Mercedes-Benz dealers sue luxury carmaker for $650 million

In what has been called the most significant test of franchise laws in an Australian court, Mercedes-Benz dealers are suing the parent company for $650 million over a new fixed-price sales model that dealers claim will decimate their profits.

A total of 38 franchisees of the luxury German car-maker are alleging it breached the franchising code and consumer law after it introduced a new agency model in January where the manufacturer retains ownership of the cars in the salesroom.

The franchisees became “agents” who sell the cars at a fixed price for a fixed commission — a vastly different and less lucrative model than the prior arrangement, where dealers bought cars from Mercedes and sold them to the customer for their own price.

UNSW’s Jenny Buchan, who was a panel member of the Australian Competition and Consumer Commission’s Franchising Consultative Committee from 2010-2015, tells SmartCompany the original model was the “ideal one”.

“They can cost it and assess their risks with their eyes open. Changing the model after the franchisee is established is fraught with trouble,” she said.

“A big problem with the agency model is that franchisees who currently derive income from a wide range of customers will, in future only derive it from one source, the franchisor.”

Two-thirds of Mercedes’s 55 dealers launched action in the Federal Court to seek compensation, alleging they were forced to sign onto the new sales model despite it slashing profits and damaging goodwill with existing customers.

Buchan continued the dealers’ case was a reasonable expectation, not just for automotive but for any franchisee going through a similar thing.

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“If the franchisor changes the model they should compensate the franchisees for losses of goodwill and sunk costs, as appropriate,” Buchan said.

Dealers also alleged Mercedes acted deceitfully by undertaking a consultation process for show as it proceeded with the new model despite most dealers being against it.

The court will determine whether Mercedes has broken Australian Consumer Law by engaging in unconscionable conduct, along with breaching the franchising code’s good-faith provisions in what could set an important precedent for franchisees everywhere.

For this reason, partner at Pitcher Partners Sydney Steve Bragg says, franchisees should watch closely.

“It’s a very important case that is expected to set the precedent for what needs to be paid in compensation as brands move from a franchise model to an agency sales model.”

Australian Automotive Dealer Association (AADA) chief executive James Voortman says the case is shaping up to be “probably one of the most important franchising cases in Australian history”.

In a statement, a spokesman for Mercedes-Benz Australia said the company stood behind the new model on the basis of transparency.

“It is evident Australian customers had embraced the new and transparent sales model,” the company spokesman said.

“We remain committed to the agency model and the advantages it delivers for our valued customers, especially in terms of transparent pricing, the reduction of dealer delivery fees and access for all Australians.”

The model is also gaining traction elsewhere. Jaguar, BMW, Land Rover, VW, and Honda have all rolled out the fixed-price model, while it’s increasingly common in New Zealand, Europe, and the United Kingdom.

But Bragg, who is a specialist in the automotive sector, says car brands and car dealers need to find a balance where everyone wins, rather than the win-lose situation at the moment.

“The consumer needs to win by having a better purchase experience that is more transparent, with a better handoff from the online shop to the physical delivery, the dealer needs to have a win so they have a business model that they can operate profitably and brands need a win,” Bragg continued.

“Brands have made a very significant investment into research and development and retooling all their factories to produce electric vehicles, somewhere near half a trillion dollars globally, and they need to recoup some of the investment they have.

“They are going after the margin on sales, and they want that access to customer data.”

Bragg says the case will clarify what sort of arrangements will be commonplace for Mercedes-Benz dealers moving forward, “but the upshot is everyone needs to find a way to negotiate a better outcome”.

It comes just a year after a Senate inquiry found there was a significant power imbalance between car makers and car dealers in Australia, which was launched after Holden exited the Australian market after 160 years.

Parent company General Motors had determined the Holden brand was no longer competitive and would be retired from sales across Australia and New Zealand, but the decision was crippling for dealerships.

“As part of its offer, all Holden dealers have been given the opportunity to continue the very profitable service, warranty and repair operations, for a longer new five-year term,” it said in a submission to the committee.

“Holden’s compensation offer is about four times the amount of average profit which dealers were making on the sale of a new car, over the past three years.”

But General Motors came under scrutiny for moving dealers onto a fixed-price agency model before winding down the brand too.