You’re probably familiar with dealer profit margins by now. Supply shortages created during the pandemic have left the world with fewer automobiles, and auto dealers are taking full advantage of the high demand. As you’d expect, this trend has caused many people to overpay or be wary of a market they now view as extremely predatory.
Automakers began telling dealers not to worry too much about price gouging. General Motors made its plea last week and Ford followed up by reiterating its own concerns during the company’s fourth quarter 2021 earnings report. The Oval fears dealer profit margins will hurt its relationship with customers, with top executives making occasional references to the trend in November. Ford CEO Jim Farley is now telling dealers they must cut it out lest they be punished by the manufacturer.
Ford also fears that the price spikes will permanently dent the introduction of electric vehicles. He already wants dealers to include a no-sale clause on the next F-150 Lightning similar to what happened with the GT supercar. Although this has been disputed by consumer advocates and the right to fix movement, the fear that the first batch of all-electric vans will be purchased at markups only to be returned by private sellers demanding even more remains very real.
Meanwhile, domestic automakers are beginning to realize that they cannot operate at limited capacity indefinitely and that their current lineups may not be ideal for the times. I have often emphasized the inherent dangers of manufacturers becoming obsessed with high-margin SUVs and pickup trucks. Once the economy hits a snag or fuel prices start approaching $4 a gallon, some people will start looking down and moving to smaller vehicles with better fuel economy.
We now seem to be approaching that scenario. But the industry is also poised to sell consumer and commercial electric vehicles at higher prices. Ford’s Lightning is said to start at $40,000 while the liquid-fueled F-Series starts at $30,000. Certainly, the electric option is supposed to help customers recoup the highest entry point by having lower operating costs and less maintenance. But those savings take years to add up, forcing customers to weigh lower monthly payments against not having to pay at the pump.
“In the spring, we are launching the F-150 Lightning. Few people ask us anymore why we phased out sedans, and many more ask when they might take delivery of the new Bronco or Maverick or Lightning. We are therefore doing everything we can to increase our production and break the constraints. We don’t like to keep our customers waiting and we’re taking steps to ensure they don’t pay unreasonable markups,” Ford CEO Jim Farley explained during the year-end report.
“We know very well who they are. And their future product allocation will be directly impacted because of this policy. And we saw very quick action from our team. From the BEV side, this is quite an important topic because the margins we want to build in BEV are going to be highly dependent on a different go-to-market and customer experience. I won’t go any further than that, but it’s a pretty important lesson for us about the franchise system and how we’re going to manage going forward.
Mr Farley did not explain what constituted unreasonable mark-ups or exactly how he planned to adapt his management of the franchise system for electric cars. But he reiterated that the automaker believed only around 10% of dealerships were over the line during a recent interview with fox businesslikely indicating some willingness to raise prices:
Farley’s warning came shortly after Ford sales chief Andrew Frick sent a letter to dealers saying they could lose F-150 Lightning allowances if they try to charge license holders. booking extra charge for the electric truck.
Barclays analyst Brian Johnson has suggested that the markups applied by Ford dealerships are worth more than $3.6 billion.
Farley added that it will be particularly important for the company to address EV pricing issues while competing with Tesla and Rivian who operate direct-to-consumer models.
While markups may be modest, helping to absorb lost revenue from disappointing sales, that’s not what’s happening. Many dealers simply add tens of thousands to the sticker or models in demand and refuse to sell anywhere near MSRP on everything else, resulting in record profits for major retailers (supported by data from North American Dealers Association). Meanwhile, small stores serving isolated communities with modest average salaries are struggling.
Although it is quite difficult to see the factory as the hero. Automakers have also taken advantage of the situation by eliminating incentive spending and rearranging production schedules to prioritize vehicles with the biggest margins. Component shortages led to repeated shutdowns of assembly lines while pandemic protocols sent many workers home, reducing overheads.
Manufacturers can also use dealer pricing to streamline direct-to-consumer sales. With haggling having been largely phased out over the past two years, the franchise model makes less sense for consumers with lower expectations, and automakers are waking up to this. This created an opportunity for manufacturers to start selling the idea of factory direct, no-bargain sales as an improvement. Although this does not automatically mean that it would, especially if there is a chance that the market will return to the previous state of normality.
[Image: Ford Motor Co.]
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