Ford Canada hopes to reduce its dealership numbers by dropping its mercury brand

"For the last 50 years, Ford said the Mercury franchise was unique and different," Bedard says. But Gaunt's core-franchise plan changed the rules. "Now they're saying, because we didn't support the Lincoln Mercury franchise and it evolved to a lot of common product, they're going to make us all Ford dealers.”

Report on Business magazine
November 26, 1999

Ford Canada hopes to reduce its dealership numbers by dropping its mercury brand.
So far, all its done is ignite a family feud.
John Lorinc

Al Palladini's Pine Tree Lincoln Mercury, its huge lot lined with minivans, pickups and sport utility vehicles, is a family business with flair. Located in Woodbridge, a suburb of Toronto, the operation is, perhaps, the best-known dealership in Ontario, famous for hokey ads that declare "any Palladini is a pal of mine." Al parlayed a knack for selling trucks into a political career as Ontario's Economic Development Minister. His son Franco, a sharply dressed replica of his father, runs the shop while the paterfamilias is serving the public. Franco has nine relatives who are also "pursuing automotive careers" there.

The future looks bright for the Palladini clan. Yet Franco's bullishness is also due to a key change in his business. On Oct. 1, the dealership became Pine Tree Ford Lincoln.

The name change is the result of Ford Motor Co. of Canada Ltd.'s "core franchise" policy to eliminate all 124 Mercury dealerships across the country by "rebadging" them as Ford Lincoln stores. Behind the buzzwords, the company's agenda is to substantially scale back the Mercury brand in Canada, cut dealers and sink equity investments in some of those that remain, all with an eye to improving Ford's retail profile.

For Pine Tree, this will mean more sales and a clear identification with Ford. While Canadian Mercury dealers have long had the right to sell Ford trucks and compacts as well as Lincolns, Palladini can now peddle higher-end Ford cars such as the Taurus, the Crown Victoria, the Mustang and the Thunderbird. So now, when customers drop by for a Mustang, as they often do, Palladini's sales guys won't have to send them off to Summit Ford in Rexdale. "Instead, they'll come here," says Franco, grinning cheesily. He waves aside the suggestion that his gain is Summit's loss. The important thing, he asserts, is that any sale is good for Ford. "It's still within the family."

Not according to Del Bedard, who owns a Ford dealership in Etobicoke, a Toronto suburb. He's the guy who may lose sales to four neighbouring former Lincoln dealerships. A heavy-set, cautious man, Bedard started in finance but shifted to selling cars, became a general manager, then a dealer. He chose Ford
in 1971 because it made him the best offer, and ran Thorncrest Ford for 14 years. In 1985, he redeveloped his lot into condos and merged his store with a truck dealership.

The lobby of Thorncrest Sherway Ford's showroom tells of Bedard's success: On display are various company awards for sales and customer satisfaction. Bedard's beef is that all he gets out of Ford's core franchise policy is the right to sell Mercury Cougars and Grand Marquis at a time when the company admits it doesn't intend to promote Mercury in Canada. But he won't be able to sell Lincolns.

Bedard regards Ford Canada's direction as so discriminatory that he and three other dealers have launched a class-action suit charging that Ford is breaching the part of its franchise agreement that guarantees dealers exclusive territory. The suit, he laments, is the most distasteful thing he's ever done—"like suing your wife." One of Bedard's co-plaintiffs, an Ottawa Ford dealer whose daughter runs a Mercury store nearby and is now in direct competition with her father, told Bedard, "My situation is untenable.

I feel like I've been ridden hard and put away wet."

The unhappiness within the Ford family these days traces back to 1997, when executives at Ford's world headquarters in Dearborn, Mich., launched a radical redesign of its retail network, a move that challenged the comfy status quo that car dealers have long enjoyed. The impact of this broadside showed up in the 1998 dealer satisfaction survey by the Canadian Automobile Dealers Association. Ford ranked dead last. The company didn't fare much better in similar surveys conducted in the United States. Says one Toronto dealer: "There's a lot of anxiety."

