Dealer Markups Can Hurt Manufacturers in More Ways Than One

·4 min read
Photo credit: fotog
Photo credit: fotog

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As a lemon law lawyer based near Detroit, my practice is tied to new car sales. Over the past thirty years I have seen a wide range of trends but nothing compared to what recent supply chain issues have wrought with the car market, both used and new.

Dealer lots I drive by that were flush with inventory pre-COVID are often empty or nearly so. And car prices reflect the supply problem. Prices are up, and that is if you can find what you are looking for. Now, almost two years into COVID, we are seeing an even crazier phenomenon. In the old days (pre-COVID) you would occasionally hear of dealers adding markups on top of MSRP for certain hot models. These “market adjustments” were frowned on by the manufacturers but you’d usually hear nothing beyond the grumbling of a few disgruntled would-be buyers who were shut out in their hunt for that particular new car. For the most part, the manufacturers appeared to let the dealers slide so long as it wasn’t a permanent business practice.

Now? All bets are off. In fact, the high-demand, low-supply market – coupled with some new hot models – has market adjustments in the headlines, as dealers seek outlandish money above and beyond MSRP. And manufacturers are publicly pushing back. Ford’s new F-150 Lightning electric truck checks all the boxes: A line that historically sells well, with the introduction of an electric version. Buyers lined up to place deposits on the trucks long before they could be delivered. Some dealers, realizing how far they could push this, actually told buyers that they would have to ante up more money than what they had already paid to get in line, just to stay in line. A signed purchase agreement? Some dealers didn’t put a whole lot of stock in such a thing and asked buyers to pony up more or lose their “place in line.” As for the sale price, some dealers were asking for a market adjustment of $30,000 above MSRP according to a variety of sources.

Those stories created enough of a stir to cause Ford to communicate its unhappiness to its dealers. One memo warned dealers that these “negative” customer “interactions” with higher prices and further down payments were damaging the Ford Motor Company brand. The problem there, though, is that Ford dealers are independently owned and operated and Ford can only exert so much control over them. And the “S” in MSRP does stand for “Suggested.” Interestingly though, Ford does have leverage here. With the trucks in such high demand everywhere, Ford threatened to divert the first deliveries of the Lightnings to dealers that were playing along with corporate. Want to sell that truck for $30K over MSRP? We’ll bump your delivery to the back of the line.

And Ford is not alone in this. GM has had an almost identical situation occur with several models, including the upcoming Z06 Corvette. Always a hot commodity, the heat is turned to full blast with the current market conditions. Dealers have been asking buyers to pay well over MSRP for the Vettes, as well as Chevy’s Silverado EV.

GM has now warned its dealers about gouging, and noted that the dealers do have “program rules” to follow. And while situations like this may have occurred in the past, it seems to be much more pronounced these days – with the market so warped by COVID’s effects. Like Ford, GM has warned its dealers that it could prioritize delivery of the hottest new vehicles to the dealers that are selling them without the crazy market adjustments or extra down payments to hold a place in line.

Will any of this work? It’s hard to say. It wasn’t so long ago that Tesla rolled out its direct-to-consumers sales model and the Big Three automakers lobbied against them on every front. One wonders if Ford and GM might not be looking at Tesla now and wondering what it would take to cut the dealers out of the equation.

Just because I am a lawyer, I will point out a very strange nuance to the “market adjustment” overpriced cars. Under the lemon law in Michigan (and this is true in most states), if a vehicle is defective and cannot be fixed under the law, the manufacturer must buy the vehicle back from the consumer – for what the consumer paid the dealer. So, if the consumer bought a lemon with a $70,000 MSRP and a $15,000 market adjustment, the manufacturer would have to buy it back for $85,000.

The odds of that happening are slim, of course. But anything that can happen in theory can always be used as fuel for an argument.

Steve Lehto is a writer and attorney from Michigan. He specializes in Lemon Law and frequently writes about cars and the law. His most recent books include Preston Tucker and His Battle to Build the Car of Tomorrow and Dodge Daytona and Plymouth Superbird: Design, Development, Production and Competition. He also has a YouTube channel where he talks about these things.

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