What the Mercedes-Benz win in Federal Court means for new-car buyers across other brands

The decision by Mercedes-Benz and Honda to switch to a non-negotiable, fixed-price business model in Australia has been deemed legal after a challenge in the Federal Court. Will other brands follow suit, and is this good or bad for new-car buyers?

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German car giant Mercedes-Benz last week won a multimillion-dollar legal challenge in Federal Court – initiated by 38 of the approximately 50 dealers across its network in Australia – following a radical change to its business model that led to non-negotiable, fixed prices no matter which showroom customers walked into.

The decision by Mercedes-Benz Australia to make the switch from January 2022 follows a similar decision by Japanese car-maker Honda to change the way it does business with new-car buyers in Australia from July 2021.

Supporters of the non-negotiable, fixed-price business model say it delivers fairer prices and stock allocations to buyers who don’t want to haggle.

Detractors say the new arrangements have led to rising prices and customers are worse-off because dealers no longer have the ability to negotiate a sharper deal to clear stock.

Dealers also say the new fixed-price business model discourages them from investing in staff or facilities because the terms of future contracts could change suddenly – or the renewal could be declined without reason.

On the flip-side, some dealers haven’t exactly helped their cause by overcharging exorbitant dealer delivery fees on certain in-demand vehicles during the global pandemic, though for the most part these examples have since eased.

Under the new structure at Mercedes-Benz and Honda, the car companies own the showroom stock and the dealers are simply “selling agents”. This is how both companies were able to side-step anti-competitive consumer protection laws.

If, for example, 50 Mercedes dealers or the approximately 100 dealers in Australia agreed to set prices among themselves on the new vehicles they sell, it would be deemed illegal.

But now that Mercedes-Benz and Honda own the stock, they are each regarded as one entity – not several entities colluding with each other.

The Australian Competition and Consumer Commission (ACCC) – the peak consumer watchdog – has previously acknowledged it is monitoring the change by some car giants to their dealer agreements, to see if the current laws have kept pace to continue to offer consumer protections on price fixing.

In announcing the findings of the Federal Court case this week, Justice Jonathan Beach indicated Australia’s franchising laws may need to be reviewed further (following changes in 2021).

His Honour took the extraordinary step of highlighting that the group of Mercedes-Benz dealers who launched legal action “ran a powerful and very thorough forensic case” and their legal team “presented a very skilled case on their behalf.”

“All that could be said or should have been said on their behalf was said,” Justice Beach noted in his findings.

“It will be apparent from the reasons that I’m publishing, that the applicants (the Mercedes-Benz dealers who launched legal proceedings) were successful on many issues of fact, but lost on the law, essentially.

“Given the facts of this case, leading to an adverse result for the applicants, it may be that further consideration needs to be given to the terms of the Franchising Code and possible modification. And that is a matter for another day. And obviously, in another forum.”

The group of Mercedes-Benz dealers who launched the legal action claimed they were entitled to compensation for the “goodwill” they had built-up in their businesses over several years, and in some cases over decades.

The new Mercedes-Benz dealer agreements were put in place after the most recent changes to the Franchising Code were introduced in 2021.

The question now is how many – if any – rival car-makers will follow Mercedes-Benz and Honda down this path in Australia by switching from the traditional dealer business model to a new non-negotiable, fixed price structure?

After all, companies such as Tesla and Polestar set-up shop in Australia without dealers – and with fixed prices – from the get-go.

But as for brands with a long history in Australia preparing to make the switch to fixed prices, the answer is: it’s not yet clear.

The early reading on this is that the Mercedes-Benz court case may not trigger a stampede of car giants wanting to rewrite their contracts with dealers. Here’s why.

Under the traditional new-car dealer sales model used widely across the majority of brands today, the showroom owner buys the vehicles from the car company and starts paying for the vehicles the moment they leave the car company’s holding yard.

By the time the stock arrives into the showroom, it has already started to cost the dealer money, so they need to sell it as quickly as possible – so they can order another car, and so on.

When car companies are overstocked, they hit the phones in the final few days of the month and offer generous discounts to dealers to buy in bulk.

And so, with one phone call, a car company can effectively reach into a dealer’s cash register (or the dealer’s access to credit, to be specific) and rake out millions of dollars in one go.

Most car companies like this approach: they build cars in bulk and like to sell cars in bulk. And the funds hit their balance sheets right away.

Under the non-negotiable, fixed-price business model, car giants such as Mercedes-Benz and Honda are not getting paid until the car is in the customer’s hands. Add in the frustrating delays with finance approvals or bank cheque clearances, and it’s a lengthy and cumbersome process for these multinationals.

Which is perhaps why you see car companies such as Toyota and Ford – and in fact all Top 12 brands we canvassed on this subject more than a year ago – repeatedly saying they have no plans to switch to non-negotiable, fixed prices locally.

Indeed, Volvo Australia recently experimented with selling its electric cars at non-negotiable fixed prices under the so-called “agency” model, but has since reverted to the traditional sales model. Volvo Australia now sells its electric vehicles to dealers who sell them at negotiable prices alongside Volvo’s petrol-powered models.

The Volvo Australia example points to why most other car brands are likely not about to follow Mercedes-Benz and Honda down the fixed-price path locally. Chances are most of them can’t afford – or have no desire – to carry the tens of millions of dollars in unsold stock for months on end.

Chasing every individual customer sale would be like scratching around for loose change to these big car companies.

So while fixed pricing works for some car brands for now – while demand is high and vehicle supply is tight – this radical business model is yet to face its true test: a market downturn.

The last three years has seen profits soar as demand went off the charts amid production bottlenecks and limited vehicle supply.

In the meantime, if you’re looking to buy a new car and don’t want to pay over the odds, wait for demand to ease and supply to increase in the next year or so. Then you will be able to drive a bargain.

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