‘One too few’ at Audi is key to restore dealer profits

Audi‘s record U.S. sales streak continued last year despite parent company Volkswagen‘s diesel scandal, no major product launches and one of the oldest lineups in the luxury business.

Yet the brand not only surpassed 200,000 U.S. sales for the first time, it did so five years ahead of its original plan. Dealers have responded with $1 billion in new facilities since 2008, and another $1 billion investment is planned through 2020.

Audi dealers have challenges this year, too, says Ralph Mauro, 59, chairman of the Audi National Dealer Council and president of International Autos Group in West Allis, Wis. Audi dealers sacrificed some profitability last year to get to 200,000 sales, he says. Inventories need to be reduced, and profits need to rebound.

Key launches such as the Q7 crossover and A4 sedan lineup will help. Mauro spoke with Staff Reporter Ryan Beene.

Q. How did Audi dealers fare in 2015?

A. Based on what we had to work with, I think we fared excellently. At the beginning of the year, [Audi of America President] Scott Keogh met with dealers around the country in roundtable meetings. He described 2015 as a challenging year. We had older products. We didn’t have any major product launches. We were at the end of the life cycle on a number of our vehicles. And after coming out of 2013 and 2014, record-breaking years, and after setting an objective of 200,000 without any product launches, here was an opportunity in 2015 to get to 200,000 vehicles five years ahead of when they originally projected.

The choice that Scott Keogh gave us was, we can either back off, not continue to move forward and lose market share and lose that momentum that we had, or we could keep the pedal to the metal and sell to the wall, even with an aging line.

We sacrificed some profitability to get there. We sacrificed some gross profit to get there, which led to a lesser return on sales than we’ve had in some of the recent years.

But I think it was the right decision for the dealer body and the right decision for Audi.

What are Audi’s 2016 expectations, given that it’s launching key products such as the redesigned Q7 and A4?

We will continue to see increases in sales. We’re hoping to see increases in our profitability and an individual dealer’s return on sales. The Q7 is an absolute home run. Demand definitely exceeds supply on that vehicle, and that tends to be a pretty good thing when it comes to gross profit.

The A4 is being launched as we speak. Unlike a lot of product launches, we’re going to have tremendous availability of that product and great programs on the cars, high residuals and low interest rates. That car is positioned to do extremely well as a launch product.

How will profitability improve this year?

Audi announced a new loaner program, which should help with our profitability. It gives us the ability to put more loaners into service and to turn our loaner fleet quicker and more profitably than we ever have in the past.

In addition to that, one thing that has absolutely helped our bottom line for dealerships is our fixed operations. Audi launched a building facility program a few years back, and one of the main concerns was, they’ll get us the vehicles to hit 200,000 units here, and more, but will we have the service capacity? Because of the building plans and the commitments the dealers have made to facilities, we’re all seeing tremendous increases in our fixed operations.

How much has fixed-operations business grown?

In my particular case, we have built two new facilities in the last 12 months. Both of those facilities have seen a 20 to 30 percent increase in fixed-operations sales and gross profits.

How have Audi dealers been affected by the 3.0-liter diesel emissions violations?

Much less than anyone would have imagined. Nationally, I believe, it’s only 5 percent of Audi sales; it’s a little larger in California and a little less in certain parts of the Midwest and East Coast. But what was originally a major concern, we’ve seen very little effect in our showroom traffic and our customer goodwill.

When you talk about diesels, it seems that Volkswagen was much more heavily affected. It’s almost like it’s a Volkswagen problem, and it’s such a small part of our sales that we haven’t seen the impact that we thought there may be.

The addition of the A3 e-tron helps with that, even though I think it’s a product that we probably need to relaunch because we didn’t have enough of them in stock when it originally launched.

I think Volkswagen often is driven by people looking for a TDI, and that may drive them into VW showrooms. I think in our case, our customers who bought TDIs were Audi customers who chose TDI as an engine, much more than they came in as TDI customers who chose Audi. It was a little different for us.

Customers have been extremely patient in waiting for a fix and to find out what the future of TDI is with Volkswagen. But for those customers who want an answer and want an answer now, we’re doing whatever it takes to keep these customers happy and in the family.