And so there should be. Car dealers exist in a kind of time warp, in which the orthodoxies of modern retailing don't apply. The system works like this: Ford grants franchised dealers the right to sell its cars, use its logo and promote its financing deals. The manufacturer sells vehicles to the dealers on a wholesale basis, along with a suggested markup, but the dealer doesn't always get what he wants when he wants it. That's up to the factory's dealer-allocation managers, who have been known to play favourites, delivering desirable models to their pals while shortchanging others. Having fought for stock, the dealers take it out on customers, haggling theatrically and peddling overpriced extras such as rust-proofing and extended service warranties. Dealers have long held to the fiction that they struggle by on razor-thin margins, in the low single-digit range. But for consumers, who get it coming and going, the exercise is about as enjoyable as root canal work.

One of the biggest threats to dealers is the Internet, which makes price comparison easy. Another potential challenge is the U.S. dealer chains, some of which offer customers a slightly more sane, no-haggling buying experience.

All automakers face these pressures, but Ford has responded by trying to persuade dealers to improve service and sell accessories, and it has taken a hard-nosed stand to get what it wants. The company in 1997 embarked on a campaign to merge groups of dealers into larger entities, known as Auto Collections, with Ford taking an equity stake as a means of getting its way. The move, intended to cut costs by combining back-office functions and capital expenses, was Dearborn's reaction to the growing influence of publicly traded chains such as AutoNation Inc. It hasn't worked that well. Auto Collections have sprung up in cities such as Rochester, N.Y., Tulsa, Okla., and Salt Lake City, Utah. But Ford hasn't had much luck extending the concept in the United States. Two years after opening the first of its Auto Collections, Dearborn mothballed the U.S. program last fall (company officials say it has only been slowed down).

The main stumbling block has been old-time dealers who fear competing against giant dealerships in which Ford is an investor. "They've done everything they can to eliminate the dealer body," complains Edwin Mullane, a veteran New Jersey Ford dealer. He presides over the 20-year-old Ford Dealers Alliance, which represents a third of all U.S. franchisees. "They want to run the retail end of the business. They've got someone up there who thinks the dealers are a bunch of bums."

Neither have Canadian dealers relished the prospect of becoming mere employees in a corporation, especially if several dealers have to co-exist with one another as well as with Ford. "Too many oars in the water," grouses Bedard.

Ford Canada's president and CEO, Bobbie Gaunt, 53, has the unenviable task of negotiating the terms and conditions of the company's retail revolution as it plays out north of the 49th. "These decisions aren't taken lightly," she says, striving to hit a diplomatic note. "If you're going to undertake it, you'd better get it right." Canadian Ford dealers have their doubts.

A Washington, Pa., native who started out in Ford's management training program more than 25 years ago, the low-key Gaunt is a rising star. She established herself as a marketing whiz while working on the sleek redesign of Ford's F-series pickup trucks.

Since she arrived in Oakville, Ont., in 1996, the company has bought a majority stake in Young Drivers of Canada and negotiated a groundbreaking contract with the Canadian Auto Workers. However, the Canadian division's performance has slumped on her watch: Car sales are down and the company has lost its two-year lead in the fiercely competitive truck segment.

In 1998, Gaunt began shaking up Ford's Canadian dealer network. One long-standing problem persisted: Ford Canada, compared with General Motors of Canada Ltd. and DaimlerChrysler Canada Inc., has far too many outlets. There are 577 Canadian Ford stores. While the dealer count has dropped over the past decade, Ford believes there are still too many, given the intense competition in vehicle retailing. Gaunt cites Volvo, which Ford bought last year, as a contrast to the waste in Ford's retail network. Volvo moved 9,013 luxury vehicles through only 47 dealerships in 1998; Canada's 124 Mercury dealers sold just 3,332 Lincolns. "There's too much cost in the distribution channel," Gaunt says, explaining that an oversized dealer body ties up capital that could be used to bolster marketing efforts or to invest in improved showrooms.

How many are too many? Gaunt won't say: "I don't want to put a number out there and have [the dealers] scared to death.''

Gaunt can't claim authorship of the plan to cut dealerships. But the scheme to transform Mercury dealerships into Ford Lincoln stores is a made-in-Canada plan, and one curiously at odds with Dearborn's plans to boost its support of the Mercury lines in the United States. Unveiled in the fall of 1998, Gaunt's franchise plan is one of those corporate policies that comes fully loaded with a variety of agendas, some obvious, others less so.

