A number of car companies have switched to a fixed-price business model in Australia. The outcome of a court case will set a legal precedent for the automotive industry – and help determine how much money dealers invest in their businesses to look after customers.
A costly court battle between a number of Mercedes-Benz dealers in Australia and the German automotive giant will set a legal precedent that could impact the customer showroom experience for all new cars sold locally.
Last year Japanese company Honda switched from its traditional dealership model to non-negotiable fixed prices in Australia.
Luxury brand Mercedes-Benz followed suit in Australia at the beginning of this year, but a number of local dealers have launched legal action claiming they have not been fairly compensated for drastic changes to their business structure – and for the customer base they established over several years and, in some cases, decades.
Evan Stents, an automotive expert for HWL Ebsworth Lawyers – which is representing 38 Mercedes-Benz dealers in the legal action – told the Australian Automotive Dealers Association (AADA) conference in Brisbane last week the court case will establish whether or not it is fair and reasonable for automotive giants to rewrite the contracts with their dealer network, appoint them as selling “agents”, and not offer them any goodwill for building up a network of loyal customers.
“This case that’s been fought now by the Mercedes dealers is probably the most important legal case in the history of the Australian automotive industry and franchising generally. There’s been no more important case,” said Mr Stents.
At the centre of the issue is “franchisor opportunism” – where car companies become established in a certain country over many years “and they decide to take that market back, in effect acquiring the goodwill that’s been developed by the franchisees (the dealers) and paying no consideration for it.”
Mr Stents (pictured above) indicated the outcome of the Mercedes-Benz court battle could influence just how much money car dealers across other automotive brands in Australia would be willing to invest in showroom facilities and the customer service experience they offer.
If car companies can help themselves to a customer base established over several years, it could discourage dealers to upgrade their facilities or open showrooms and service centres in new areas. It could also fast-track the shutdown of established sites, amid fears of a takeover, say industry experts.
“It’s a key threat, because if the goodwill of dealers is not protected, then there’s a lack of confidence in investing in the (automotive) industry,” said Mr Stents, who noted the Mercedes-Benz court case is not just a landmark legal case for car dealers but “all franchising” businesses.
“The issue of protecting goodwill has been kicked around now for the last 20 years in government reports and franchising, but no-one’s done anything about it, to protect it, but now it’s not theoretical anymore. It’s real,” said Mr Stents.
“Mercedes dealers are having a monumental battle at the moment (with Mercedes-Benz head office in Germany) to protect their investment in their dealerships and to be compensated for their goodwill.”
Mr Stents noted it was yet to be determined whether the switch by some car brands to non-negotiable fixed-prices was itself a concern.
“I’m not suggesting that (the fixed-price business model) is wrong, but what I am suggesting is that if a franchisor is going to convert their network work (to a fixed-price business model), there needs to be fair compensation paid to the franchisees, because without it, it undermines the whole confidence in investing in that sector.
“It shouldn’t be up to the Mercedes-Benz dealers to have this battle on their own in the courts, and we need government intervention to protect that. It’s critical, not just for … motor vehicle dealers, but all franchising,” he said.
According to court documents seen by the Australian Financial Review, Mercedes-Benz Germany had forecast the legal battle with dealers in Australia could cost up to €500 million Euro ($AU752 million).
Australian franchising laws have since been broadened to cover traditional dealers – as well as those appointed under the new scheme as “agents” who sell new cars at non-negotiable fixed prices.
Initially it was not clear whether the fixed-price business model was “captured within a definition of motor vehicle dealer”.
However, said Mr Stents, “that’s been changed to make it very clear now that a (fixed-price business model) is captured by that definition.”
“Finally now … there’s an obligation under the code that whatever term is offered has to be able to provide a reasonable return on the investment that the dealer makes,” said Mr Stents.
“So when you look at those reforms … they are quite substantial, material, and important.”
Meanwhile, motorists across all automotive brands now have a better chance of not losing their local dealership and service centre to a sudden closure – following an update to franchising laws dubbed “the Holden amendment”.
“As you know, recently Holden decided to retire the brand in Australia, but they did that in the middle of the term of the dealer agreements,” said Mr Stents.
“As a consequence, there was a long and torturous negotiation process to get a fair and reasonable resolution for the dealers. For most of them, it was a very unsatisfactory outcome.
“For a number of the rest of them, it resulted in a (legal) class action, which is still running to this day … watch this space.
“Now, as a result of this new amendment, if a manufacturer decides to leave the country mid-term, rationalise its dealer network, or change its business model, there has to be compensation paid for a number of different things.
“One of those is there’s a loss of goodwill, loss of profits and goodwill, and they’ve got to buy back all the parts and pay any (employee) redundancy costs.
“That’s a significant major reform as a consequence of what happened with Holden.”