DETROIT — General Motors isn't in the "dealer termination business." But every so often, the company finds, there's a reason to cut ties with a franchised dealer.
That was the case with Folsom Chevrolet, a dealership in the Sacramento, Calif., area that the company found to be underperforming on several metrics — particularly a widely used benchmark called the retail sales index, or RSI — for several years.
But GM failed to meet the substantial burden of proof for the termination under state statutes that govern the criteria for evaluating dealers, a California agency ruled in upholding Folsom's protest.
The case yielded an in-depth look into GM's thinking on what conditions warrant termination and new insights into how regulators view the industry's use of sales metrics, as well as a road map for other dealers to navigate conflicts with the factory.
And, along with a similar case in New York, it underscores the difficulty automakers face in enforcing strictly defined performance standards across a retail network made up of independent dealers in disparate markets.
On paper, GM appeared to have a strong case for termination. Folsom, GM argued in a hearing before the state New Motor Vehicle Board, had "dismal" sales in relation to its market size and "robbed" its retail inventory to feed its lucrative fleet business.
Folsom's emphasis on fleet sales as its profit engine — including work trucks for commercial customers — often meant that it didn't stock enough vehicles in the colors and trims preferred by retail customers, GM contended.
GM further said Folsom failed to implement a fully functional business development center and "occasionally" failed to fulfill warranty obligations.
As a result, GM said, Folsom was near the bottom of RSI scoring for several years, below average on customer satisfaction indexes and failing to meet other company expectations for customer service.
Four other Chevrolet dealerships within 30 miles, meanwhile, averaged close to GM's expectations of RSI.
In 2014, GM placed Folsom on a "performance improvement plan," a rehab program that included quarterly check-ins with brand representatives, added allocations of vehicles and a recommendation to establish a strong BDC to generate leads.
Folsom adopted some of the recommendations and made management and facility changes. By the time a probationary "cure" period ended in December 2015, Folsom's RSI had improved markedly, but it remained below average, as did its customer satisfaction index scores.
GM issued a notice of termination in November 2016, citing both the RSI and customer satisfaction scores.
"Folsom Chevrolet has been in continuous breach of the sales performance obligations of its [dealer agreement] since at least 2011, and its failures are serious enough to warrant termination on that factor alone," GM contended as part of a termination hearing before the New Motor Vehicle Board.
While several other dealerships ranked lower statewide, GM said Folsom stood out for falling significantly short of expectations over a long period. "We're not in the dealership termination business," testified Ronald Meier, regional director of Chevrolet's Western Region, according to the board's ruling.
Broader, deeper look
In rejecting GM's view in its Aug. 13 ruling, the board took a far broader view of RSI and a deeper look into the factors that affect it.
A key area of contention was Folsom's commitment to — and dependence on — the fleet business, which depressed its retail sales but gave it a potent weapon against competing dealerships in a market where Chevy lags in popularity behind Asian brands.
Folsom had a long history of serving fleet customers. As far back as 1998, it volunteered to join the Business Elite tier of Chevy dealers who agree to invest in added equipment to service vans and heavy-duty trucks in exchange for more generous allocations of popular fleet vehicles. Having more such vehicles in inventory, an expert witness testified, could allow Folsom to command premium prices from customers that didn't want to wait weeks for their vehicles.
In 2014, more than half the dealership's new-vehicle gross profit came from fleet sales. In 2015, Folsom's fleet business accounted for about 58 percent of its gross profit, thanks to the sale of 500 vehicles to SolarCity, the solar energy company headed by Elon Musk and later folded into Tesla.
Those numbers were the pride of the dealership. But they did nothing for RSI.
In a way, "Folsom Chevrolet is a victim of its own success as an elite GM fleet sales dealership," dealer principal Marshal Crossan wrote in a July 2015 letter to GM.
"Our fleet sales do not count toward our objective, but if they did we would be sales effective."
That reasoning swayed the board, which noted that neither GM's franchise agreements nor state law differentiates between commercial and retail sales in laying out a franchised dealer's obligations to the factory. On the other hand, state law does require that any performance standard that could hold sway over a dealer's business be reasonable "in light of all existing circumstances," including local demographics and market characteristics.
The 2016 New York case, which was cited in the California decision, involved Beck Chevrolet in Yonkers and prompted GM to review its policies in the state.
Despite the California ruling, GM doesn't intend to retreat on how it evaluates dealers for termination, said GM spokesman Jim Cain. The California agency makes its rulings case by case, so the Folsom decision doesn't necessarily force a company to change its processes. Last month, Cain said GM would decide later whether to appeal the ruling. No update was available as of last week.
Crossan, reached last week by Automotive News, referred questions to his attorneys but said in a statement that he's "very happy to get this past us" and "happy to continue on as a dealer."
Uniform enforcement
The California New Car Dealers Association is looking for ways to head off such conflicts over sales performance metrics before they culminate in a termination hearing. It has backed a bill that would allow dealers to pre-emptively challenge such requirements.
"They should be able to evaluate their franchisees on some criteria," Brian Maas, association president, told Automotive News. "The question is which criteria and how are those criteria developed and applied?"
Maas said automakers must apply their policies uniformly and not "cherry pick" as GM did in the case of Folsom Chevrolet.
"It's pretty damning how inconsistent General Motors is in applying its own standards," Maas said. "From a public policy standpoint, that's the major concern that we as a dealer trade association and our individual dealers have about General Motors or any manufacturer."