Nissan could end scorned stair-steps

Nissan is considering pulling the plug on the contentious stair-step incentive program it has used to drive its dealers to higher monthly sales, according to some of the brand's retailers.

Nissan could halt the program as early as this summer, though a decision might be delayed until year end, according to a dealer familiar with the plans.

The shift would be a sea change for the brand, which has earned scorn for what some dealers claim has been hard-driving sales pressure on its franchisees.

The internal discussion was revealed last week in a letter to Nissan's dealers obtained by Automotive News, which said Nissan North America is studying an end to the program.

According to the letter, distributed by email Thursday, May 23, by the Nissan National Dealer Advisory Board, Nissan North America Chairman Jose Valls and his executive team have agreed to evaluate moving away from the program and are working on the best timing for the move.

A spokesman for Nissan North America in Nashville declined to comment.

The situation occurs in the wake of management turnover at the Japanese automaker since November, when Nissan Motor Co.'s then-chairman, Carlos Ghosn, was arrested and accused by Japanese prosecutors of years of financial improprieties while running the company. Ghosn has denied wrongdoing. But his abrupt departure has opened the door to changes in the way Nissan has been run.

CEO Hiroto Saikawa has vowed to change the automaker's approach to retailing vehicles in the U.S., and as his new chairman over North America, Valls has signaled that he eagerly wants to improve Nissan's long-suffering dealer relations.

The stair-step program was one of the primary tools in Ghosn's campaign to grow U.S. market share between 2011 and 2017. It rewarded dealers with cash for hitting ambitious monthly, quarterly or year-end sales goals, and for a fleeting period, it helped lift Nissan North America to Ghosn's specific target — a 10 percent U.S. market share in March 2017.

But the practice of incentivizing dealers to move metal has been a source of friction and sour relations for five years, causing some franchisees to walk away from the brand rather than participate.

Dealers have complained privately that the program sets unrealistic vehicle sales targets and fosters a culture of discounting that has dented Nissan's resale values, damaged brand reputation and sunk dealer profitability. Residual values on Nissan vehicles have declined 3.3 percentage points in the last five years, compared with a 0.6 percentage point decline for the industry overall, according to ALG.

David Basha, for one, is tired of chasing what he described as unrealistic and unprofitable sales targets. The Atlanta-area dealer said his April stair-step sales target was about 5 percent higher than the previous year, despite the soft industry.

"April's net profit was the worst we've ever had since becoming a Nissan dealer 30-plus years ago," said Basha, owner of Carriage Nissan in Gainesville, Ga. "Nissan's agenda for capturing market share at all costs has ruined the resale value of the product, attracted the worst creditworthy customers to the brand, destroyed the morale of the dealer body and hurt dealer profitability, all for some very short-term achievements."

Basha said he got off the stair-step "roller coaster" for May and set a more sustainable plan for himself — retailing 60 to 80 new vehicles a month and augmenting the business with sales of 80 to 100 used vehicles. "The dealers that are profitable today are the ones who have already adopted this business plan," he said.

Despite his frustration, Basha said he is optimistic Valls and his team will address dealer concerns. "Stair-step programs only make sense if the objectives are realistic," he said.

The stair-step program, while meant to boost market share, has done little to help Nissan gain on its main Japanese competitors. Nissan's 7.9 percent share of the U.S. market for the first four months of the year trailed Toyota (12 percent) and Honda (8.4 percent), according to the Automotive News Data Center.

The bonus program has instead triggered price wars among Nissan dealers in a market, siphoning off store profitability, dealers said.

One Florida Nissan dealer said the pressure for volume has given Nissan the image of a "discount brand" in the U.S. "We are forced to put current customers into new vehicles much faster than normal," the dealer said. "We lose $2,000 or $3,000 per vehicle to do it, but we need to hit our objectives to get our $100,000 bonus."

Not all Nissan retailers have been unhappy with the system.

Wayne Siegel views the goal-oriented program as an earning opportunity for retailers. But he acknowledged it may have run its course in its current configuration.

"There are dealers who made money with the program for a very long period of time, only to wind up with increased objectives that became unattainable in the end, causing them to disconnect with the program," said Siegel, owner of Legend Auto Group on New York's Long Island.

"The program, in its current state, needs to be reworked, reconfigured or completely done away with."

He says the stair-step program has been effective for his Nissan dealership. Store profit is up 15 percent from last year, despite rising sales targets.

Saikawa acknowledged this month in Japan that reversing Ghosn's U.S. growth strategy will be tough, especially as industry sales slow.

Saikawa flew to Nissan's U.S. headquarters in May and met with a handful of dealers. He "wanted to speak, and with equal time and equal fervor, wanted to listen," said Siegel who attended the meeting and is a member of the dealer board.

Sitting at the head of the table, the Japanese CEO assured the dealers that Nissan had its arms around the situation.

"There is a goal; there is a game plan; it will take some time," Siegel said, recalling Saikawa's comments.

"We talked about patience, consistency, transparency and the way to interact with the dealer body. Nissan understands there's going to be bloodshed but is willing to accept the risk for the long-term reward of greater brand value and mutual profitability with dealers."

Saikawa has said that he wants to prioritize profitability over market share. The comeback plan calls for throttling back the engines that have driven volume in recent years — rental fleet sales and vehicle discounts.

Nissan has maintained in recent years that it has benefited from selling its vehicles to rental fleets by the thousands. In addition to making money on the transactions, putting vehicles into fleets exposes brands to consumers who might otherwise not consider their vehicles.

But there needs to be better oversight in determining the number of fleet vehicles needed to serve that purpose, Siegel said. "An over-reliance on fleets degrades the value of the vehicle because you have too many in the marketplace," he said.

Nissan simply sold too many cars to rental fleets for thousands of dollars below invoice, said Ray Brandt, CEO of Ray Brandt Auto Group in suburban New Orleans. "That knocked down the residual values of these cars tremendously," said Brandt, a Nissan dealer board member. "That's what oversupply does."

Saikawa has pledged to reduce fleet sales to 15 to 17 percent of total sales by about 2022 — from a high of about 40 percent in the first quarter, according to Reuters.

But moving away from fleet sales will be problematic, as Nissan and the industry brace for a softening in auto sales this year. U.S. new-vehicle sales are expected to fall below 17 million for the first time since 2014, according to most forecasts.

"If the [retail] market chokes on us and we've got excess inventory, then we've got to go with fleet," Brandt said.

To boost brand value and margins, Saikawa seeks to remove another demand lever for Nissan — vehicle price discounting.

Nissan has been trying to reduce its per-vehicle incentive spend for months. Its year-over-year incentive spend in April rose 21 percent, compared with a 7 percent decline for the industry as whole, according to ALG. Nissan incentives accounted for 13 percent of the average transaction price in April, compared with the industry's 10 percent.

Rather than constant discounting that confuses customers, Nissan should come to market with a "great car at the right price," said Dave Wright, dealer principal at Dave Wright Nissan-Subaru in Hiawatha, Iowa.

"If they can give a $5,000 rebate, why are they overpricing the car to begin with?" Wright said. "Nissan is knee-deep in incentives, and it's not working."