Do you think diesel will have an important role in Audi’s lineup going forward?

I think it was a very small part of what we did. With or without TDI product, I don’t think that will stop Audi from continuing their sales increases and continuing their leadership in increased sales that they’ve had for the last few years.

Diesels account for around 20 percent of Q7 sales and more than 10 percent for Q5.

Have you been able to make up that lost volume with gasoline-model sales during the diesel stop-sale?

Definitely. It’s because people were first motivated to buy a Q5 or Q7, and their secondary choice was selecting an engine type. Especially with the Q7. The new Q7, once again, the demand is much higher than supply at this point in time. It’s really not a question of the engine, it’s a question of, “Can I get one?”

“I think it was impacted across the board. That’s not to say that Audi dealers weren’t extremely profitable, but it was impacted. We were above 3 percent return on sales prior to 2015, and we probably fell below that.”How significantly was profitability impacted last year?

Will Audi increase Q7 shipments to the U.S.?

As a dealer body, we’re clamoring for more Q7s. One of the things that Scott Keogh and his management team has told us is in order to help our profitability, they believe one of the things to do is help the mix of models that we receive to make sure that when we do have a product where the demand exceeds the supply, they find a way to increase that supply. And in addition to that, when we have a product where the supply exceeds the demand, they find a way to adjust that supply to meet demand.

For years, Audi was always a product that we had one too few, where a lot of other luxury manufacturers had one too many or a lot too many. The commitment that management has made to the dealer body through the dealer council is that they’re committed to being a franchise that has one too few, not one too many.

Keogh says Audi dealers have another $1 billion in facility investment planned through 2020. Why is there such eager investment from dealers?

I think it’s to meet the demand for the product. Once again, when you go from 100,000 to 200,000 vehicles in such a short amount of time, it’s amazing. That increased fixed operations.

There are also new dealerships opening, but not a lot. My dealer group happened to be fortunate enough that we’re opening up a brand-new Audi store in Bloomington, Minn. We’re putting a 100,000-square-foot facility there. You’re seeing some of that around the country where Audi is not represented or not represented well.

The majority of it is coming through dealers who are redoing their facilities because of the increase in sales, or dealers who are finally getting around to make that investment because the demands on their service or sales facility has put it under stress, so they’re willing to make the commitment. With the new product launches we’re looking at in 2016 and 2017, the future is extremely bright, especially when you look at a year like 2015 with no new product launches and probably the oldest model line of any of the luxury manufacturers.

What’s missing from Audi’s lineup?

I think as they continue to expand their electric lineup, that would help. We don’t know what the future of TDI is. It’s important that in the absence of TDI that their electric-car lineup continues to increase.

We have a fuller gamut of products than we’ve ever had before. When you add in A3 to the lineup, that is a franchise all in itself.

Some dealers saw new-car margins get squeezed and new and used inventories increase in the fourth quarter. What are Audi dealers seeing so far this year?

We definitely saw it in 2015. We saw margins and profitability eroded. We saw inventories increase. We’ve seen a little bit of that in the first quarter in January and February, but some of that is seasonal.

But I can tell you this: There’s a demand out there for the new A4. There’s tremendous demand for the Q7. If Audi lives up to their commitment to get the product mix right, I think we’ll get back to seeing by the third quarter of 2016 that we become that franchise that has one too few.

What needs to be done to get there?

We’ve got to clean up some A3 inventory and see what the effect of the A4 is on the A3 and some of our other product lines. It’s our hope that it won’t take away from the A3. Inventories are dropping. We’ve got some work to do to clean it up, but we’re not in as bad of shape as a lot of other luxury manufacturers.

We may get to 210,000 sales … but we can do it more profitably if we have the products that are more in demand in this market.

So Audi is targeting 210,000 U.S. sales in 2016?

One of the things that Audi did was decrease their original projection to make sure that we were that product line that has one too few. They have adjusted their numbers downward, but they are still very optimistic numbers. They’re showing an increase in a market where they believe a lot of the luxury manufacturers won’t see an increase, and that number is approximately 210,000 vehicles.

What was it previously?

Just under 220,000 vehicles. I think it’s a great move.