Nissan back on slippery slope of stair-steps

Nissan is facing a test of its will in the U.S.

The automaker has vowed for a year that it will reduce its past reliance on heavy retail incentives and its often-contentious dealer bonus programs to move metal and build market share.

But suddenly, the market is coming back after a ruinous year for industry sales. And Nissan is turning to dealer volume incentives again as it sees an opportunity to improve its U.S. market share.

Last month, Nissan reinstated its dealer sales-objective program — often referred to in the industry as stair-step — that financially rewards retailers for hitting specific sales volume targets.

Late last week, dealers received their incentive targets for September. The sales objectives have some dealers grumbling again.

"In the last five months, dealers went through the addiction recovery process because we haven't had objectives," said Tyler Slade, operating partner at Tim Dahle Nissan Southtowne in suburban Salt Lake City. "Now we're right back to our crack cocaine."

That's not what Nissan wants, and it's not the message that the automaker's senior executives in the U.S. and Japan are now emphasizing.

"We want to continue to be reasonable and work with the dealers," David Kershaw, Nissan Division vice president of sales and regional operations, told Automotive News last week. "A healthy dealer body with healthy profitability is key to our success."

But some retailers see the automaker on a slippery slope. Georgia dealer David Basha said his factory objectives for September jumped 21 percent over his August targets, even though September sales historically are about 85 percent of August's.

"We just barely made last month's sales goal," said Basha, owner of Carriage Nissan near Atlanta. "To me, it looks like the same old game of escalating objectives. We should have gotten a two-to-three-vehicle increase; instead, we got an increase of about 10 vehicles."

Nissan's dilemma: It wants to avoid the temptation of escalating incentives, which erode vehicle profitability, and it wants to go easier on dealers after several years of pushing aggressive sales targets on stores. At the same time, the automaker needs to boost its fortunes in the profit-rich American market. Nissan Division sales for the first half of 2020 came in at 393,281, a decline of 40 percent from a year earlier.

It's a moment of challenge.

"We have a much more strategic outlook on where we want to go," Kershaw said. "We are moving from a push strategy to more of a pull strategy with the customers — getting them into the showroom and seeing the value of our products as we roll out everything that we have coming.

"We've seen retail sales that have continued to improve and exceed our internal targets," he added. "Dealers are seeing much better profitability in spite of the market challenges."

Many dealers realize that sales bonus programs are a necessary tool for automakers to drive market share — a lever they can pull to coax dealers to close an additional 10 or 15 deals a month.

"The automaker needs the volume to maintain market share and keep the factories busy as they return from COVID shutdown," Nissan National Dealer Advisory Board Chairman Scott Smith said. "At the end of the day, we see the need for Nissan to stabilize."

Nissan's stair-step activity led to a dealer uprising last year when retailers griped that the automaker set unrealistic sales targets that fostered a culture of discounting, dented resale values, damaged brand reputation and sank dealer profitability.

The approach was one of the primary tools in former Chairman Carlos 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 it briefly helped lift Nissan North America to Ghosn's specific target — a 10 percent U.S. market share, including Infiniti, in March 2017.

The practice was a source of friction and sour relations for five years, causing some franchisees to walk away from the brand rather than participate. Nissan backed away from its aggressive behavior as new management came into the company in Japan and the U.S.

By last December, half of the brand's dealers were participating in the sales programs, down from about 65 to 70 percent a year earlier.

Nissan North America executives last year evaluated abandoning the sales program but eventually decided to keep it. In February, Nissan overhauled the program, doubling sales-volume bonuses to help drive foot traffic at stores and lift dealer profitability. Many dealers were receptive to the improvements.

But the emergency of the coronavirus pandemic complicated the plans and also brought dealers a temporary reprieve from factory objectives.

Nissan's return to sales objectives reflects the pressure the Japanese automaker is under to turn around its U.S. business. The brand's U.S. market share slipped to 7.2 percent last year from 8.4 percent in 2017, according to the Automotive News Data Center. The market deflation of this year's pandemic has exacerbated that decline — for the first half of 2020, Nissan market share was down to 5.4 percent.

Easing back into incentives also reflects a growing confidence about a market recovery from the COVID-19 slump earlier this year.

The pace of industry sales is accelerating, with the seasonally adjusted annual rate of light-vehicle sales reaching 15.18 million in August, compared with just over 12 million 90 days earlier.

"We're starting to see the market come back for us, [but] it doesn't mean we are out of the woods," Kershaw said. "We remain focused on achieving more sustainable results for the company and the dealers. It will take some time, but we are seeing some really positive indicators."

Some dealers argue it's too soon to bring the sales objectives back, given the market realities of soft demand and inventory shortages on certain models following a more than two-month shutdown of Nissan's big North American factories.

Dave Wright, dealer principal at Dave Wright Nissan in Hiawatha, Iowa, said he's down to about a 15-day inventory, making it hard to commit to a sales objective.

"The timing is horrible," said Wright, whose store received a September factory sales objective that was 33 percent higher than a month before.

"In August, you had Altima and Kicks volume bonuses and I didn't have one of those vehicles on the ground."

Nissan's return to objectives does not bode well for dealer profitability, said a Midwest-region Nissan retailer who asked not to be identified.

The dealer said Nissan was the first of his 11 brands to bring back sales objectives since the pandemic brought the economy to a halt.

Nissan "is grasping at straws," he said. "They are throwing everything they can at the wall to drive sales and buy some market share."