Australian Mercedes-Benz dealers are in a $650 million “fight of their lives” against the luxury German car maker in a test case described as one of the most significant in franchise-law history.
Key points:
- 38 Mercedes dealers are suing the German car-maker for $650 million in compensation
- Mercedes-Benz is one of a growing number of car makers switching to a fixed sale price and commission model
- Car dealers argue Mercedes has breached the franchising code and consumer law
Bob Craig sold his dealership of 48 years last year in frustration over Mercedes-Benz’s decision to move to a fixed-price agency sales model.
“I would love to have done 50 years with Mercedes,” Mr Craig said.
“In the last five years, there was a deterioration in relationships between the dealer and the manufacturer.”
Previously, dealers bought cars from Mercedes and could set their own sale price.
But under the agency model, which came into effect in January, the manufacturer retains ownership of the cars while dealers become agents that sell cars at a fixed price for a set commission.
Thirty-eight of the nation’s 55 Mercedes-Benz dealerships have launched legal action against the company in the Federal Court seeking compensation.
Dealers argue they were forced to sign new agency model deals with Mercedes that will dramatically reduce their profits and wipe out years of goodwill with customers.
Mr Craig is not involved in the court case because he sold his business in Orange before the agency model came into effect, but he is speaking on behalf of former colleagues too nervous to publicly criticize Mercedes.
“They’re all shattered, their livelihood is shattered,” Mr Craig said.
Dealers allege Mercedes hatched a secret plan in 2016 to switch to an agency model, undertook a sham consultation process, and pushed forward with a decision despite the majority of Australian dealers being against it.
They claim that in a bid to capture the profits of dealers, Mercedes has broken Australian Consumer Law by engaging in unconscionable conduct, along with breaching the franchising code’s good-faith provisions.
“This is an incredibly important case for the automotive industry,” Australian Automotive Dealer Association (AADA) chief executive James Voortman said.
“In fact, it’s probably one of the most important franchising cases in Australian history.”
Dealers involved in the case are seeking $650 million in compensation from the car marker.
“That takes account of all the millions of dollars of investment that has gone into facilities, but also equipment and the goodwill they’ve created,” Mr Voortman said.
“It’s a large claim, but it’s more than fair.”
“These are regional dealers, these are city dealers, they are Australian businesses, and they’re in the fight of their lives against a big multinational corporation.”
In March 2019, Deloitte modeled the impact of the agency model for dealers.
It found, for example, that under the agency model one particular dealer’s profits would decline by more than 50 per cent compared to the dealership model.
The case against Mercedes, which saw hearings begin in the Federal Court this week, is being funded by dealers involved in the legal battle, including billionaire businessman Nick Politis, the PR company working for AADA has confirmed.
“So many of these dealers have represented the brand for decades, they’ve invested so much money in the brand, and they’ve put in so much work to bring customers to the brand,” Mr Voortman said.
“And now all of that hard work is being taken away with change to a new business model.
“They need compensation for that change, and we hope that the court agrees with that.”
Test case for updated franchising laws
Last year a Senate inquiry, launched after General Motors decided to ax the Holden brand, found an inherent power imbalance between car dealers and manufacturers.
The inquiry also examined Japanese car manufacturer Honda’s treatment of dealers in its move to a fixed-price agency model.
Subsequent legislative changes introduced by the Coalition government doubled fines for breaches of the franchising code, and added other protections for car dealers, including “fair and reasonable compensation for franchisees in the event of early termination.”
Jenny Buchan from the University of New South Wales’ Business School said the Mercedes-Benz Federal Court legal battle was a test case for those new laws.
“So since 2015, there have been progressive slight tweaks to the code, and the current tweak is probably the biggest that we’re dealing with,” Ms Buchan said.
“The current tweak introduces very specific requirements in relation to motor vehicle dealers and the franchise agreements that they enter into.
“It is an important case, and it’s really important that the dealers have their day in court, and that the courts have an opportunity to really interpret the wording of this new change to the franchising code.”
“The problem with good faith is that good faith is such a nebulous concept,” Ms Buchan said.
Ms Buchan said a recent case involving 7/11 franchisees showed the difficulty of mounting legal arguments based on a breach of good faith and unconscionable conduct.
“They were unsuccessful [at] alleging good faith, they were unsuccessful with unconscionable conduct,” she said.
“But they did succeed in establishing that 7/11 had misled them, so they did receive an award of damages in relation to the misleading conduct.”
Ms Buchan believes that ultimately Australia’s franchising code is still too weak to protect franchisees.
“My really deeply held view is that the franchising code can never give franchisees the protection that they ultimately need, and that we won’t really see true equality until franchisees are somehow brought in under the corporations act,” she said.
Transparent sales model
In a statement, a spokesman for Mercedes-Benz Australia said the company was defending its position in court.
“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 to our national pool of vehicles, regardless of where the customer may live.” .”
Car industry analyst Steve Bragg, partner at Pitcher Partners, said the agency model had been in place in New Zealand for several years and was becoming widely adopted in Europe and the UK.
Jaguar, BMW, Land Rover, VW and Honda are just some of the other companies moving to a fixed-price sales model.
Mr Bragg said a potential upside for customers in buying through an agency model was price transparency — as long as they were not paying too much.
“It’s a model that’s coming, but that doesn’t mean the dealers have to lose,” he said.
“In the future, as dealers are doing their part, they’ll need to be compensated as well — and what they get paid needs to cover costs.”
‘Not the company we recognised’
As direct online sales grow and more companies move to bypass dealers and maximize profits, the agency model represents the end of an era for industry veterans like Mr Craig.
“In a country town, the motor dealer — not just Mercedes, but every franchise — is a great part of the community,” Mr Craig said.
“Our customers are our friends and they (dealers) are part of the fabric of our city.
“I don’t want to be the cranky old man that sold out [of the dealership].
“But in the last few years, it’s not the company that we recognised.”
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