Spending spree at dealerships

The owners of the former Cadillac Hummer of Mahwah, N.J., learned three years ago that their Quonset-hut-style showroom and service center, which they had just built to Hummer's design specifications for $9 million, would have to be almost completely renovated.

Cadillac's parent, General Motors, told them that the Hummer division was about to be sold and that they would lose that franchise, recalls Tony Fernandez, the principal dealer for the company now called just Cadillac of Mahwah. "All we had left was Cadillac," he said.

The former Hummer showroom had to be refurbished inside and out to the manufacturer's exacting standards, or else Fernandez would be cut out of crucial cash incentives other dealers get under GM's Essential Brand Elements program, part of its post-bankruptcy turnaround plan.

So, in the past year, at an additional cost of about $1.2 million -- financed with a second mortgage -- a drop ceiling and black floor tile were installed, exposed steel support columns were covered with sheetrock and the exterior received a coat of beige stucco.

Now Fernandez and his partners are paying two mortgages, and the standards compliance incentive pay he receives from GM, which is tied to facilities upgrades, customer satisfaction, employee training and other metrics, does not nearly cover the costs, he said.

"We are very happy with the product, but we would like to see more support given to the dealers," he said. "The last quarter was the most profitable in the history of GM, but not for the dealers. They keep demanding more and more."

Car dealers like Fernandez have been spending millions of dollars on showroom and service center upgrades to comply with manufacturers' brand-strengthening initiatives -- sometimes reluctantly -- as U.S. auto sales continue to rebound amid improved consumer confidence.

But some dealers, especially those at GM, believe they are not getting a fair share of the spoils and that carmakers' demands to modernize and standardize showrooms are unnecessarily expensive.

Although they are asked to pay for the improvements, they have no assurance of a return on their investments, said Jim Appleton, president of the New Jersey Coalition of Automotive Dealers.

"Sometimes [dealers] embrace the plans, but other times they say, 'You can't be serious,'" Appleton said. "Manufacturers have every right to manage their brand and image, but dealers are separate businesses, and they have to be free to make investments that make sense."

Dealers who sell BMWs, Lincolns, Audis and other brands have also been under pressure from manufacturers to upgrade facilities, he said. Dealers are closely watching a federal court case in Florida that could affect how manufacturers do business with dealers.

Norman Braman, the former owner of the Philadelphia Eagles, claims GM's requirement that his Cadillac dealership remodel using limestone from a particular supplier on the exterior walls was unreasonable. The lawsuit says that the structure could not support such heavy material and that he would have to demolish and rebuild to meet the requirement. So he used a lighter material.

GM, which emerged from bankruptcy in 2009, said 3,400 of its 4,400 U.S. dealers have committed to participate in the Essential Brand Elements program, which includes initiatives to improve training and customer service and standardize websites as well as upgrade facilities.

About 1,000 dealers have completed or have begun facilities upgrades, said Tom Henderson, a company spokesman.

"We think it's a fairly generous program," he said. "A majority of our dealers are pretty satisfied with it."

The program, introduced three years ago, was scheduled to continue until 2014 but has been extended to the end of 2016.