New York’s highest court recently ruled that General Motors violated a state law in dealing with a Chevrolet franchise in Yonkers, NY. GM attempted to cancel the franchise due to “subpar sales”. GM uses a system called the Retail Sales Index (RSI) as a benchmark for the sales that their franchises should meet. However, many dealers, including the Beck franchise in Yonkers, argue that this system is unfair because it compares dealers to the rest of the state but does not account for “market nuances”. The Beck co-owners, Russel and Leon Geller, claimed that the RSI was unfair because they were compared to the Buffalo area, where Chevy’s market share is about four times greater. The Beck Chevrolet franchised sued GM in 2011, and thi
s week the New York Court of Appeals ruled that GM’s failure to recognize local-market factors violated state law and ruled 5-1 in favor of the Beck franchise.
This ruling has large-scale implications. Many car companies use similar systems to GM’S RSI benchmark, and this point has been a central argument between dealers and manufacturers for years. A Florida lawyer Richard Sox, who helped draft the New York dealer-protection law that is at the heart of this case, stated that it “is going to apply to all manufacturer sales-performance formulas in all states when it comes to attempts to terminate dealers.” This ruling could change how manufacturers measure their franchises across states and determine which ones are successful and which ones aren’t. This case targets the importance of local-market features that car manufacturers are overlooking when evaluating their franchises.
Source: http://www.autonews.com/article/20160507/LEGALFILE/305099965/dealer-wins-court-battle-against-gm
Timely, in that Ruggles talked about this, though he noted that in practice these were guidelines not rules that could (would!) be adjusted to reflect local market challenges. OEMs don’t benefit from dealers that fail because they’re set with impossible targets. So was GM simple-minded in what they did in the NYC suburbs? Possibly. Is this a court that failed to understand the basics of the business? Maybe, but it was an appeals court, not a small-town jury. Does it set a strong precedent? I wonder, and while we’re are a Common Law society, a single ruling is not enough to be a binding precedent. And it could be that this was one of those idiosyncratic cases, where someone on the GM side had an axe to grind.
Professor Smitka, I was wondering if you have any suggestions of better ways to set goals for franchises and measure improvement? Unfortunately, for a large-scale company that is not “on the ground” in the local market, it may not be entirely possible to capture all the nuances of the local economy. What are possible ways for a large corporation to get more involved on the ground level without expending large amounts of capital to have upper-level management employees looking over the shoulders of the dealer and taking note themselves of the nuances of the local market?
I think it’s interesting that GM hasn’t figured out how to satisfy their dealers and not get sued in the process. You would think that more than a century of auto-making would teach them how to deal with car dealers productively and without conflict. I hope that American companies will begin to realize the errors of their practices and make better management principles to lead their business models in the twenty first century.
Thomas Barnett
There are enough dealers that there will always be odd circumstances including odd people. Such suits are not just GM, but the Tesla controversies have made these more newsworthy than in the past.