MICHAEL DIFEO: I think that they've got a really good team built up here, and if I had to, you know, say what I feel about 2018, I would have to say that I'm cautiously optimistic because it was this management team that I think repositioned the Tiguan midstream, which no one thought could be done. And, so far, they are highly focused on making the brand function better and also to do things right the first time around.
The past year for Volkswagen dealers has seen at least some progress toward normalcy as the brand's sales recovered from the devastating impact of the automaker's diesel emissions scandal and the resulting buybacks of more than 500,000 vehicles in the U.S. The pace of new buyback transactions has slowed dramatically.
Yet at the dealer level, VW struggles with profitability. Its lineup has two new utility vehicles in the Atlas and long-wheelbase Tiguan, both introduced in 2017. But the sedan-heavy lineup is a headwind in a market where sedans are outsold 2-to-1 by crossovers and utility vehicles.
Michael DiFeo, chairman of the Volkswagen National Dealer Advisory Council, sees the brand's efforts to better conform to the U.S. market as a positive step for its 652 U.S. dealerships, and says a new management team at Volkswagen Group of America is proving more responsive to dealer needs.
DiFeo, 38, who is dealer principal at Linden Volkswagen in Roselle, N.J., spoke with Staff Reporter Larry P. Vellequette in late February.
Q: What issues are facing Volkswagen dealers today?
A: I think the No. 1 issue for Volkswagen dealers is profitability. And this is an extremely difficult topic. There are a lot of factors that play into it. And I think that it's been a struggle for us to maintain sales volume and do it in a way that is profitable. I think we're looking forward to this year being a year where we can actually grow our business profitably.
In 2016, the last time the NADA convention was in Las Vegas, Volkswagen dealers were talking about filing suit against the factory. Tell me how things have changed in those two years.
It was two years ago and they had just created the dealer investment committee, which was a group of dealers — mostly former chairmen — that ended up negotiating or at least dealing with the factory on a settlement.
I guess looking back on it, it's a very complicated question. I would say, you know, the past two years has been a mixture of excitement and disappointment. I believe that Volkswagen is focusing very hard on moving past the diesel issue and setting up the North American region to be a successful story. There were some disappointments. I felt in 2017 with the launch of the Tiguan, which the dealer network really felt should have been one of the better success stories, and we personally feel that they made some miscalculations on launching that vehicle. Specifically, the pricing of the car, which ultimately was modified on Jan. 1. So that was part of the excitement, to see that Volkswagen could actually quickly modify a mistake without having to wait a long time to get something like that rectified.
Where are VW dealers in terms of profitability?
I think profitability is an across-the-board issue, especially for standalone Volkswagen dealerships. I believe what is needed is competitively priced products, and competitive programs on those products, and a strong marketing message to build customer demand for our products so that we can drive more customers to our showrooms.
In terms of VW's marketing, it looks to me as though it's been much more emotional messaging than what it used to be. Is there an issue with how it's resonating?
If I wanted to use an example, I think that the Tiguan launch advertising wasn't very successful because it failed to deliver the most important message, which was: We have an unbelievably large small compact SUV. Although the creative was funny in nature, it didn't educate the customer in that segment to all of the great changes that they made with the new Tiguan. In that sense, we didn't see a lot more traffic, even though the ads were good. Whereas the new ads that are coming out this year are more focused on content, to explain and educate people that might not be aware of the Volkswagen Tiguan, about all the great features that it has, and that's the largest growing segment, the A-SUV market, so it's important that we capture more market share there.
Was it part of the issue that the old short-wheelbase Tiguan was still around, as the Tiguan Limited?
No. I just think that the marketing messages didn't resonate. And I think part of it is that we lost our head of marketing, Vinay Shahani, in May, and he was responsible for the Atlas launch, which we felt, marketing-wise was much more spot-on, and they didn't replace Vinay until December with Jim Zabel, who I think is doing a great job. He's helped to kind of bring back a message that I think will have a greater impact on driving customers to our showrooms.
Volkswagen Group of America CEO Hinrich Woebcken is on a push to Americanize the brand, at least here in the United States, aiming the brand to compete more with the domestic automakers than other import brands. How does that play out for dealers?
I think that their push to Americanize Volkswagen has gone on in stages, which has been somewhat painful for the dealer network. It started all the way back with Stefan Jacoby, who started bringing product and building products that met more of the needs of the American consumer, which was the Jetta and the Passat. After he left, we didn't make a lot of progress. We were still on these old product cycles, which we've now shortened our product life cycles, but Volkswagen is still experiencing the tail end of that decision with our models that are aging out — specifically the Jetta and the Passat – which are almost 7- and 8-year-old models.
The dealers are very excited that they are starting to reset now, with the new Jetta on a five-year product cycle. I think they've finally got the pricing where they're going to price the cars competitively. I think that was a painful lesson that they learned recently with the new Tiguan, where they realized that they missed the mark and they needed to price nearer the basket. The last component that's really going to ultimately dictate how much market share Volkswagen wants, is going to be how competitive they are with their programs, and that is still a work in progress.
Last year, Volkswagen sold 339,676 vehicles in the United States, and it has just over 650 dealers. Can the brand compete effectively against domestic automakers with a dealer network that is so much smaller?
Without a doubt. If you look at the most successful franchises in the U.S. market, they all have networks that are over 1,000 cars per dealer. The most successful dealer networks, should easily be able to sell 650,000 to 750,000 units.