A prominent feature is Ford Canada's intention to scale back the Mercury brand on grounds that it foments consumer confusion. Today's Ford Taurus and Mercury Sable are virtually the same car. To Gaunt, duplication diluted brand recognition. As one Ford dealer says, it doesn't make sense to run Taurus and Sable ads on alternating days when you can generate more bang for the buck by throwing all the promotional funds behind the Taurus.

A year ago, Gaunt informed dealers the changeover would take effect Oct. 1, 1999. But during the yearlong run-up, Ford Canada officials quietly sounded out dealers on a Canadian version of Auto Collections in 12 markets across the country, including Toronto, Winnipeg and Edmonton.

Ford has thus far orchestrated only one Canadian Auto Collection, in Quebec City, a market that definitely needed some work. Ford's 8% share in that car market was its lowest in any Canadian urban area, and Quebec City's dealers had been involved in a major feud, complete with ruinous price wars. Gaunt says the five stores — three Fords, two Mercurys — have lost $5 million since the mid-1990s. Gaunt decided Ford should either get out altogether or take an entirely different approach. Ford took the latter course, consolidating all five outlets and taking a controlling stake in the new entity.

The new outlet boasts three separate showrooms: one for Lincoln and one for Jaguar, another Ford division, and one for Ford cars and trucks. The company wants to test-drive some merchandising gimmicks in this Auto Collection: The Jaguar display is done up in greens and mahogany, with a fireplace and a cappuccino bar. The truck section has granite floors and country music.

While Gaunt was touting Dearborn's Auto Collection strategy to Canadian dealers, she also had to contend with the historical quirks of Ford's retail presence here. For years, Ford and Mercury dealers existed separately. In the United States, Mercury has always enjoyed a distinct identity; in Canada, the brand had far less visibility. Because of Canada's large size and small population, Mercury dealers were allowed to sell Ford's popular pickup trucks. When urban Mercury dealers found themselves with no viable Mercury product in the '80s, Ford Canada granted Mercury dealers the right to sell the Ford Escort. "It wasn't a big deal," recalls Del Bedard. "But what it did was set the precedent of Mercury dealers selling Ford car products." Over time, entrepreneurial Mercury dealers such as Al Palladini got rich by selling Ford minivans, F-series trucks and Ford's sport utility vehicles—in short, by cannibalizing the Ford dealers. Prior to the changeover, company officials estimate that Ford-branded vehicles accounted for something on the order of 87% of Mercury dealer sales.

Despite the overlap, Ford Canada has always treated the Ford and Mercury franchises as fish and fowl. Ford dealers, for instance, have a provision in their franchise agreements that Ford can't locate a new store within 15 kilometres of an existing outlet unless market studies prove unmet demand. But the rule didn't apply to new Mercury dealers; over the years, Ford has located

Well over 100 Mercury dealers — near or next to — Ford stores. (In Toronto, there are 16 of each.) Ford dealers had no say because the Mercury dealers operated under a separate franchise agreement. "For the last 50 years, Ford said the Mercury franchise was unique and different," Bedard says. But Gaunt's core-franchise plan changed the rules. "Now they're saying, because we didn't support the Lincoln Mercury franchise and it evolved to a lot of common product, they're going to make us all Ford dealers. They had done absolutely no research to support their premise." Responds Gaunt: "By collapsing the Mercury franchise, we have not added dealers. The Ford oval has been on every one of their buildings."

With the Oct. 1 deadline looming, Bedard and other disgruntled Ford dealers spent the first half of 1999 pushing Gaunt to reconsider. "It's not my divine right to be a dealer, but they want me to pay for their past sins," he says. The dissidents even went over Gaunt's head, and fired off letters to Ford's CEO, Jacques Nasser, and chairman, William Clay Ford Jr. Says Bedard: "We wanted to make goddamn sure that it wasn't Bobbie Gaunt going off half-cocked. It was apparent she had the backing."

By last summer, the dispute had escalated to the point that some Ford dealers had formed an association and hired a team of high-powered lawyers, including Sonja Falkenberg, the former head of legal affairs for the Canadian Automobile Dealers Association (CADA), Canada's car-dealer lobby group. Bedard's lawyers advised him that the proximity question was his last chance to stop Ford from gutting his franchise agreement.

