Applegate Chevrolet – A case for MR

Jim Travis, general manager of the Applegate Chevrolet dealership, had to decide if he should seek the Yugo franchise for his area. The Yugo car was produced in Yugoslavia and was sold in the United States for about $5000 – several thousand dollars lower than most small cars. Travis knew that the Yugo was quite small and perhaps not as well built as some of the Japanese small cars, but he thought the low price would attract some customers. Travis was also greatly concerned about selling only US cars because foreign producers seemed to be getting a larger and larger share of the car market. Their costs and prices were much lower than US cars.

Travis’s dealership was located in Petoskey, Michigan. The Petoskey area had a population of about 10,000 people that swelled to more than 50,000 during the tourist season. It wasn’t a large market, but most of the major domestic and foreign producers were represented in the area. Travis’s choice of a foreign franchise was Yugo or some South Korean lines that were entering the US market. Travis was giving the Yugo brand more serious considerations because of the much lower price which had received substantial media attention. Travis thought the publicity might help speed acceptance of the car in the US market. It was estimated that about one third of all US auto dealers were selling both domestic and foreign cars, although Travis’s dealership would be the first domestic dealer in Petoskey to take on a foreign line. All other foreign lines in the area were handled by dealers who specialized in one or more foreign lines.

Travis was becoming quite positive about taking on the Yugo line. He had the space to carry the line, and the he thought his sales people could easily handle another line especially as the primary emphasis would be on much lower price. Travis’s mechanics said they would be able to handle the necessary repairs without too much difficulty. Furthermore, Travis would have to carry only a few Yugos to have an adequate display because the company produced a very basic car with few options.

Travis’s major doubts about taking on the Yugo line were: (1) whether it would be profitable to do so, and (2) whether it would affect his image as a quality dealer. As to his first concern, he was worried that profit as a percentage of sales was usually only 2 or 3 percent in the car business – so there would be a relatively low dollar profit on a $5,000 sale. He would have to sell quite a few Yugos to earn a sizable profit. Furthermore, there was also the possibility that some of his low-end customers might buy a Yugo instead of a Chevrolet resulting in a lower profit per car sold.

With respect to his second concern – a quality image – Travis thought that his regular customers were basically rather conservative people who had bought American for many years. He knew that many of them wouldn’t switch from an American product. But he also was aware that some of his formerly loyal customers had purchased foreign cars in recent years. By offering the lowest priced car on the market, Travis might be able to attract some of those people back as well as some new customers shopping for the most economical car. He saw the possibility of increasing sales by appealing to those price conscious shoppers who otherwise would not buy from him. Travis thought that his sales people could probably deflect the criticism of some of his buy American customers by simply joking about how some people always want to buy the cheapest product and that’s what they are going to get if they buy a Yugo.

To set up the franchise or not,

1. Travis must find out if the Yugo is low priced then what about its fuel consumption and running life as compared to the next lowly priced car.
2. Marketing research can be used to gather the above information as well as potential buyers’ opinion.
3. To what extent the manufacturer contributes in terms of technical assistance and financial reimbursement.
4. Last but not the least how many cars would be required to be sold to make the franchise feasible and to ensure faster delivery to customers whether the manufacturer is having a cars stocking point in the vicinity of Petoskey, Michigan.