Dealers Marking Up Above MSRP on Dangerous Ground

Between Tesla, Rivian, Lucid and Fisker operating without dealerships and the agency model introduced by traditional manufacturers, marking up above MSRP during these demand-driven times may come back to haunt dealers.

John Possumato

February 9, 2022

4 Min Read
Tesla Retail-Store-Interior
Tesla thriving outside franchised-dealer retail model.

A recent article in a national trade publication described OEMs’ dissatisfaction with many dealers’ current practice of marking vehicles above manufacturers’ suggested retail price – in effect, making more money by leveraging the current vehicle shortage.

Frankly, I was dumbfounded when one dealer justified his extra markup by saying, “We have to keep the doors open and feed mouths here.” That’s disingenuous to say the least, as last year franchise dealers made record net profits (according to the National Automobile Dealers Assn., the average U.S. dealership recorded a net profit of about $3.4 million through October 2021), and this year is forecast to be even better.

Let’s call this practice of marking up above MSRP for what it is: taking advantage of the new-vehicle shortage by making more money, by “charging what the traffic will pay.”

However, even older than Adam Smith is the adage “you reap what you sow.” When the pandemic caused shortages of things such as toilet paper, or disinfectant, the local supermarket usually simply ran out, rather than increase the price of these commodities substantially (some online vendors offered these goods at greatly increased prices but didn’t win many sustainable customers).

Can car dealers really afford bad will from the plethora of customers that will pay these jacked-up prices above MSRP but resent both the process and the dealer who charged them?

MSRP with Market Adjustment (002).jpg

MSRP with Market Adjustment (002)

First, car sales have always been cyclical. While “good times” have never been this good for dealers, we have always been a “peaks and valleys” business. Does anyone really think this pattern has permanently changed? The higher the peak, usually deeper the valley.

And from what I read, both new- and used-car buyers over the past year are way out of equity and probably therefore out of the market for a long while to come. The customers you are marking up today may not return when you need them.

Second, in addition to the direct-to-consumer used-car marketplaces such as Carvana and Vroom gaining traction, on the new-car side there is a new wrinkle on the horizon, something that frankly wasn’t a factor in the last downturn: manufacturer-to-consumer direct sales (or legacy manufacturers that start a new car line, e.g., General Motors’ BrightDrop), and the equivalent “agency model” for established manufacturers’ vehicle lines (where the sale and margin are set by the manufacturer online).

Tesla pioneered the direct-to-consumer model and so far has prospered by it, so not only are the new kids on the block (Rivian, Lucid, Fisker, Arrival, etc.) all going direct in the U.S., but it’s also clear that GM, Ford, Stellantis, Volkswagen and Daimler are exploring new ways to go “direct” through the agency model for their EV sales.

This is already reality for Daimler in the U.K. and for VW in Germany. To think franchise laws alone will protect dealers from this in the U.S. is naïve at best if the general public wants this to happen.

Manufacturers such as Tesla claim it is unfair to the public not to allow direct-only sales, that dealers stand in the way of free enterprise, and indeed the fair presentation and sales innovation of BEVs require direct-to-consumer sales. OEMs’ fostering “agency” models are validating these arguments, are they not?

Dealers of mass-market vehicles, on the other hand, say consumers can be best taken care of through a local full-service dealership that can handle trade-ins, service, maintenance, etc.

I think ultimately, consumer sentiment and choice will rule the day, not government franchise laws or more regulation. Remember, the taxi industry was one of the most legally protected industries in the U.S. for decades – until Uber came along and consumers championed their cause to open the market up, and things quickly and dramatically changed.

John Possumato_2022 picture.jpg

John Possumato_2022 picture_1

So now, in addition to risking local consumer resentment, those dealers that are, for lack of a better term, price gouging to take advantage of the current demand/supply imbalance, risk national backlash, just at the time both new manufacturers’ direct-to-consumer model and the established OEMs’ agency model are gaining in popularity.

Yes, state franchise laws and dealer lobbying groups are powerful on a national, regional and local level, but so is consumer sentiment for change. If that were not the case, not only would taxis still be a protected industry, but Tesla’s market valuation probably wouldn’t be well above Toyota, GM, Ford and Stellantis combined.

John F. Possumato (pictured, above left) is an attorney and founder and CEO of DriveItAway, which provides a turn-key cloud platform/consumer app enabling dealers to offer new mobility solutions, including subscription-to-purchase options for new subprime and EV buyers.

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