Luxury brands cutting dealers some slack

Amid signs of a softer market and restless consumer trends in vehicle shopping, some luxury brands are now rethinking big-budget and often contentious facility upgrades.

The automakers want to see just where economic and retail trends are going before pressing their dealers to commit to more investment in ever bigger and flashier brick-and-mortar facilities.

"It's not all about square footage and building the biggest facility in the world for no reason," said David Smith, CEO of Sonic Automotive, the nation's fifth-largest new-vehicle retailer, which owns premium-brand stores in multiple states.

Instead, a new attitude is rising that asks, "What's going to make financial sense?" he said. "It seems like we've gotten a lot more cooperation with our manufacturer partners with that."

With new-car sales flattening, retailer profitability slumping and the prospect of a pricey shift to selling electric vehicles, some dealers are pushing back against the factory's demands for seven-figure facility overhauls.

"You can't ask dealers ... to make investments in facilities and have profitability going in the other direction, which is what had been happening for the last three or four years," added Sonic President Jeff Dyke, who in the past has been outspoken about pricey facility upgrades.

But unlike in other times, when automakers used carrots and sticks to press showroom renovations forward, manufacturers at the moment appear to be listening to dealers.

Mercedes-Benz has instituted a 10-year moratorium on facility upgrades for dealers who have updated stores to the brand's second-generation Autohaus image standards. About 95 percent of Mercedes dealers are up to date, said Adam Chamberlain, Mercedes-Benz USA's vice president of sales.

"I see no wholesale changes to what we have today," he said. "We certainly want to be more flexible with dealers to allow them formats that suit the needs of the local market, that supports the brand," but that also pencil out from a viability context.

Mercedes is rethinking what future dealerships might look like in a world where car shoppers increasingly do their proverbial tire-kicking online. That's because the way in which consumers buy cars is changing, Chamberlain said.

Mercedes understands that bigger doesn't make better, Jeff Swickard, principal of three Mercedes-Benz stores in Seattle, Atlanta and Wilsonville, Ore.

The brand realizes there will be more focus on digital retailing in coming years, and that having a dealership that requires every model to be on display in a showroom isn't feasible, said Swickard, who also is chairman of the Mercedes-Benz Dealer Board.

Instead, the factory is focused on helping dealers have the right tools and maximize the use of their current stores.

"There are times that expansion is needed, but Mercedes wants all dealers to utilize things like Express Service and expanded hours, where possible, to limit the capital investment," Swickard said.

Penske Automotive Group CEO Roger Penske also reports that a more "rational discussion" is taking place today between the manufacturer and retailer on the issue of store upgrades.

"I think OEM senior leadership is now looking at what's reasonable for the size of the store and the market, the costs," said Penske, whose dealership group is the nation's second-largest retailer of new vehicles and sells mostly in the premium space.

Retail stores are still important for brand recognition. But major facility updates can represent seven-figure investments for dealers — even when they have little effect on actual sales volumes.

"It's not like a customer comes in and says, 'Oh, now that the brand color is black instead of blue, I'm buying a car from you,' " said Jeff Aiosa, owner of Mercedes-Benz of New London in Connecticut.

Lexus gives its dealers autonomy when making facility upgrades — to a degree.

"When I went through my redesign, it was my own redesign," said Paul LaRochelle, chairman of the Lexus National Dealer Advisory Council. "It was my own thoughts about what I wanted to do."

There was not a "millisecond of pushback" on materials or decorating choices, said LaRochelle, partner at Sheehy Lexus of Annapolis in Maryland, part of the 29-store Sheehy Auto Stores group.

"They're not saying, 'Hey, you have to use this color; these are the furnishings you must go with; this is the glass,' " LaRochelle said. "There's none of that."

Last year, Porsche revealed an ambitious retail concept, referred to as "Gen 5," that expands the dealership from showroom to experience center and hangout space.

The 45,000-square-foot concept store in Palm Springs, Calif., is designed around individual content areas that offer visitors a deep dive into various Porsche models.

The store, owned by indiGO Auto Group of Houston, features an E-Performance section that highlights electric powertrain technologies and charging infrastructure. Another section features vintage Porsches and showcases the company's growing classic restoration business.

Factoring in tweaks to the design, constructing such a next-gen Porsche store format could cost up to 10 percent more per square foot than one of the brand's current "Gen 4" stores, according to indiGO Auto Group CEO Todd Blue.

The new Gen 5 design is expected to roll out across Porsche's retail network over a decade. The automaker said it will work with individual dealerships on the timing of the upgrade, based on market size, sales volume and when the store was last updated.

Robert DiStanislao, president of Porsche of the Main Line in Newtown Square, Pa., is building a Gen 4 store because at the time the plans were made, Gen 5 had not yet been released.

"Fortunately, Porsche allowed us to choose whether to move to Gen 5 or stick with Gen 4," said DiStanislao, who also is a member of the Porsche Dealer Board of Regents.

DiStanislao remains wary of the latest store design concept, referring to it as an "unproven concept."

"If dealers had their druthers, they are going to stick with Generation 4, because it is an efficient dealership layout," he said. "It's easy to get cars in and out. There's a lot of utility because there's open showroom space. The shop is directly behind the showroom. There's an underground storage area."

BMW is taking a measured approach with its demand for store face-lifts in response to dealer feedback on the NADA Dealer Attitude survey.

In 2013, BMW launched a new dealership standards program, dubbed Future Retail, that emphasized digital tools and an Apple store-like dealership design. Some of those standards, specifically those relating to structural elements and the size of the showroom, were relaxed beginning last year.

"When we looked at requirements in terms of what we consider to be a must-have in the facility, we started to develop some flexibility around that," said Shaun Bugbee, BMW of North America's executive vice president of operations.

Dealers who have updated to Future Retail standards receive a 15-year exemption from the date of their doing so, in which no major architectural facility design changes will be required.

BMW also agreed to let Mini dealers downsize their stores or move operations into their BMW locations to help defray operating costs and real estate overhead by sharing backroom expenses.

Melissa Burden and Larry P. Vellequette contributed to this report.