Dealers Score Above MSRP On Dangerous Ground

A recent article in a national trade publication described OEM dissatisfaction with the current practice of many dealers of marking vehicles above the manufacturers’ suggested retail price – in effect, earning more money by taking advantage of the current shortage of vehicles.

Frankly, I was stunned when one dealership justified their extra markup by saying, “We have to keep the doors open and feed the mouths here.” This is disingenuous to say the least, as last year franchised dealerships made record net profits (according to the National Automobile Dealers Assn., the average US dealer recorded net profit of approximately $3.4 million until October 2021), and this year should be even better.

Let’s call this practice of marking up above MSRP for what it is: taking advantage of the shortage of new vehicles by making more money, by “charging what traffic will pay”.

However, even older than Adam Smith is the adage “you reap what you sow”. When the pandemic caused shortages of items such as toilet paper or sanitizer, the local supermarket usually simply sold out, rather than dramatically increasing the price of these products (some online sellers offered these products at dramatically higher, but weren’t getting many sustainable prizes). clients).

Can auto dealerships really afford the ill will of the plethora of customers who will pay these high prices above MSRP, but resent both the process and the dealer who charged them?

First, car sales have always been cyclical. While the “good times” have never been better for dealerships, we have always been an “ups and downs” business. Does anyone really think this pattern has changed permanently? The higher the peak, the deeper the valley.

And from what I’ve read, new and used car buyers over the past year are way out of equity and likely therefore out of the market for a long time to come. The customers you score today may not return when you need them.

Secondly, in addition to direct-to-consumer used car marketplaces such as Carvana and Vroom gaining traction, on the new car side, there’s a new wrinkle on the horizon, something that frankly hasn’t been a factor in the latest downturn. direct manufacturer-to-consumer sales (or traditional manufacturers launching a new line of cars, e.g. General Motors’ BrightDrop), and the equivalent “agency model” for established manufacturers’ vehicle lines (where the sale and margin are set by the manufacturer online).

Tesla pioneered the direct-to-consumer model and so far it has thrived, so not only are the new kids on the block (Rivian, Lucid, Fisker, Arrival, etc.) all going direct to the US, but it’s also clear that GM, Ford, Stellantis, Volkswagen and Daimler are exploring new ways to go “straight” through the agency model for their EV sales.

This is already the reality for Daimler in the UK and for VW in Germany. To think that franchise laws alone will protect dealers from this in the United States is naïve at best if the general public wants this to happen.

Manufacturers such as Tesla argue that it is unfair to the public not to allow direct sales only, that dealerships impede free enterprise, and indeed fair presentation and business innovation of BEVs require sales direct to consumers. “Agency” models favoring OEMs validate these arguments, don’t they?

Consumer vehicle dealerships, on the other hand, say consumers can be better supported by a local, full-service dealer who can handle trade-ins, service, maintenance, and more.

I believe that ultimately consumer sentiment and choice will rule the day, not government franchise laws or more regulation. Remember, the taxi industry was one of the most legally protected industries in the United States for decades – until Uber came along and consumers made their case to open up the market. , and things changed quickly and drastically.

John Possumato_2022 image.jpg So now, in addition to risking resentment from local consumers, dealers who, for lack of a better term, price gouging to take advantage of the current imbalance between supply and demand, risk national backlash, just when both new manufacturers the direct-to-consumer model and the established OEM agency model are growing in popularity.

Yes, state franchise laws and dealer lobby groups are powerful at the state, state and local levels, but so is consumer sentiment for change. If it weren’t, not only would taxis still be a protected industry, but Tesla’s market valuation probably wouldn’t be much higher than that of Toyota, GM, Ford and Stellantis combined.

John F. Possumato (photo, top left) is a lawyer and founder and CEO of DriveItAway, which provides a turnkey cloud platform/consumer app for dealerships to offer new mobility solutions, including subscription-to-purchase options for first-time buyers subprime mortgages and electric vehicles.

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