponents argue that it is not available to all dealers on a proportionally equal basis because only favored dealers receive the incentive. In the Ohio lawsuit mentioned above, the plaintiffs argue that the fact that Nissan does not publish the terms of the incentives makes them per se unavailable to other Ohio dealers.
Regardless of the outcome of the lawsuits challenging these programs, it is important that buyers and sellers recognize that these incentives exist, and that they fundamentally impact the market for Nissan and Infiniti dealers. Unlike buyers of other manufacturers' dealerships, Nissan buyers fall, in effect, into one of two categories: favored buyers and non-favored buyers. Non-favored buyers face several challenges. First, they do not receive special incentives from Nissan to help offset their acquisition costs. If a non-favored buyer purchases a dealership in the same market a favored buyer does, the non-favored buyer is at an immediate disadvantage.
In addition, the incentives create additional purchasing power for the favored buyer, meaning he can pay more for a dealership than a non-favored buyer, knowing that he will receive support from Nissan to offset his costs. Being a favored buyer is not without its own perils. If plaintiffs prevail in their legal challenges of these incentives, the manufacturer may be forced to discontinue the incentive in a particular state. If that occurs, the favored buyer will find himself without the incentives he relied upon to make his acquisitions, thereby jeopardizing his ability to make a reasonable return on his investment.
Sellers must also appreciate the profound impact Nissan's initiative has on the market for their dealerships. The bifurcation of purchasers into two classes (those who receive incentives and those who do not) has a chilling effect on Nissan dealership acquisitions. Knowing that Nissan has a plan in place to consolidate ownership of dealerships to a few favored dealers, many non-favored buyers will simply opt to buy another brand's dealership, thus reducing the pool of potential buyers for Nissan and Infiniti dealerships. This gives the favored buyers leverage to dictate the terms of the sale in ways disadvantageous to sellers. Favored buyers can extract concessions from sellers simply because few viable purchasers exist to create competition.
Incentives like Nissan's add another layer of complexity to buy/sells that the parties must address. Although dealers are challenging these incentives in courts, buyers and sellers should anticipate they will exist in some form for the foreseeable future, and plan accordingly.
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