Honda Powerhouse Dealer Profile, Part 3: Selling Honda — Great Financing, Horrible Margins

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Editor’s note: This is part three of a three-part profile of Heartland Honda in Springdale, Ark. Part one contains a history of the store, as well as details on how the staff has been downsized. Part two focuses on the store’s marketing efforts, both in the real world and digitally. Vendors are praised, and panned.

The joys and sorrows of selling Honda are well known. The brand’s margins have been low for years. But the company’s in-house finance arm has proven invaluable during the credit crisis.

These joys and sorrows are intensified for the single-line dealers, who live or die by the brand. In addition, these dealers have their own issues. They have to comply with Honda’s special Powerhouse requirements while at the same time benefiting from special perks.

I got an inside look at the Powerhouse dealer’s world in November. As I explained in part one of this profile, I visited Heartland Honda in Springdale, Ark. and had a conversation with Greg Donahoe, who runs the Level 5 store.

My timing couldn’t have been better. Just a couple of weeks earlier, Donahoe had attended a symposium for Powerhouse dealers at corporate headquarters in California.

Donahoe told me about the event. He also shared why he thinks Honda margins are so bad, and why he thinks Honda is afraid to enforce an online MAP (minimum advertised price) policy, even though it would be in its best interest.

Strong words perhaps. But Donahoe is no Honda hater. In fact, he loves this year’s new models and praises the company’s financing and recent invoice discounts, customer rebates and willingness to listen to complaints. Honda asked each dealer at the symposium to write a list of demands, then prioritize. Donahoe had just faxed his new list before we talked.

But before delving into the positives of being a Honda-only dealer, let’s get back to those margins.

Market Share at All Costs?
Back in early 2008, the RPM Group managed 20 groups for about 350 dealerships, which skewed toward larger retailers and included about 80 Harley-Davidson dealers. The RPM Group president at the time told me that according to preliminary sales data collected from the stores, the average new-vehicle sales margin in 2007 had been 16 percent. The 2006 average had been 18 percent.

Honda dealers, he said, had been particularly hard-hit. “Several of our Honda-only dealers are in the single-digit gross profit percentage,” he noted. “They’re running 6, 7, 8 percent gross profit on Honda.” I didn’t ask whether these statistics took into account holdbacks.

The RPM Group president may not have been authorized to share those numbers (after I included them in an article, he stopped returning my phone calls), but I’ve heard similar stories from consultants and Powerhouse dealers.

So why are Honda margins particularly bad?

One reason, Donahoe says, is that Honda lacks a good MAP policy for online advertising. “I don’t have the accurate, real information,” he says, “but I think Honda has some big-volume dealers that are Honda-only, and they put everything on eBay and the Internet for net-net or close to net-net. And whether they get the actual sale, they drive the market because a consumer can go on there and see what they think they can buy it for. That hurts margins.”

Donahoe says other dealers feel the same way. “We just got back from Torrance two weeks ago, a big symposium with Powerhouse dealers, and it’s a big issue because the margins are lower than they should be,” he says. “We’ve got the Cadillac of touring machines in the Honda Gold Wing. It ought to bring close to list, or it ought to bring invoice at least. There’s a 10 percent holdback on them, and dealers sell right into it. It’s ridiculous.”

Honda does have an online MAP policy for its power equipment. “Generators are our saving force,” Donahoe asserts. “There’s good margin in it. There’s high demand in it. It’s a great product.

“And see, that’s what’s funny,” he continues. “They’re the same parent company, but obviously Power Equipment and Motorcycles are very different divisions within American Honda. Power Equipment’s got their advertising on the Internet figured out. You don’t mess with it. You can’t whore it out. You can’t do any of that.”

According to Donahoe, even Honda’s Motorcycles division has a good MAP policy for print and traditional media. But he also calls such advertising “a dying breed” when compared to the Internet.

“Where everyone is going, there’s no regulations,” he reiterates. “In Power Equipment, it’s just the opposite. They regulate it. It’s a fantastic program. It maintains the integrity of the product. It maintains the margins. And dealers don’t dare mess with it because they don’t want to jeopardize getting their product line yanked.”

So the answer for the Motorcycles division seems to be: Do as Power Equipment does. “There’s a big push from the dealer body, I can tell you just from the meeting I was at,” says Donahoe.

Why hasn’t Honda already implemented a strong online MAP policy?

Donahoe thinks the company is “scared to death to do it” for two reasons. First, there might be legal issues. Telling your dealers what to do, then monitoring them, does seem like a serious project for the legal department.

Second, Honda might be scared that if it were to put an end to heavy discounting, it would lose volume and market share.

“And I beg to differ,” Donahoe says. “I think its market share would increase.”

As an example, he says first consider that there are about 1,250 Honda dealers nationwide, then ask yourself, how many of those dealers are in the Gold Wing business?

“A handful,” he says, “because most of them don’t want to compete because the pricing stinks. But if you had that pricing integrity put in place, you would have a lot more Honda dealers selling Gold Wings. They’re a premier product, and the customers would want to buy local if it’s no different versus here or there.”

Donahoe says Honda’s status as the country’s largest metric importer could hinder its battle against discounters. “Honda’s got more capacity to produce, so they have more product out there because they typically have more market share. So it’s easier to get your hands on products.”

Donahoe praises Honda’s efforts to increase margins after the fact by offering retail rebates on scooters, on ’08 units like the Recon 250s and 250X ATVs, and on all CRF dirtbikes. He says VTX1800 models have rebates plus “huge” invoice incentives.

“They’re trying to clean up their old stock,” he says. “It’s not totally clean yet, but it’s getting there.”

