Volkswagen Woos U.S. Dealers Devoted to Grow Sales by 83%

Volkswagen AG handpicked a group of 25 U.S. auto dealers two years ago for a three-day trip to its headquarters. Off-road drives in a Touareg sport-utility vehicle and a glimpse at future products were capped by dinner with German beers in the medieval Wolfsburg Castle.

“I don’t want to say we drank the Kool-Aid when we were there, because it was all real,” said Beau Boeckmann, vice president of Galpin Motors, a dealership group in the Los Angeles area. “I came back a believer.”

The Wolfsburg, Germany-based juggernaut is on a mission to become the world’s largest automaker and growing in the U.S., where it has lagged for decades, is crucial to that goal. The best-financed and most enthusiastic dealers -- ones who have few Volkswagen franchises or none at all -- have been invited along for the ride.

Deliveries of Volkswagen brand cars and SUVs surged 35 percent in the U.S. last year to 438,133, the best since 1973. The division has more than doubled its market share since 2007, to 3 percent from 1.4 percent.

Now, the brand’s target is to expand further by 83 percent the next five years. Volkswagen intends to pull this off while keeping the number of dealers roughly the same, a feat that would require sales per store that only Toyota Motor Corp. and Honda Motor Co. have ever mustered.

Sales Target

Volkswagen had 617 U.S. dealerships at the end of last year, only slightly more than the roughly 600 it has had for the past several years, said Jonathan Browning, chief executive officer of Volkswagen of America.

The trips to Germany are part of an effort to persuade stronger dealers to step in where Volkswagen has underperforming franchises. Volkswagen will allow new outlets -- called open points -- on a selective basis, Browning said.

In 2007, Chairman Martin Winterkorn set the target for the VW brand of 800,000 U.S. sales in 2018. By then, the company plans to pass Toyota and General Motors Co. to become the world’s top-selling automaker. As VW closed in on GM in global sales last year, its shares rose 57 percent, compared with 12 percent for the S&P 500 Index.

Volkswagen is one of the sales leaders in the world’s major auto markets. Already Europe’s largest carmaker, it nearly dethroned GM as the best-selling foreign car company in China last year and trails only Fiat SpA in Brazil. Volkswagen’s standing in the U.S., where it is outsold by seven other carmakers, is the anomaly.

‘Love Bug’

After Boeckmann visited Germany, Galpin Motors, which already owns Ford Motor Co.’s top-selling dealership in the world, opened a Volkswagen dealership in August that is also in the Los Angeles area. One of the original “Herbie” Beetles from “The Love Bug” franchise, which began with the 1968 film, greets shoppers from the showroom floor. In just its second month, Galpin was the second best-selling U.S. Volkswagen store.

“This isn’t another one of those big goals that companies put out that doesn’t have anything behind it,” Boeckmann, 42, said in a telephone interview. “They have a plan, they have a way they’re going to execute the plan, they have the people in place, they have the product in place, and now they’re looking to get their dealer body in place.”

Browning, 53, declined to say how many dealerships the company will need to reach its 2018 U.S. target. The company would have to sell about 1,300 vehicles per franchise, a figure referred to in the industry as throughput, to reach its 2018 goal with a dealer network at today’s size. That threshold has been achieved only by the Toyota, Lexus and Honda brands in the years before the recession.

Favorite Acquisition

“Because of our success, we can actually pick and choose the best dealers that are going to help us grow the brand and grow the franchise,” Frank Trivieri, head of U.S. sales for Volkswagen, said in an interview. “If we do have an open point, we can pick the best of the best.”

Volkswagen was the most-acquired franchise among the 10 largest U.S. auto dealership groups last year, according to Presidio Automotive. The San Francisco-based firm advises dealers who are selling their stores.

AutoNation Inc., Group 1 Automotive Inc. and Asbury Automotive Group Inc. combined to purchase seven Volkswagen franchises last year in Texas, Florida and Georgia. Hyundai Motor Co.’s namesake brand was the second-most sought after, with four acquisitions in 2012.

