The Toyota recall of 2010 was a (likely baseless) black mark on a respected brand. But, recalls happen all the time – and often they are a valuable opportunity for dealerships to make money and win back customers.
Toyota’s “sticking accelerator” recall was distinct from other, typical recalls in several ways:
1) Gravity of the defect: the mechanical defect forcing the recall was thought to have already killed people. This wasn’t a precautionary measure but a reactive one.
2) Negative press: national media aggressively ran with the “evil OEM” story, which will hurt Toyota’s new and used car sales for years to come.
3) Breadth of recall: Toyota’s recall applied to numerous models and years. According to one official Toyota statement, Toyota dealers were “reported to lose $1.75 million to $2 million a month in revenue from new and used versions of the models that (weren’t) allowed to be sold.”
4) Ongoing investigation (related to #3): While the Transportation Department’s 10-month investigation into Toyota accelerators was underway, the cause of the problem had not been identified conclusively. Had the root cause of the sudden acceleration been known, then Toyota technicians at each dealership might have been able to repair on-site vehicles and enable continued sales.
All that said, recalls happen all the time. Most are precautionary and relate to minor mechanical issues reported by a tiny percentage of consumers. Most have not been linked to accidents, let alone fatal ones. Finally, most recalls result in straightforward fixes by factory technicians.
Two examples of recalls in 2011 that you probably haven’t heard of: on January 24, 2011, certain Honda CRV and Accord models were recalled due to faulty engine wiring harness connectors; and, on January 11, 2011, certain Cadillac and GMC models were recalled because “the rear axle cross pins were not properly heat treated.” You can find every recall at http://recalls.gov.
How can a recall help dealerships, assuming it does not spiral into a national media event? Two ways:
1) Immediate revenue: the mechanical work performed in connection with recalls is the equivalent of warranty work. It is free to the car owner, but money is changing hands: the manufacturer is paying the dealership for services rendered. Warranty services are not as profitable for dealerships as “customer pay” work. Nonetheless, mechanical work resulting from recalls still represents a source of incremental revenue for dealers.
Once a vehicle is in the dealer service center, a well-run organization will conduct a free multi-point inspection to determine if there are other mechanical issues. Our data at ClearMechanic shows that technicians identify “additional service recommendations” in over 70% of multi-point inspections. These ASR’s (or “upsells”) are split between customer pay and warranty work.
So, dealers profit not only from recall work, but also any other services that the consumer authorizes.
Side note here: customer pay work is generally very high margin (50-60% gross margin). Thus, even lower margin warranty work is still lucrative (20-30% gross margins) by retail standards.
2) Win back customers: the buzzword at the NADA convention this year was “retention.” Every dealer service center is focused on getting customers to come back for future service visits instead of visiting a cheaper, local independent shop. Stunningly, 70% of car owners will switch to an independent shop when their vehicles are off-warranty. Recalls represent a rare opportunity where the dealership service outlet is the only trusted source for repair work (because of their affiliation with the folks who caused the problem, interestingly).
A well-managed service center will roll out the red carpet for recall customers, who have been inconvenienced and may be wondering about the quality of the brand they purchased. In addition, service advisors should explain clearly the reason for the factory recall (hopefully precautionary and minor). If I put my ClearMechanic hat on, I would also highly recommend that the advisor provide a visual explanation of the work being performed, either through photos, videos or a quick walk into the service bay area.
Because dealers often cannot compete with independent shops on price, they must differentiate themselves on service quality, including cleanliness of the facility, access to higher-end technology and one-on-one attention from advisors. A recall permits dealers to show off all of these, even if during a sub-optimal context.
Another side note: the multi-point inspection and upsell process I described above is almost always painful for the consumer. It can be directly at odds with the goal of winning back customers, especially if there is hundreds of dollars of additional recommended work. Again, I am biased here, but the use of communication tools like ClearMechanic can really make the difference between retaining customers and alienating them.