Mercedes-Benz dealers are suing the luxury car maker for $650 million

Two-thirds of Australian dealers are demanding compensation for the new sales model. Source: Unsplash/Luke Oslizlo

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 say will will decimate their profits.

A total of 38 franchisees of the German luxury carmaker say it broke franchising code and consumer law after it introduced a new agency model in January where the automaker retains ownership of cars in the room of sale.

Franchisees became “agents” who sell the cars at a fixed price for a fixed commission – a very different and less lucrative model than the previous arrangement, where dealers bought cars from Mercedes and resold them to the customer at their own expense. price.

UNSW’s Jenny Buchan, who was a member of the Australian Competition and Consumer Commission’s Franchising Advisory Board from 2010 to 2015, says SmartCompany the original model was “the ideal”.

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

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

Two-thirds of Mercedes’ 55 dealerships have sued in federal court seeking compensation, alleging they were pressured into signing the new sales model despite shrinking profits and losing goodwill with existing customers .

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

“If the franchisor changes the model, it must compensate franchisees for lost goodwill and sunk costs, as appropriate,” Buchan said.

The dealers also alleged that Mercedes acted deceptively by undertaking a consultation process for the show as it proceeded with the new model despite most dealerships objecting.

The court will determine whether Mercedes breached Australian consumer law by engaging in unconscionable conduct, as well as breaching the good faith provisions of the franchise code in what could set an important precedent for franchisees around the world.

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

“This is a very important case that should set a precedent for what should be paid in compensation as brands transition from a franchise model to an agency sales model.”

James Voortman, chief executive of the Australian Automotive Dealer Association (AADA), said the deal is shaping up to be “probably one of the biggest franchise deals in Australian history”.

In a statement, a Mercedes-Benz Australia spokesperson said the company supported the new model on the basis of transparency.

“It’s clear that Australian customers have embraced the new transparent sales model,” the company spokesperson said.

“We remain committed to the agency model and the benefits it offers our valued customers, including transparent pricing, reduced dealer delivery costs 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, as it becomes increasingly common in New Zealand, Europe and the UK.

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

“The consumer must win by having a better shopping experience that is more transparent, with a better transfer from online store to physical delivery, the reseller must win by having a business model that they can exploit in a profitable and brands need a win,” continued Bragg.

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

“They’re looking for the margin on sales and they want that access to customer data.”

Bragg says the case will clarify the type of arrangements that will be commonplace for Mercedes-Benz dealerships in the future, “but the bottom line is that everyone has 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 automakers and car dealers in Australia, which was kicked off after Holden exited the Australian market after 160 years. .

Parent company General Motors had determined that the Holden brand was no longer competitive and would be withdrawn from sales in Australia and New Zealand, but the decision was crippling for dealers.

“As part of its offer, all Holden dealers have been given the option of continuing the highly cost-effective service, warranty and repair operations for a new, longer five-year term,” he said in a statement. submission to committee.

“Holden’s offset offer is approximately four times the amount of the average profit dealerships have made on the sale of a new car, over the past three years.”

But General Motors has come under scrutiny for moving dealerships to a fixed-price agency model before also scrapping the brand.

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