At the AADA Convention in September there was a very interesting presentation made by Urban Science on the thorny issue of Dealer targets.

Most Dealer Agreements have clauses contained in them stating that a failure to meet targets is a breach of the Dealer Agreement. A breach of the Dealer Agreement may ultimately result in a non-renewal or termination of the franchise, depending on the circumstances. These clauses are, therefore, of critical importance and should be carefully drafted and reviewed by Dealer Councils.
Some Dealer Agreements go into great detail as to how a Dealer’s performance is measured, while others are very vague on how performance is measured and simply state a failure to meet a target is a breach of the Dealer Agreement. The targets themselves are usually set annually and will vary from Dealer to Dealer depending on location. It goes without saying that the setting of targets should be reasonable and considerable thought should be given to the many factors that can affect a Dealer’s performance and ability to meet targets.

Urban Science describe themselves as business scientists, and in relation to the setting of targets and evaluating performance I certainly recommend a scientific approach.

Urban Science describe how they go about target-setting, which includes a consideration of the following factors:

• Number of vehicles an OEM wants to sell.
• Split sales volume by buyer type (retail and fleet), model and month.
• Correct PMA set-up.
• Use VFACTS data, segmentation and buyer types.

The Total Retail Sales Target is then made up of 80 per cent PMA Opportunity and 20 per cent Sales History.

In terms of measuring Dealer sales performance there are three common metrics:

• Dealer Sales vs Target.
• Dealer Sales Effectiveness, which is Dealer total sales divided by expected sales in PMA.

Brand Registration Effectiveness, which is actual brand registrations divided by expected sales in PMA.

Adjustments are made for consumer preferences such as location in a city or rural suburb. It appears to be significantly fairer to adopt a sales performance metric based on sales effectiveness that measures a Dealer against what was actually sold across the Dealer network as opposed to simply looking at a Dealer’s sales against a desired target, which is inherently difficult to predict.

Achieving targets and achieving other metrics set by the distributor is often linked to significant bonuses and other significant incentives. In some situations a franchise may not be profitable without the achievement of the bonus incentives. As discussed above and at the other end of the scale, significant under-performance can lead to a deterioration in the relationship between Dealer and distributor and may ultimately lead to non-renewal of a franchise or termination of a franchise.

Given the importance of these provisions in a Dealer Agreement, Dealer Councils should discuss these issues with the distributors when targets and evaluating performance are next discussed. Once an approach is agreed with the distributor, the next step is to have it accurately drafted in the Dealer Agreement and accurately applied to each and every Dealer when targets are set each year and when performance is evaluated.

Vinesh operates his own legal practice in Sydney and currently advises Dealers and Dealer Councils in relation to general commercial, consumer, corporate, disputes and leasing issues.

 

Vinesh George
Company Secretary
and Legal Council,
AADA