Over the past 7 months Ford dealers have been on a rollercoaster ride tied to the comments of Ford’s CEO, Jim Farley, who has made a habit of voicing plans and theories on automotive retail that are inconsistent with logic, in some cases, and inconsistent with franchise laws in nearly all cases. At some point, the words alone are enough to damage Ford’s brand, as it relates to dealers’ blue-sky values. In his recent public comments and policies, he is actively targeting the very distribution network of dealers who have made Ford the juggernaut brand that it is today.
Recently, Ford has been transparent with their focus to EV markets and how dependent it will be on dealership’s networking to sell these types of vehicles. Although this might sound promising, it is not, as there is no longer the clear path for the EV company and the internal combustion companies to survive separately and equally, as originally pitched by Farley. In some cases, such as California and perhaps New York, the ability to sell internal combustion powered vehicles in 12 years may well be a legal impossibility. Meaning that in those states, a Ford dealer must forfeit the economic benefits of their franchise in 2035 unless they opt into Ford’s recently announced EV program. This is a de facto termination notice for the hundreds of Ford dealers in those two states.
It is possible for some, including Farley, that this is an opportunity for Ford dealers to invest in the future of the industry. With an “investment,” the investor hopes to earn a return. The programs presented to dealers do not allow for any return on investment. If a dealer is going to dedicate themselves on becoming EV certified, the options will be a Model e Certified or Model e Elite type of dealer, which will give them the ability to sell EVs beginning in 2024. The Model e Certified option allows dealers to sell 25 EVs per year, but the dealer will neither have any inventory or demonstration vehicles. Pricing and gross are determined by the factory. This lowest option comes with a $500,000 price tag. If the gross is anything like the Ford Mach E ($500 GPRU), then the economics simply do not exist. A dealer would need to sell 1,000 units simply to break even with the upfront investment and given that the dealer is limited to 25 units per year, it would take 40 years before the dealer recouped their cost. This first option is merely to give dealers the false sense that they have an option.
The second option, the Model e Elite dealer, will be allowed to have some inventory, demonstration models, and an ability to sell EVs as allocated by Ford. The required dealership investment for this option is $1,200,000. Ford informed dealers that they will provide proformas to them detailing expected sales volume, chargers needed, potential profits and the like. Assuming the profit is like today’s Mach E, a dealer would need to retail 2,400 EVs to break even on the up-front investment. While the e Elite program doesn’t explicitly limit the dealer to a fixed allocation each year, Ford’s own EV production guidance implies that the average dealer could expect to see no more throughput than 300 EVs annually, which suggests an 8-year payback.
Despite being a questionable return on investment, the large amount of up-front investment is financially difficult or impossible for many dealers to afford. In a sense, there are two different scenarios in which Ford dealers are truly being stripped of their franchise rights. The first category would be tertiary market dealers or dealers in” no call” markets/stores. That is, the dealer who has earned a decent living serving their local rural communities for decades. For them, an investment of $1.2 million is an impossibility. A requirement to invest 7-figures in their stores is tantamount to a termination notice in the mail. The termination may not be effective immediately, but there certainly is no “blue sky” in the point any more as that point is just running out the final few years of ICE production.
The second scenario are the dealers who, to tow the company line, has recently invested millions (in many cases tens of millions) in a new facility, showroom, service facility, and parking lot at the request of Ford. While Farley is asking dealers to cut $2,000 in per-unit selling costs, there was likely a dealer somewhere in this country having a discussion with their factory rep about how many 10’s of thousands of square feet their new facility would need to be to be compliant with Ford’s image standard. That the new dealership would be required to have parking for 300+ units in order to earn their full allocation of new vehicles. It seems disingenuous and harmful for Ford to have required these multi-million-dollar facility investments over the past few years only to now tell dealers that they need to cut overhead AND that dealers won’t hold any inventory under the new EV paradigm.
The two scenarios in this summary touch on only the dealers who are, in practice, having their franchises practically terminated, or are feeling the economic damage of an OEM pushing inconsistent corporate policies solely at the dealer’s expense. We did not even begin to assess the operators of large Ford franchises and groups, who are fully capable of affording the up-front cash outlay of the programs. In their case, the real pain of the program is that they will ultimately transition from retailing ICE F150’s at $4,000 GPRU to electric F150’s at $500 GPRU. There is no question the change in Ford’s retail strategy will harm this group of dealers as well.
Our initial assessment of Ford’s program is that this is their attempt to eliminate their smaller market dealers. Rather than follow Cadillac and Buick in offering financial buyouts to their dealers, Ford has instead opted to expense their dealers out of existence. Make no mistake, many Ford dealerships are worth less now after Farley’s comments and corporate directives. We are urging all Ford dealers to consult with their dealer-focused legal counsel. If you currently use a general counsel without extensive expertise in franchise matters, Withum’s Dealership Services Team would gladly provide to you a list of experienced legal counsel.
Read our recent article, To Model e or Not to Model e? That Is the Question, for more information on this topic.
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For more information on Ford Model e options, please reach out to Withum’s Dealership Services Team.
