Dealers’ Conduct May Threaten State Franchise Law Protections

In my recent Wards article, “Dealers Marking Up Above MSRP on Dangerous Ground,” I outlined how some dealers are taking advantage of the current new-car shortage by marking up new vehicles above manufacturers’ suggested retail price by thousands of dollars across the board. It’s clear the public and press consider this “price gouging” and are beginning to shout about this throughout the nation.

I suggested in that article, and now believe more than ever, that this practice may come back to haunt dealers in a more substantive and long-term way than just current manufacturer prohibitions. This visible public backlash is coming at a very dangerous time – when new electric vehicles are gaining major investment and traction and new EV manufacturers are upending the traditional dealer franchise system and going direct to consumer.

As good as times now are financially for automotive retailers, we may be at what could be called a “strategic inflection point” for the franchise dealer model – a “perfect storm” where today’s operating systems, procedures and regulations could be a thing of the past.

First: Technology has changed car sales dramatically, and app-based used-car sellers such as Carvana and Vroom have proved used-car sales do not need a traditional fixed dealer base to either perform the transaction or operate in scale.

While only a small percentage of the public are engaging in, or even wanting, an all-digital transaction, I note that a used-car sale is more complicated than a new-vehicle sale (a new car is “fungible” and comes with OEM warranties), and online/in-app used-car sales are growing exponentially.

Second: A majority of the public now purchasing EVs in the U.S. do so outside a traditional dealership franchise structure. Tesla pioneered and revolutionized this model for new vehicles, and it’s a model that most new EV manufacturers (Rivian, Lucid, Fisker, Arrival) are emulating. These newcomers don’t have to be as successful as Tesla to usher in a whole new landscape that didn’t exist just a few years ago, before the “digital sale” became reality.

In valuations and investment dollars, Wall Street is clearly voting for the “change agents” and the new dawn coming; look at the valuation of Tesla (higher than General Motors, Ford, Toyota and Stellantis combined), or compare the valuation of Carvana to that of CarMax.

These valuations aren’t based on today’s sales or net income, but on what the “smart money” foresees in changes down the road.

Also, most traditional manufacturers seem to want to emulate this digital direct-to-consumer sale, at least in some way. This has spawned the creation of the “agency model” for EV sales –  where the manufacturer controls the terms and sale price of the vehicle in a digital environment, subsidizes inventory costs for dealer test drives, and the dealer is a delivery agent for new vehicles.

Manufacturers with giant investments in EVs seem to be demanding more control of the sale, both to ensure the success of the new EV product and for quality and brand control.

That’s the conundrum here, and it’s where, I think, what in reality might be a small minority of dealers marking up across the board are helping to usher in tough sledding for all.

I want to make it clear: I’m not talking about franchise dealers marking up a hot model or two. That has been happening for decades and I think OEMs and consumers can understand and accept that. What I’m talking about is the wholesale markup of all new vehicles thousands of dollars above MSRP.

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This conduct is getting noticed. NBC’s “Today” show carried a story on dealer “price gouging” with a gentleman complaining to his state’s attorney general. Dealers have always been targets in the press, but this is now national news and will get more and more attention, with possible political repercussions.

In a free-market system, franchise dealers can, of course, price as they see fit, and I have supported that for decades. I’m only suggesting that all be aware of the potential short- and long-term consequences of how this pricing effects our industry on a state and national level. Franchise laws, like all others, can change based on public opinion, and the times, they are a-changin’.

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.