Nissan May Win U.S. Sales but Biggest Dealer Doesn’t Like How

(Bloomberg) -- When U.S. auto sales numbers arrive Tuesday, Nissan Motor Co. is expected to look pretty good -- or at least less bad than its competition. The Japanese automaker's sales slipped just 1.5 percent in October, compared with drops of 6.9 percent for General Motors and 11 percent for Ford, analysts estimate.

Behind Nissan's result, though, is a controversial and aggressive dealer-incentive program, one that it rarely discusses publicly: giving big, retroactive bonuses to dealers who hit certain monthly sales targets. Age-old car-buying advice -- wait until the last hour of the last day of the month to walk into a dealer -– comes in part from programs like these.

Some dealers love the way the incentives reward them for helping the manufacturer compete. “Capitalism at its best,” said Scott Smith, who owns three Nissan dealerships in the Atlanta area. He gets as much as $1 million a year per store and reinvests about a third of it in his facilities and operations. “I wish I had it at every other franchise.”

The biggest new-car dealer in the U.S. disagrees. Nissan's program is arbitrary, and the sales targets are inconsistent among dealers, says Mike Jackson, chief executive officer of AutoNation Inc. This in turn reinforces habits of car-buying that many in the industry have come to loathe, such as aggressive haggling and last-minute gamesmanship.

“It's a discriminatory, multi-tier pricing system that creates winners and losers among customers and retailers,” Jackson said last week in an interview. “The manufacturer is giving the perception that something's available to everyone, but it's not really.”

For a graphic of automotive analysts' October sales forecasts, click here.

Growth is becoming harder for automakers to find in the U.S. market, and it's looking less likely that 2016 might mark a record seventh straight year of sales gains. The annualized rate for October, accounting for seasonal fluctuations, will probably be 17.7 million, the average of 11 analyst estimates, down from 18.2 million a year earlier.

Incentives Outlier

At the moment, Nissan's sizable incentives to dealers for hitting targets -- as much as $2,000 a sale, according to Jackson -- make it an outlier. Ford Motor Co. abandoned its practice of volume-based discounts this month, a change reflected in its sales drop, along with a reduction in fleet sales from a year earlier. Ford says it will adjust production to match slowing demand. For October, a month with two fewer selling days than the year-earlier period, Nissan has the smallest projected decline, Ford the largest.

Fiat Chrysler Automobiles NV, whose October sales are forecast to drop about 9.8 percent, employs a similar program but not as aggressively as Nissan does, Jackson said. Toyota Motor Corp. and Honda Motor Co. have long eschewed the practice.

Nissan typically doesn't comment on dealer programs for competitive reasons, said Brian Brockman, a spokesman.

Stairstep Programs

These incentive programs, sometimes called stairsteps, kick in when dealers sell a certain number of cars by a certain time, making salespeople more likely to bargain when they're close to making the numbers. Giving up even thousands of dollars on one sale to a lucky customer can bring the dealer retroactive rewards from the manufacturer for $100,000 or more.

Data from Edmunds.com help bear out the old chestnut that the best deals are made late in a month. Transaction prices in the last week of a month are typically lower than those in the first week by about 0.5 percent of the manufacturer's suggested retail price, Edmunds analyst Jessica Caldwell said. For a $38,000 vehicle, that's worth about $190.

Because so much money can ride on the last sale or two of a month, Jackson says the programs create a perception of unfairness and end up killing resale values. Used Nissans sell at about 43 percent of the original sales price. Used cars from more disciplined automakers, such as Honda or Toyota sell for closer to 50 percent. On a $30,000 vehicle, that's about a $2,000 difference in value after three years.

Heavy reliance on fleet sales to boost total deliveries contributes to the weak resale values, while masking tepid demand by individual consumers, Jackson said. Nissan's U.S. sales, including its Infiniti luxury brand, rose 5.4 percent through September, increasing market share to 9 percent from 8.6 percent, according to researcher Autodata Corp.

Nissan's American depositary receipts rose 1.6 percent to $20.26 at 10:20 a.m. in New York on Monday. They had slid 4.9 percent this year through Friday.

Ford's Program

Erich Merkle, Ford's U.S. sales analyst, said in an e-mail that the company ended its Volume Growth Bonus Program after consulting with dealers and deciding that money “could be put to better use in customer-facing programs.”

Ford, like other automakers, is making a difficult but responsible choice in a slowing market, said Eric Lyman, chief analyst for TrueCar. “Planned reductions by FCA and Ford indicate a more disciplined approach to sales strategies going forward that will support a healthy automotive market.”

Among luxury car makers, Jaguar should continue to enjoy the fastest-growing sales, said Joe Eberhardt, the head of North American operations for Tata Motors Inc.'s Jaguar Land Rover unit. That segment has seen a big surge in discounts to customers, he said, especially on car models as demand has shifted to SUVs.

“We do what needs to be done” to sell vehicles, Eberhardt said in an interview last week. With its XE compact sedan and F-Pace SUV, he said he expects more growth comparable to what the brand has shown in recent months -- “more than 100 percent.”

To contact the reporter on this story: Jamie Butters in Southfield, Michigan, at jbutters@bloomberg.net. To contact the editors responsible for this story: Kevin Miller at kmiller@bloomberg.net, Janet Paskin