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5 Ways Car Makers Reduce Price Competition

It’s a murky world the Australian automotive industry. Always has been and probably always will be.  When big, emotional purchases are on the table and there’s a complicated system of sales distribution, it’s always going to be difficult for the consumer to work out what’s a good deal.

The ‘problem’ is you can only buy a new car from an official new car dealership, licensed by the manufacturer.  Unlike almost any other product there aren’t new car resellers, independent distributors or outlets.  The actual purchase must always take place at a dealership and that dealership must be bound by conditions and obligations bound by the carmaker.  This means the manufacturer is in a unique position to influence the sales process and therefore the competition.

Of late there’s been significant interest from the ACCC and the government into what this means for the consumer in terms of pricing competition and transparency and also for the long-suffering dealerships.

 

In June, the ACCC announced they were examining the competition risk from the merger of the two biggest new car dealer groups in Australia

“The ACCC’s preliminary view is that the proposed acquisition is unlikely to substantially lessen competition for the supply of new cars in Melbourne, Sydney and Brisbane or nationally”

 

In August, the Morrison government announced a reform entitled ‘Delivering a fair and competitive car retailing sector’

“We have heard the concerns of those within the sector and are committed to creating a level playing field. It’s about ensuring everyone gets a fair go, including our small and family car dealers,”

 

This is squarely addressing the influence that car manufacturers have on the new car marketplace in particular with respect to their franchise agreements.

Private Fleet, having relationship with over 1,000 new car dealers, is uniquely placed to have recognised and worked through many of these issues over the last 20 years.  Here are 6 ways the car makers restrict competition:

 

1) Don’t Advertise Discounted Prices

Most independent businesses are unrestricted when it comes to what price to set for their products and services.  After all, it’s their profit margin so makes sense that they can vary their pricing structure to suit their needs.  Not so with new cars.  If a dealer advertises a new car at below RRP (or current national driveaway special), they will risk the wrath of the car manufacturers and be instructed to take the ad down

2) Don’t Advertise In Other Territories

Car makers allocate each dealer a ‘PMA’ or Primary Marketing Area.  If dealers advertise outside of these defined boundaries then, again, they’ll get a tap on the shoulder from the manufacturer.

3) Discourage Working With Brokers or Car Buying Services

Hits close to the bone this one.  But for almost all of our 20 years OEMs have put pressure on dealers to only sell directly and no through intermediaries who aren’t contracted to the sales and pricing conditions as the dealers themselves.  Thankfully, although dealers would never dare to publicly challenge this, in practice they have a business to run and overheads to meet so this ‘advice’ is generally ignored.  Here’s an extract from one of Toyota’s many dealer communications.

“Toyota is aware that new vehicle brokers and buyers agents may be acting as intermediaries between customers and Toyota Dealers.  This practise is of concern to Toyota.  Toyota strongly believes that Toyota Dealers are best placed to fully service the needs of Toyota customers.”

4) You Can’t Sell Brand-X if You Sell Our Brand

More and more there are multi-franchised dealers across Australia.  This makes sense especially for consumers as it makes it easier to compare models & prices in one spot.  However certain manufacturers will throw their weight around and threaten to rescind a franchise agreement if a dealer looks to take on a new ‘competing brand’.

5) No Trucking of Cars on Delivery

Dressed up as being the optimal delivery process, certain manufacturers (particularly prestige brands) insist on a personal handover between dealer and car buyer at the time of delivery.  But in practise this limits the scope of where a buyer can buy from unless they are prepared to travel a huge distance to compare options.  Consider Lexus buyers in Perth – there’s one dealer in WA.  Interstate dealers are prohibited from trucking cars across the country so where’s the competition there?

6) You Must Spend $$$ to Promote our Brand

Once a dealership is ‘granted’ a franchise, along with the agreement is a heavy obligation towards supporting the manufacturer’s brand even over the actual dealerships brand.  Want to sell plenty of cars without the fancy dealership overheads?  Nope, sell our cars and you’ve got to spend X million on an ultra-fancy forecourt to help fly the flag.  No efficient volume sales channels here please.

 

Without exception all these restrictions lead to less pricing competition for the consumer.  But what about the poor old car dealer?  Yes, I’m serious!  The dealers have their pressures and obligations to meet, staff to pay and doors to keep open. If they were allowed to run like normal independent businesses, what impact would that have on prices?  What efficiencies would we see flowing through the whole current sales process?

NEXT: Import restrictions, dealer ‘holdback’, legal intimidation…

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