The suit was filed in an Ottawa court in late July. Bedard says they only needed four plaintiffs, but he predicts more will throw their support behind the suit once a judge makes a ruling on whether or not they constitute a class. Bedard won't say how many dealers are waiting in the wings, but, he states, "I have yet to talk to any dealer who didn't believe that we should take action." Take this with a grain of salt, however: A Western Canadian Ford dealer who has a Mercury store in the vicinity says he's not interested in Bedard's fight because he doesn't believe the changeover will affect him. In fact, he regards the dispute as an unwelcome interruption: "You don't want to have distractions on an ongoing basis."

Once legal manoeuvring was under way, however, it took Ford officials just a month to change gears. On Aug. 26, Gaunt unveiled a new Ford offer during a broadcast to Ford dealers on the company's internal video network. The show featured Gaunt and a team of executives, a couple of dealers and a representative of CADA. Ford officials said they had identified 26 instances in which Ford and Mercury dealers were within two kilometres of one another — and competing unhealthily. After Oct. 1, Ford announced, when both would be Ford dealers, these outlets would face two options aside from the status quo: merge or move. The owners could qualify for no-interest "loans" of $500 to $700 per vehicle, based on combined retail volumes averaged over the past three years. Gaunt, conscious of not appearing to drive over the dealers, made a point of crediting CADA with proposing the scheme. Still, it looked as if Ford was trying to buy its way out of a potential legal swamp. "They blinked, didn't they?" Bedard says. Gaunt replies the timing was "unfortunate," but insists the offer has nothing to do with the lawsuit.

The company's deal included a number of other major shifts in the way it intends to manage dealers. In preparing to revamp the franchise agreement, Gaunt's executives have laid out new methods for evaluating dealer performance, based on sales, profits and other quantifiables, something that's never really been done. The results, they said, will determine whether they'll qualify to buy new outlets and name their own successors—always a big deal with dealers such as Franco Palladini, who wants to inherit the family business. Ford officials also put the franchisees on notice for the first time that if their stores weren't meeting the performance criteria, the company would either buy a minority stake or impose a "performance contract."

The goal is to persuade neighbouring dealers to negotiate mergers so Ford Canada doesn't have to start axing dealers to reduce their number. Gaunt admits this is a 180-degree about-face for Ford. In the past, the company discouraged dealer mergers. The reason: The consolidated dealerships didn't reinvest the savings, but chose to take a bigger profit — and lost market share. In short, good for dealers, not good for Ford. Under Gaunt's plan, the company will make damn sure that if dealers join forces, they'll plow the savings into factory-backed retail programs, such as Fast Lane. Ford hopes that from such consolidations in many markets — especially in smaller communities traditionally served by both Ford and Mercury dealers—one large Ford Lincoln store will emerge.

Gaunt hopes all this upheaval will sort itself out within a year. But Bedard and his co-plaintiffs don't seem interested in declaring a truce just yet. Ford's merger incentives may not work, either. Franco Palladini thinks the dealers facing shotgun weddings will have real trouble exchanging vows. "If they're smart, they'll come to good terms," he says, adding that it's a tall order. "Let's face it: When you own a car dealership, you have a big ego."

What impact will it all have on consumers? Bedard says his customers couldn't care less about his legal fight with Ford. But there are clearly broader implications to the company's bid to pare its "retail capacity." Ford believes that fewer, larger, more professionally managed dealers will benefit consumers, even in markets where only one Ford dealer remains. Gaunt argues unconvincingly that this development won't lead to higher prices. "While there will be only one dealer representing Ford and Lincoln in a market, there are other competitors. …It isn't as if there is a monopoly."

Bedard, who may well be angling for the best buyout offer he can get, is naturally dismissive of the company's attempts to force the dealers to fall in line. "Can you imagine Ford controlling the retail market and setting prices? Hellooo? Is that a consumer benefit? I don't think so." Like every other car dealer, he maintains — despite what customers might think — that the consumer wins when there are plenty of dealers out there "hooting and hollering and competing."

If nothing else, they're certainly hollering.


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