Editor's note: This article looks at a problem rampant in New York City, but the fundamental issues apply nationwide. It first appeared in Crain's New York Business, a sibling publication of Automotive News.
NEW YORK — Green and white balloons float above Jeep Wranglers and Dodge Challengers inside Manhattan Jeep-Chrysler-Dodge- Ram. Court papers, however, tell a less cheerful story: In March, the franchisees filed for Chapter 11 bankruptcy protection, citing debt of more than $22 million to their chief lender. The filing included a related Alfa Romeo-Fiat dealership a few blocks away.
The bankruptcy was the second to hit Manhattan's auto row in less than a year. A nearby Jaguar Land Rover dealership that included Maserati and Ford franchises went bust in July.
Industry experts said the two bankruptcies point to a changing automotive retail landscape.
On the one hand are escalating rents in an expensive neighborhood. On the other is increasingly intense competition from automotive leasing brokers, who market themselves on the Web and operate out of modest quarters. The brokers, who number in the hundreds and are concentrated in the outer boroughs of New York, are part of a shift to digital car shopping that includes the growth of Carvana, Vroom and other app-enabled auto retailers.
"I don't want to sound like an alarmist, but I think within 10 years, half of these franchised dealerships will be gone, and not just in Manhattan," said Max Zanan, a Manhattan automotive retail consultant. "Companies like Amazon have trained customers to expect complete transparency. They expect that transparency when they're shopping for a car, and they're not getting it" from dealerships.
For New York dealers, leasing brokers represent the most immediate threat. Dealers often complain that brokers operate outside the law, but the two sectors share a complicated, symbiotic relationship.
Brokers need dealers: Under state law, only franchisees can sell vehicles straight from the automaker. But dealers also need brokers, whose purchases help dealers hit their sales targets and thus receive incentives from automakers.
Brokers appeared in New York decades ago in small numbers in Hasidic neighborhoods in Brooklyn. Some are still rooted in ethnic communities, but they now outnumber the city's dealerships, which are down to 105, 24 percent less than 15 years ago, according to consulting firm Urban Science.
Brokers can thank carmakers for at least some of that growth. Automakers have embraced incentive programs for dealerships in recent years, including stair-step programs, in which hitting escalating targets results in bigger bonuses.
"Many dealers make almost no money on a new-car sale," said Patrick Anderson, CEO of Anderson Economic Group, a research and consulting firm in East Lansing, Mich. "They have to make money on incentive payments from the manufacturer, from service and from auxiliary things, like financing. That's been the situation for the past five years, but now sales are slowing, so the strain is starting to show."
Incentive bonuses can total $1,000 to $2,000 per car, depending on the automaker. Often, dealers hit the targets only by selling a portion of their inventory — pretty much at cost — to brokers. As a result, the dealerships lose out on the high-margin parts-and-service business that's built on relationships with loyal customers. But broker sales get them through each month.
"We help them survive," said Zoriy Birenboym, CEO of eAutoLease, a 3-year-old brokerage in Brooklyn. He has been in the brokering business since he was 16 — half his life.
"The manufacturers give the dealerships very high quotas," he said. "Sometimes they get forced to take on inventory they don't want. They borrow money for every unit, and the interest is piling up. They want to hit those bonuses, and they can't do it on their own. That's where we come in."
Birenboym said he has partnerships with "most of the dealerships" in the tri-state area and can provide buyers with almost any make and model within days. He operates out of a second-story office plus a basement garage to store vehicles overnight. Transactions are handled online and over the phone. One of his 30 or so sales staffers delivers the vehicle to the customer's door.
As Birenboym sees it, eAutoLease is offering a needed service to busy New Yorkers — and it boasts hundreds of five-star DealerRater reviews to prove it. And the dealers he buys from expand their reach. "I am providing customers who would never walk into their dealership," he said.
More than 31,000 vehicles were sold into Brooklyn through brokers in 2016, according to dealership network Bram Auto Group, which looked at sales coming from dealers outside the market. That's more than half of all new vehicles registered in the borough that year.
