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Mercury loss threatens smaller dealers: If customers leave, mergers could follow

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Mercury loss threatens smaller dealers: If customers leave, mergers could follow

Daniel Duggan

Crain's Detroit Business -- June 7, 2010 - 12:15 pm ET

DETROIT -- Local Lincoln-Mercury dealers are putting a positive face on news that Ford Motor Co. will discontinue the Mercury line -- as they prepare to fight for as much as half of their existing sales.

With the Mercury line gone, the soon-to-be Lincoln-only dealers will attempt to get former Mercury customers to spend more for a luxury car, while Ford dealers will try to win over the same Mercury customers.

“This will be a real challenge for the standalone Lincoln dealers to keep those Mercury customers who might move over to Ford cars,” said Daniell Patterson, a principal specializing in car dealership consulting in the Southfield, Mich., office of UHY Advisors Inc.

“That also makes it an opportunity for the Ford dealers.”

Patterson said the deal likely will force more consolidation among dealers in the area, making it a natural fit for Lincoln dealers to merge with Ford dealers.

“That's the unspoken part of all of this, that it will encourage people to be part of the consolidation program,” he said.

Michael Stanford Sr., co-owner and general manager of Varsity Lincoln-Mercury in Novi, Mich., agrees that more consolidation among Ford dealers will be in the works.

With the possibility of losing a large portion of sales, he said it will be very difficult for smaller dealers to survive by selling Lincolns alone.

Stanford has been preparing for the Mercury announcement for more than a year. He said he has analyzed his sales and can stay in business even if he lost all of the Mercury sales -- which represent 50 percent of all cars sold on his lot.

“We're strong enough that we'd be OK,” he said. “But, we sold 2,500 cars last year. For a dealer who sells 70 cars a month, it's not going to work.”

Stanford is in the good position, like several dealers in the area, to also own a Ford dealership nearby. His Varsity Ford dealership is in Ann Arbor, Mich.

There are 15 Lincoln-Mercury dealerships in the Detroit Auto Dealers Association, according to statistics from the industry group.

Just three have a Ford dealership connected to the Lincoln-Mercury dealership.

Stanford also said he's encouraged by Ford's moves to possibly sell an entry-level Lincoln vehicle built on the Focus platform.

“So, we'll get an entry-level Lincoln, which we've never had before,” he said. “It's going to be a great opportunity to draw in new customers.”

Short-term pain

Chan Whiting, general manager of Crest Lincoln-Mercury in the Detroit suburb Sterling Heights,Mich., said there will be some short-term pain for dealers, but it will help in the long term.

“At the end of the day, there is going to be more money to use for marketing Lincoln, more resources available from the company,” he said.

Roughly 35 percent of Crest's sales were Mercury vehicles last year, he said, but he expects to keep most of those sales for Lincoln.

Marketing from the dealership will be able to be focused exclusively on Lincolns, he said.

At Village Ford -- in the shadow of Ford headquarters in Dearborn, Mich. -- owner Jim Seavitt expects his monthly sales of roughly 200 to 250 cars per month to increase by 15 to 20 once Mercury vehicles are no longer being sold.

“A lot of Mercury customers are going to have a hard time moving to a Lincoln,” he said. “For some people, that's a real sharp step up.”

He plans to wait until the incentives offered by Lincoln-Mercury dealers end before stepping-up his marketing efforts.

“We'll have our turn at those customers in the fall,” he said.

Dealer payouts

The Lincoln-Mercury dealers will be getting some compensation in the deal, however. They will be given a payout based on the percentage of Mercury vehicles sold as a total of all Ford vehicles sold by their dealership, Automotive News reported last week.

The formula gives dealers whose Mercury sales were 0 to 25 percent $1,500 per unit retailed annually. Dealers with 26 to 50 percent Mercury sales get $1,650 per unit, those with 51 to 75 percent get $2,000 per unit, and those with 76 to 100 percent get $2,500.

Michigan's current Dealer Franchise Act does not require the manufacturer to offer the compensation, but there is a precedent set by GM's elimination of the Oldsmobile brand, said John Youngblood, co-chairman of the dealership practice group at Abbott Nicholson Quilter Esshaki & Youngblood PC in Detroit.

“Apparently, the (Michigan) Legislature did not contemplate the elimination of brands when they created the franchise law,” he said. “So there's nothing requiring such compensation in the Dealer Franchise Act as it now stands.”

Youngblood added that proposed amendments to the act that address this issue and others are currently pending before the Michigan House and Senate.

“Ford's position is that it is doing the best it can under the circumstances to be generous. But whether it's enough in light of the millions of dollars the typical dealer has invested in their facilities and business in general is a question that can only be answered by the dealer,” he said.

Read more: http://www.autonews.com/apps/pbcs.dll/article?AID=/20100607/RETAIL07/100609899/1256#ixzz0qCwOY5WJ

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