“If you’re looking for a franchise you can buy low and hopefully ride up with, it’s hard to find a better opportunity than VW right now,” Alan Haig, a managing director at Presidio Automotive, said by telephone. “There was a time when profitability was very low, and nobody wanted to own one because it just simply wasn’t worth your time.”

Dealer Sales

Volkswagen’s U.S. sales per franchise climbed to 710 units in 2012, up from 543 a year earlier and 437 in 2010, according to the company. The Volkswagen division had just 368 car and light truck sales per franchise in 2009, according to the Automotive News Data Center.

Toyota and Honda, Japan’s two largest automakers by U.S. sales, have consistently ranked highest in sales per franchise, data compiled by Automotive News shows. Toyota City, Japan-based Toyota sold 1,169 cars and light trucks per franchise in 2011, followed by Honda at 988. The last time both sold more than 1,300 cars and light trucks per franchise was 2007.

By comparison, Hyundai sold 796 cars and light trucks per franchise in 2011, Ford’s namesake brand delivered 648 and GM’s Chevrolet sold 575, according to Automotive News data.

Crucial Metric

Throughput is a crucial figure to dealers. In addition to revenue from selling new cars, the sales of those vehicles lead to high-margin parts and service business, said Kevin Tynan, a senior analyst for Bloomberg Industries in Skillman, New Jersey. Volkswagen will have to exploit the benefits of limiting the size of its dealership network without missing sales because it doesn’t have enough outlets in some markets.

“You want a healthy, profitable dealership footprint that’s not competing with itself, but you also want the ownership experience and your footprint to cover as much of the market as you can,” Tynan said in a telephone interview. “You don’t want to be losing sales because people can’t get back to you when they need service or they need a new car.”

Last year, 90 percent of U.S. VW dealers were profitable, Browning said, up from 83 percent in 2010. The company is planning a third annual dealer retreat in Wolfsburg this March, said Bob Kim, general manager of Volkswagen dealer network. Not all invitees end up becoming a dealer for the brand, he said.

‘Dating Process’

“I always refer to it as part of the dating process,” Kim said in a telephone interview. “We ask you out on a date; if you like us, call us back, maybe we’ll go on a second date.”

Dealers are benefiting from the addition of a plant in Chattanooga, Tennessee, in mid-2011 that builds Passat midsize sedans, plus redesigns of the compact Jetta in 2010 and Beetle last year. A new Beetle convertible went on sale last year.

U.S. sales exceeded 575,000 Volkswagen and Audi cars and SUVs last year, beating the company’s objective of 500,000. Browning said the automaker is targeting at least 600,000 deliveries this year on its way to 1 million by 2018.

The next leg of growth for the company follows the same pattern: new product and additional local production. Volkswagen’s best-selling Golf hatchback is scheduled to begin production in Puebla, Mexico, in early 2014. Audi is scheduled to open another plant in the same area southeast of Mexico City to assemble the Q5 SUV in 2016.

More Local

Researcher LMC Automotive forecasts that Volkswagen group production in North America will climb to almost 1.12 million by 2018, an increase of 47 percent from 761,328 units last year. Local production will reduce cost and help protect the company from currency swings, Browning said.

“That has been one of the hindering factors in the past as to why VW hasn’t been able to be such a strong presence in the U.S. market,” he said.

Volkswagen also will look to fill holes in its product lineup, particularly with small and mid-size SUVs. The company can “do much more” with Tiguan, its compact SUV, Browning said. And the automaker showed a concept called the Crossblue at the Detroit auto show last month that could fill the gap in the midsize segment between the Tiguan and larger Touareg.

The Crossblue “absolutely is a signal of how we would plan to approach that mid-size SUV segment,” he said. LMC’s forecasts assume that the concept will translate into a production model in 2014, with expansion of the Chattanooga plant.

“Of any automaker who’s said ‘we’re coming for the U.S.’ in recent years, they have the best chance of executing,” Bloomberg Industries’ Tynan said. “If there’s anybody to be afraid of or be confident in, it would be VW, even before a Hyundai or Kia. They have that scope and scale and experience.”

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