Not all-in
Many dealers won't sell to brokers. Others who do would prefer not to. Those dealers said the practice undermines the dealership model: Franchisees invest in training and facilities, meet demanding standards set by the automakers, and get marketing support and a relatively exclusive sales territory in return. The incentive programs, though, push dealers to act like wholesalers. The carmakers, with rare exceptions, don't bat an eye.
"Manufacturers don't really care — they're moving the inventory," said Eric Snyder, a partner at Manhattan law firm Wilk Auslander who handled the dealership bankruptcies.
But carmakers don't deserve all the blame.
"Dealers are their own worst enemy," said Suzanne Cochrane, general manager of Helms Bros., a Mercedes-Benz dealership in Queens that does not sell to brokers. "Why would you want to sell a car for what you paid for it and create competition for yourself outside of all the competition you already have?"
Cochrane, who also manages a Volkswagen dealership, adds that selling to brokers is a dangerous gamble because a dealership that doesn't hit its bonus targets — which can involve other metrics beyond sales — can dig itself into a big hole. "That's where the stair-steps become a nightmare," she said. "You negotiated away your profits, and now you find yourself with a bigger loss."
Selling to brokers entails other costs, says the Greater New York Automobile Dealers Association, which has pushed legislation to rein in the business. "The state loses a tremendous amount of money," said President Mark Schienberg, who began monitoring brokers on Staten Island a couple of years ago after complaints from his members. "New York loses corporate taxes on the business," he said. "It loses money from employment." The organization counted some 50 brokers and connected them to a spike in deals that originated at out-of-state dealerships, primarily in New Jersey.
"There's no oversight of brokers from a manufacturer," Schienberg said. "They have no investment in property — we found one working in the back of a barbershop. ... If something is promised and not delivered, there's no recourse."
During the last five years, the trade group has worked with Brooklyn Assemblyman Peter Abbate and Sen. Martin Golden to force stricter regulations on brokers, starting with requirements that they be licensed and bonded. The latest version of those rules will take effect in June. A recently passed bill also requires brokers to disclose all fees and commissions.
Brokers said they welcome the regulation. "This takes us out of the shadows," said David Hazan, president of Montage Auto Leasing, in Brooklyn. He founded the New York Auto Brokers Association, a group that includes about 100 of his colleagues, last year as an effort to ensure the rules "protected clients, not just dealerships," he said.
Hazan said it's unfair that brokers will have to disclose their commission when no dealership has to. But he hopes the legislation flushes out fly-by-night operators. He insisted they are the exceptions. Bad actors can be found among dealerships, too, he said.
Brokers employ plenty of people in decent-paying jobs, he said. Amid intense competition from other brokers, they can be the equal of any dealer when it comes to looking after clients. More important, he argued, they provide a transparent means of buying a vehicle — which many New Yorkers prefer.
"We break that typical b.s.-type mold that dealerships have been deploying for years, where you come in, they sit you down, and it becomes this whole daylong process," Hazan said. "With our service, a client calls me up; says, 'David, I'm interested in a Nissan Maxima'; gives me the color and the options; and I say, 'Here's the price. I can deliver it to you by Wednesday.' "
'A choice'
Schienberg and Cochrane said automakers could put a lid on the broker business by not counting sales to brokers toward incentive goals or by getting rid of stair-step programs altogether. Neither seems likely.
Some automakers consider brokers part of the sales equation. "The reality is that consumers in New York have a choice whether or not to use these buying services, and some have been doing so for many years," Nissan North America said in a statement. "Likewise, dealers also make a choice: whether it is in their best interests to sell, or not to sell, via a broker."
It's also unclear what automakers could do. A Chevrolet spokesman said it does not count broker sales toward incentives. Ford Motor Co. said it no longer uses stair-step programs and "does not support" broker sales.
Asked via email whether he could deliver virtually any Chevy or Ford model within a week, Birenboym replied right away. "Yes," he wrote. "Let me know what you need."