When trust is broken and done so intentionally, the system breaks down. Lives – and livelihoods – are affected, sometimes beyond repair. In this case, there is no group more impacted than a unique class of American small business owners — independent and franchised dealers, Volkswagen and otherwise.
Any dealership carrying Volkswagens will face losses. Some will be greater than others, but losses nonetheless. Loss of invested time and money. Loss of revenue. Loss of customer confidence. Loss of goodwill. Perhaps worst of all, loss of reputation in the local community. Reputations that have been built and nourished over two and three generations of dealer-owners can be destroyed in days.
And while most of the reputational costs will fall on the shoulders of Volkswagen franchisees, the independents and other new car dealers with Volkswagens in stock also lose as those cars will be slow to sell, if they sell at all.
Worse, those non-VW franchisees have also been placed at a significant competitive disadvantage since the cheating began in 2009. Because of Volkswagen’s deceit, competing dealers selling comparable vehicles missed innumerable sales as prospects purchased what they thought were the “better” VW vehicles. Alas, we now know those vehicles were actually quite inferior.
As for the affected Volkswagens themselves, the economic impacts are clear. There is a daily cost for holding inventory on a car lot and vehicles lose their value while sitting for an extended period of time. Profit margins for both new and used cars begin to dramatically decline after the vehicles are on lot for more than 30 days.
There are costs incurred in holding vehicles in inventory. Formulas can be used by dealers to determine the “Days in Stock Break–Even Point” which identifies the number of days a vehicle can remain in inventory before profitability on that vehicle hits “break-even.” Cars that cannot be sold in a certain time period or at a profit are wholesaled at auction or sold to another dealer.
Dealers either pay cash or use debt (a “floor plan” in industry parlance) to finance vehicle inventory. Regardless of which avenue a dealer uses, each day a car sits unsold on a dealer’s lot, there is a daily cost associated with holding that car.
Most dealerships have a low threshold for adversity; liquidity and cash positions are affected very quickly. For example, having $200,000 in cash tied up in ten to twelve recalled vehicles that can’t be sold can cripple a dealership.
Dealers that rely on debt (floor plan) to finance their operations have even less ability to withstand hardship because payments must be made on the balance of the unsold inventory. A dealership should not have any more money tied-up in inventory than is absolutely necessary. This is why dealers sell vehicles to other dealers, even if the sale is at a loss. Doing so eases cash considerations. Excess inventory levels have negative consequences on cash flow and, consequently, on the ability to meet the cash demands of an ongoing business.
Because of Volkswagen’s Stop Sales Orders, dealers were forced to pull popular models from their lots and have not had the opportunity to sell the vehicles to the public, other dealers or auto auction houses. Thus, dealers’ money has been tied up in inventory with no chance of a foreseeable return. If “floor planned,” the dealers will carry interest and other costs associated with holding the cars during the pendency of the recall. If the inventory was financed with cash, dealers are unable to realize a financial return on the cash tied up in the unsold Volkswagen inventory. Automotive auction houses have, likewise, been forced to carry expenses on vehicles subject to the Stop Sale Order. Finally, there is now a stigma associated with all Volkswagen vehicles and their values have dropped. All of these damages have been caused by Volkswagen’s deceptive actions.
These businesses, their employees and retail customers have been, and will continue to be, harmed by Volkswagen’s deceptive acts, and thus deserve compensation for their economic losses.