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 likely 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 not 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 on the subject.
“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…
Level 2, 9 Help Street
Ashley says:
Good article, hope the ACCC can get momentum on this.
What I have referred to for many years, this is the ultimate “cartel”.
Try and import a newish 2nd hand car from the UK, they have this stitched up also.
September 25th, 2019 at 6:25 pm
Bill Nixon says:
This sort of anti competitive behavior is not uncommon in other industries as well. For many years I worked in the Industrial Chemicals area importing products and representing a number of large international chemical companies. They all had strict terms regarding dealing with competitor’s products. Talking to a competitor, or Heaven forbid, buying or offering a competitor’s product to your customers was equivalent to telling your spouse you were sleeping with another woman. Instant divorce was inevitable. Additionally the manufacturer almost always wanted to know what your price to the end customer was, so they could maximize their margin and make sure your margin was kept quite modest. On the other side they would agree not to sell their products directly behind your back to any customers in your territory. This at times could produce some interesting situations, as some multinational customers would try to find loopholes to circumvent the distribution channels. There is nothing new under the sun in business.
September 25th, 2019 at 8:39 pm
Chris says:
(IF YOU RUN THE ABOVE, FIRST NAME ONLY PLEASE, AND THE VERSION BELOW).
Good piece. Very informative. I was thinking along similar lines last week when we tried to save on a service for my wife’s Golf (bought November 2015). Four-year service cost (available to see upfront and online – which is a tick to VW) at our closest dealer seemed high. (I was going through dealer servicing only because of the youth of the car, and the fact that it’s actually done only 17,000km!). So I drove 30km to the dealer who sold it to us and who quoted a cheaper service over the phone. Oops, a mistake by them – the service cost exactly the same as the local people, 30km closer to us. We’ll look elsewhere in 12 months time.
September 25th, 2019 at 10:01 pm
David says:
Talking of servicing…. ACCC are looking at this as well https://www.facebook.com/PrivateFleet/posts/10157452438987398?__tn__=-R
September 27th, 2019 at 12:16 pm
Udul H says:
I myself was in the situation of needing to purchase a car and didn’t know where I stood in the bargaining process. There were no prices advertised, only specifications of each model. The dealerships certainly had the upper hand in this process. The lack of transparency with pricing left me wondering if I had in fact received a good deal or maybe taken advantage of? Not sure, but it’s always a nervous process buying a car, when your relying on the dealership to be honest.
September 30th, 2019 at 10:13 pm