Retail

Brokers gone bonkers

Some dealers rely on brokers to hit their sales targets. “We help them survive,” says Zoriy Birenboym, eAutoLease CEO. (BUCK ENNIS)
MF
By:
Matthew Flamm mflamm@crain.com
May 06, 2018 05:00 AM

Editor's note: This article looks at a problem rampant in New York City, but the fundamental issues apply nationwide. It first appeared in Crain's New York Business, a sibling publication of Automotive News.

NEW YORK — Green and white balloons float above Jeep Wranglers and Dodge Challengers inside Manhattan Jeep-Chrysler-Dodge- Ram. Court papers, however, tell a less cheerful story: In March, the franchisees filed for Chapter 11 bankruptcy protection, citing debt of more than $22 million to their chief lender. The filing included a related Alfa Romeo-Fiat dealership a few blocks away.

The bankruptcy was the second to hit Manhattan's auto row in less than a year. A nearby Jaguar Land Rover dealership that included Maserati and Ford franchises went bust in July.

Industry experts said the two bankruptcies point to a changing automotive retail landscape.

On the one hand are escalating rents in an expensive neighborhood. On the other is increasingly intense competition from automotive leasing brokers, who market themselves on the Web and operate out of modest quarters. The brokers, who number in the hundreds and are concentrated in the outer boroughs of New York, are part of a shift to digital car shopping that includes the growth of Carvana, Vroom and other app-enabled auto retailers.

"I don't want to sound like an alarmist, but I think within 10 years, half of these franchised dealerships will be gone, and not just in Manhattan," said Max Zanan, a Manhattan automotive retail consultant. "Companies like Amazon have trained customers to expect complete transparency. They expect that transparency when they're shopping for a car, and they're not getting it" from dealerships.

For New York dealers, leasing brokers represent the most immediate threat. Dealers often complain that brokers operate outside the law, but the two sectors share a complicated, symbiotic relationship.

Brokers need dealers: Under state law, only franchisees can sell vehicles straight from the automaker. But dealers also need brokers, whose purchases help dealers hit their sales targets and thus receive incentives from automakers.

Brokers appeared in New York decades ago in small numbers in Hasidic neighborhoods in Brooklyn. Some are still rooted in ethnic communities, but they now outnumber the city's dealerships, which are down to 105, 24 percent less than 15 years ago, according to consulting firm Urban Science.

Brokers can thank carmakers for at least some of that growth. Automakers have embraced incentive programs for dealerships in recent years, including stair-step programs, in which hitting escalating targets results in bigger bonuses.

"Many dealers make almost no money on a new-car sale," said Patrick Anderson, CEO of Anderson Economic Group, a research and consulting firm in East Lansing, Mich. "They have to make money on incentive payments from the manufacturer, from service and from auxiliary things, like financing. That's been the situation for the past five years, but now sales are slowing, so the strain is starting to show."

Incentive bonuses can total $1,000 to $2,000 per car, depending on the automaker. Often, dealers hit the targets only by selling a portion of their inventory — pretty much at cost — to brokers. As a result, the dealerships lose out on the high-margin parts-and-service business that's built on relationships with loyal customers. But broker sales get them through each month.

"We help them survive," said Zoriy Birenboym, CEO of eAutoLease, a 3-year-old brokerage in Brooklyn. He has been in the brokering business since he was 16 — half his life.

"The manufacturers give the dealerships very high quotas," he said. "Sometimes they get forced to take on inventory they don't want. They borrow money for every unit, and the interest is piling up. They want to hit those bonuses, and they can't do it on their own. That's where we come in."

Birenboym said he has partnerships with "most of the dealerships" in the tri-state area and can provide buyers with almost any make and model within days. He operates out of a second-story office plus a basement garage to store vehicles overnight. Transactions are handled online and over the phone. One of his 30 or so sales staffers delivers the vehicle to the customer's door.

As Birenboym sees it, eAutoLease is offering a needed service to busy New Yorkers — and it boasts hundreds of five-star DealerRater reviews to prove it. And the dealers he buys from expand their reach. "I am providing customers who would never walk into their dealership," he said.

More than 31,000 vehicles were sold into Brooklyn through brokers in 2016, according to dealership network Bram Auto Group, which looked at sales coming from dealers outside the market. That's more than half of all new vehicles registered in the borough that year.

RETAIL07_180509856_V2_-1_BETPDNCBJTMD.jpg Auto dealers and brokers help each other: Dealers provide vehicles, and brokers help dealers hit their sales targets. (BUCK ENNIS)

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