What's A Mercury Franchise Worth?

Ford hasn’t built a Mercury in six months and 98 percent of its erstwhile dealers have signed termination agreements with the parent company, but the remaining 31 dealership owners are digging in their heels for a fight. Automotive News [sub] reports that these Mercury dealers recently spent huge amounts building or renovating their Lincoln/Mercury stores, and that Ford’s termination offers are embarrassingly tiny in comparison.

For example, the owner of Francis Scott Key L-M Inc. in Frederick, Md. claims to have spent $5.5m on a dealership expansion which was completed in 2007, but only received a termination offer of $181,026 from Ford. Liberty Lincoln-Mercury in Clifton, N.J spent $7.7m upgrading its facilities in 2004, only to receive a $733,575 termination offer from Ford. So far, AN counts four dealers who are suing Ford in federal court, and an undisclosed number have filed complaints with their state DMV. Ford, meanwhile, is trying to engage the holdouts in mediation, and though some have settled others are reporting bad experiences. Meanwhile, there’s another problem that underlines the the entire dispute: can a standalone Lincoln dealership even survive?

Though Ford won’t comment on the mediation process, it seems that the experience has been decidedly mixed for the dealers, as AN reports

Richard Sox, a Florida lawyer representing Forrester Lincoln-Mercury of Chambersburg, Pa., in a federal lawsuit filed in Pennsylvania, says his client has declined mediation based on information from dealers who have gone through the process with Ford’s outside counsel. “The consistent report we received was there was no give and take,” Sox said. “It was just an opportunity for them to browbeat the dealer into accepting the amount previously offered.”

On the other hand, another Sox client, Bayway Lincoln-Mercury in Houston, settled with Ford in April after filing a case with the Texas Department of Motor Vehicles last July. A confidentiality agreement prevents Sox from disclosing terms, but “you can presume if there was a settlement, the dealer was satisfied.” That implies the settlement amount surpassed Ford’s initial termination offer.

So what accounts for the difference in experiences? The deciding factor seems to be whether or not the Mercury franchise was part of a Ford store or a standalone Lincoln-Mercury dealership. With Ford-brand sales remaining strong, F-L-M dealers have plenty of incentive to take a hit on the unproductive Mercury brand in order to maintain good relations with the Ford factory. On the other hand, dealers who face the prospect of having to keep a store running with Lincolns alone are digging in their heels. As the lawyer for one former L-M dealer puts it,

Lincoln doesn’t generate anywhere near the volume that other brands do and nowhere close to Lincoln and Mercury together. So to pay for that overhead that comes with the new building is very difficult.

Meanwhile, this drama is playing out over a background of troubling dealer relations for the Lincoln brand. Ford is asking Lincoln dealers to upgrade their facilities to the tune of $1m-$2m, and is already having trouble culling some recalcitrant Lincoln stores. And because Ford has yet to announce anything that inspires serious faith in Lincoln’s future product plans, dealers are hardly lining up to take what Alan Mulally admits is “a leap of faith.”

Since 80 percent of former Mercury dealers also sold the Ford brand, the number of dealers facing both the tiny termination offer and the uncertain prospect of keeping a store open on Lincoln sales alone is small. Also, Ford claims it can afford to lose some Lincoln dealers for “throughput” reasons, and many dealers would have a hard time proving damages anyway, for the simple reason that Mercury stores rarely made much profit. But because Ford has a tough sell to make on Lincoln’s future anyway, this dispute is just another level of agony for Ford’s tortured luxury brand efforts. Lowballing termination offers while asking for a million dollar plus upgrade and not showing much in the way of inspiring future product is a brutal situation to be in, and some dealers are even arguing that Ford is destroying the remaining value in its Lincoln brand. And if standalone Lincoln dealers are expected to survive, they’ll need higher volume products, which in turn will further depress Lincoln’s battered image.

So what’s a Mercury dealership worth? Evidently not much. But the question that Ford has to be seriously worried about right now is how much is a Lincoln dealership worth?