Let's talk product. The Atlas gives Volkswagen dealers a large, three-row SUV to compete with in a very crowded segment, and one you've not really played in before. How should VW dealers and the factory get the Atlas in front of consumers?
I think that the marketing message was very good at the launch. I think that the product quality is fantastic. I think that, with the right incentives, we will continue to win over customers. That product has been growing in demand, even more so than even Volkswagen anticipated. I think that people that were normally interested in other cars from other manufacturers who gave Volkswagen a chance, were finally getting into and realizing that our car, from a quality perspective, was much better than the competition. We're getting a lot more interest, and surprisingly, we're even getting a lot of interest from luxury buyers. The strongest model right now is the [Atlas] SEL premium. We've seen a lot of people coming from BMW, Lexus and Audi that are willing to get into a loaded Volkswagen because the Atlas drives almost like a luxury car.
If you're drawing luxury customers, does that conflict with the factory's efforts to move the brand down market?
I think what it shows is that our product quality and the fit-and-finish of our cars is so good, that someone that is normally driving a luxury car is very comfortable driving a Volkswagen. And that will hopefully trickle down, because we're competitive with that same model in the lower trims. Then I think customers from other brands that drive it are going to realize they're getting the Volkswagen driveability. I've always felt that Volkswagen has a superior-quality product and design than their competitors. Once someone gets behind the wheel, they realize that.
One of the complaints about the Atlas that I've seen is that it may be underpowered for such a big vehicle with that engine. Do you see any of those complaints from consumers?
When you look at the competitive segment, we still have a very good performing horsepower and torque rating on that vehicle, so I think the only time we are to see issues of underpoweredness is if someone opts for the four-cylinder option. But even that one, I've driven it, and unless you're trying to tow things, I really don't feel it's underpowered. On a side note though, I would love to see a turbo V-6 in our lineup, so fingers crossed.
The brand still has a sedan-heavy lineup, and inventories at the end of last year were extremely high in a shrinking segment of the market. How will Volkswagen conquest remaining sedan buyers with the redesigned Jetta this year and the new Passat next year?
I think that what you will find is, again, going back to fit-and-finish, driveability and also styling. I think the new Jetta is going to show that, if they can be competitively priced and have competitive incentives, if people drive a Volkswagen, they won't want to drive a competitor again. So, I think it will really just come down to a superior product.
If that's the case, can you still do passive marketing, where you wait for people to come to you?
I think that Volkswagen, with this Jetta launch, needs to get it right from the start and they need to have a very strong marketing message with good incentives right out of the gate in order to attract the most amount of consumers to come look at the new vehicle. Once they drive it, and if it's a good deal, I think we're going to close most of those people.
What does the Arteon bring to the lineup?
They're billing it as the flagship. I think it's going to bring a very nice vehicle to the market that will highlight Volkswagen's styling and quality in a very nice sedan. They're not expecting it to be a volume car, but we had some years where we were very successful with the CC, when it was properly supported. And I think that if Volkswagen supports it with competitive incentives, I think this car will compete very well with even the lower-end models of luxury brands like the [Mercedes-Benz] CLA — even the [Audi] A4, which is in that price range — so I think they're going to start getting lookers from some of these luxury brands that have entry-level cars. I think it's going to make a lot more sense for those customers to be looking at a higher-end Volkswagen.
Let's talk electric vehicles and how to sell them. Dealers are going to have to spend money to invest in charging infrastructure to sell electric vehicles like the I.D. Crozz. What help should dealers get from the factory?
Honestly, we haven't had any of those discussions yet. We've had to already set up charging stations at our dealerships in general. So every dealer, for the most part, already has a charging station today. And I think that, if there's going to be a demand for an increase in the infrastructure, I bet a lot of that's going to come through Electrify America. And I think that when some of these products come, regardless of if they're Volkswagen or not, there's going to be a much stronger infrastructure in place to support electric vehicles. I don't think that's a Volkswagen-exclusive situation.
Woebcken likes to say that the brand wants to bring electric vehicles to millions, instead of just to millionaires. That's going to fall on dealers. How will dealers persuade consumers to buy?
So I think that it's going to be a mixture of the customers moving in that direction with the manufacturers probably incentivizing, as well as the government, for consumers to go that direction. Ultimately the dealer is here to serve the customers so if the customers don't want electric vehicles, it's going to be very difficult for us to change that equation.
Is leasing growing or shrinking for Volkswagen?
I would say, in the overall, it's shrinking. Right now, we're a very lease-heavy brand and I think Volkswagen, ideally, would like to reduce their leasing business. But I think they have to lease, in order to sustain growth. So I think it's going to be a balancing act of finding the right portfolio mix.
You've got a couple more gasoline-powered crossovers coming, in two-row versions of the Atlas and the redesigned Tiguan. What else is missing?
I think once they round out the SUVs and we get the new Passat, we're going to have a pretty strong lineup. The only thing that might arguably be missing is an entry-level car, but those segments are shrinking, so I don't think it makes sense for Volkswagen to get into that game.
How is the old Tiguan selling as a value play? Is it sustainable?
The old Tiguan is pretty much a bridge to what we're hoping to be a locally produced (sub)A-SUV, and the Tiguan Limited was built just so we could continue to have a value proposition underneath the Tiguan long-wheelbase, without importing the T-Roc from Europe, which was the original plan. I think they're trying to find a domestic solution for that.
You can reach Larry P. Vellequette at lvellequette@crain.com -- Follow Larry P. on Twitter: @LarryVellequett