Excess inventory, of course, is a festering problem of the past few years. When Donahoe first entered the market in 1996, he had the opposite problem. “I can remember back in the day you’d want to be careful if you sold a bike for too low because you might not be able to get another one,” he says.

Powerhouse Perks
If Honda pricing policies sound like a mess, keep in mind that most other OEMs are grappling with the same issues. And lest you envision a bleak life for the single-line Honda dealer, keep in mind that many entrepreneurs have made a fortune owning such a store. Heartland Honda’s annual revenue, for example, went from $1 million in 1996 to $15 million in 2008.

But bringing in big bucks requires spending big bucks. Opening a Powerhouse store isn’t cheap. Accordingly, Honda provides incentives.

“Automatic inventory replenishment is one of them,” Donahoe says, “which has reduced our flooring.”
Continued on page 2.

The most recent Powerhouse perk? Honda has created a BIG (business improvement group) 20 group just for L5 Powerhouse dealers. Donahoe says about half of the 44 L5 dealerships have joined. The first meeting took place at the Powerhouse symposium. “I’m pretty excited about it because for once in the lifetime of this business, it’s going to be an apple-to-apple comparison. We all face the same issues.”

Powerhouse dealers also get enhanced co-op funds — theoretically. “There’s some stuff that we’re supposed to get that maybe we’re not per se getting,” Donahoe explains. “That’s what the symposium was about.”

Overall, Donahoe is positive about Honda corporate. “They’re trying,” he says. “They want Powerhouse to work; they want it to be an added benefit, in particular for the dealers that have got the investment in the facilities and manpower. But they’re also trying not to alienate the rest of the dealer body.”

Most readers will remember the debacle that ensued when Honda entered the PWC market, selling the units only to stores that agreed to become Honda-only. “The watercraft thing bit them in the ass,” says Donahoe, whose store ironically just had a good watercraft year.

Regardless of any potential sticking points, Honda is still promoting the single-line concept. “Let’s say an open point came open somewhere,” Donahoe says, “if you want to be an open point, you’re going to have to be a Powerhouse dealer. That’s what they’re saying.”

Not that any OEM is trying to add a bunch of dealers right now. Just the opposite. Donahoe knows of a couple of Powerhouse dealerships that have gone out of business.

Flexing Honda’s Finance Arm
One major benefit of selling Honda is shared by all dealers of the brand: American Honda Finance Corp.

“They’re very strong,” Donahoe says, citing the readily available installment loans with competitive terms. “It’s a huge advantage.”

G.E. Money runs Honda’s revolving program. “They don’t buy anything,” Donahoe says. “We don’t even send them any paper.”

To be fair, Donahoe doesn’t like revolving loans. “Even during the high times,” he says, “we would only do a revolving if the customer just pushed and pushed, and we felt like we were going to lose them to another dealer that was going to slap them on it.”

Low initial payments and high interest rates, Donahoe notes, hinder future sales. “We know what our cycle is. It is two, two and a half years [before a] trade. We want customers to be in a position to be able to do so.”

Like most Powerhouse dealers, Heartland Honda sells a lot of used units of all brands. These used units, of course, provide much higher margins. In a recent year, the store sold 1,200 new units and 600 used units sourced from customers and auctions.

AHFC will finance only pre-owned Hondas, so Donahoe has close relationships with three local banks. “We’re trying to get our foot in the door with some credit unions,” he adds, “but they’re so guarded. We can’t penetrate them.”

The banks also have risen their standards. “They’re kind of picky now with credit,” Donahoe reports. “They want money down. It’s back to how it should be, as opposed to buying with zero down and the whole lock, stock and barrel. You’ve got to put yourself in an equity position and have decent credit.”

Heartland Honda is even willing to co-sign for select customers, although the store doesn’t broadcast the service. “There’s got to be an extenuating circumstance for me to tote the note,” Donahoe says.

Similarly, Donahoe has looked into creating his own finance company, but he doesn’t like the high risk involved in repossessing easily hidden vehicles and then turning them into cash.

Honda Marks 50th Anniversary With 11 New Units
In recent years, fairly or not, Honda has earned a reputation of not introducing as many new units as other OEMs.

“Well, Honda is slow to react,” Donahoe admits. “They have always been very conservative.”

Our conversation turns, naturally enough, to Honda’s late entry into the side-by-side market. “The Big Red that we have is a fantastic MUV,” Donahoe says. “It truly is, but it appeals to such a niche market within the MUVs because we don’t have a four-seater. We don’t have a sport model. If you want a workhorse, we’ve got the best one probably, but as far as sport riding or the family that needs the capacity to hold more people, we’ve missed some sales.”

Donahoe refers to the wide selection offered by Polaris. “And they’re selling a bunch of them,” he says. “Maybe we’ll see some new [Honda] ones come out in the future. I don’t know.”

Ironically, given its reputation, Honda has 11 new or revised motorcycles and scooters for the 2010 model year, its 50th in the United States.

Donahoe is excited. He particularly likes the VFR1200. “It’s a sweet ride,” he says. “It’s going to be very accepted. But it’s going to be so expensive. That’s the only problem.” (Honda has since announced a $15,999 MSRP.) “But technologywise, man, we got to sit on it out there, and it’s nice.”

Donahoe also is confident about selling the VTX1300 customs, the new Shadow 750s and the NT700V touring bike. “I think that bike will do pretty well,” he says. “I had a salesperson take it home over the weekend, and he said it’s awesome.”

So assuming the market bottomed out this past season (cross your fingers), Honda is set to have a decent golden anniversary.

Says Donahoe: “Hopefully, if the market will rebound on the street, I think we’ve got some product that will meet demand.”