Mercedes-Benz dealerships seek $650m compensation from German automaker in ‘fight of their life’

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Australian Mercedes-Benz dealers are engaged in a $650 million “fight of their lives” against the German luxury carmaker in a test case described as one of the biggest in the history of franchise law.

Bob Craig sold his 48-year-old dealership last year, frustrated by Mercedes-Benz’s decision to switch to a fixed-price agency sales model.

“I would love to have done 50 years with Mercedes,” said Mr Craig.

“Over the past five years there has been a deterioration in the relationship between the dealer and the manufacturer.”

Previously, dealers bought cars from Mercedes and could set their own selling price.

But under the agency model, which came into effect in January, the manufacturer retains ownership of the cars while dealers become agents who sell cars at a fixed price for a fixed commission.

Thirty-eight of the country’s 55 Mercedes-Benz dealerships have sued the company in federal court for compensation.

Dealerships say they have been forced into signing new agency model agreements with Mercedes that will dramatically reduce their profits and wipe out years of goodwill with customers.

Mr Craig is not involved in the court case as he sold his business to Orange before the agency model came into effect, but he is speaking on behalf of former colleagues too nervous to publicly criticize Mercedes.

“They’re all broken, their livelihoods are broken,” Mr Craig said.

A photo of Bob Craig’s Mercedes-Benz dealership in Orange in the 1970s.(ABC News: Hamish Cole )

The dealers allege Mercedes hatched a secret plan in 2016 to switch to an agency model, undertook a bogus consultation process and moved forward with a decision despite the majority of Australian dealerships opposing it.

They claim that in an effort to capture profits from dealerships, Mercedes breached Australian consumer law by engaging in unconscionable conduct, as well as breaching the good faith provisions of the franchise code.

“This is a hugely important case for the automotive industry,” said James Voortman, chief executive of the Australian Automotive Dealer Association (AADA).

“In fact, it’s probably one of the most significant franchise cases in Australian history.”

James Voorten
James Voorten says dealerships allege Mercedes-Benz engaged in unconscionable conduct and breached its good faith obligations.(ABC News: Matt Roberts )

Dealerships involved in the case are seeking $650 million in compensation from the automaker.

“That takes into account all the millions of dollars of investment that has gone into the facilities, but also the equipment and the goodwill they have created,” Voortman said.

“That’s a big ask, but it’s more than fair.”

“They’re regional dealers, they’re urban dealers, they’re Australian companies and they’re fighting the fight of their lives against a major multinational.”

In March 2019, Deloitte modeled the impact of the agency model for dealerships.

He found, for example, that under the agency model, a particular dealer’s profits would decline by more than 50% compared to the concession model.

The case against Mercedes, which saw the start of hearings in Federal Court this week, is being funded by dealerships involved in the legal battle, including billionaire businessman Nick Politis, the PR firm working has confirmed. for ADAA.

“A lot of these dealers have represented the brand for decades, they’ve invested so much money in the brand, and they’ve done so much work to drive customers to the brand,” Voortman said.

“And now all that hard work is being removed with the change to a new business model.

“They need compensation for this change, and we hope the court will agree with that.”

Test cases for updating franchising laws

Last year, a Senate investigation, launched after General Motors decided to scrap the Holden brand, revealed an inherent power imbalance between car dealers and manufacturers.

The survey also looked at Japanese automaker Honda’s treatment of dealerships in its move to a fixed-price agency model.

Subsequent legislative changes introduced by the coalition government doubled fines for breaches of the franchise code and added other protections for car dealers, including “just and reasonable compensation for franchisees in the event of early termination”. .

Jenny Buchan of the University of New South Wales business school said Mercedes-Benz’s legal battle in Federal Court was a test for these new laws.

“So since 2015 there have been small incremental adjustments to the code, and the current adjustment is probably the biggest we’re dealing with,” Ms Buchan said.

“The current tweak introduces very specific requirements regarding car dealerships and the franchise agreements they enter into.

“This is an important case, and it’s really important that dealers have their day in court, and that the courts have the opportunity to really interpret the wording of this new franchise code amendment.”

Jenny Buchan
Jenny Buchan says the case against Mercedes-Benz is one of the most important in the history of franchise law.(ABC News: Dan Irvine )

“The problem with good faith is that good faith is such a nebulous concept,” Ms Buchan said.

Ms Buchan said a recent case involving 9/11 franchisees showed the difficulty of mounting legal arguments based on a breach of good faith and unreasonable conduct.

“They did not succeed [at] alleging in good faith they failed with unconscionable conduct,” she said.

“But they managed to establish that 9/11 misled them, so they were awarded damages in relation to the misleading conduct.”

Ms Buchan thinks that ultimately the Australian Franchise Code is still too weak to protect franchisees.

“My very deep view is that the franchising code can never give franchisees the protection they ultimately need, and that we won’t really see equality until franchisees are integrated from one way or another under the Companies Act,” she said.

Seamless sale pattern

In a statement, a Mercedes-Benz Australia spokesperson said the company was defending its position in court.

“It’s clear that Australian customers have embraced the new transparent sales model,” the company spokesperson said.

“We remain committed to the agency model and the benefits it offers our valued customers, including transparent pricing, reduced dealer delivery costs and access for all Australians to our national vehicle fleet. , regardless of the client’s place of residence.

Automotive industry analyst Steve Bragg, a partner at Pitcher Partners, said the agency model had been in place in New Zealand for several years and was gaining widespread adoption in Europe and the UK.

A white Jaguar I-Pace electric car on display in a showroom.
Jaguar is another global automaker considering switching to an agency model. (Reuters: Aly Song)

Jaguar, BMW, Land Rover, VW and Honda are just a few of the other companies adopting a fixed price sales model.

Mr Bragg said a potential benefit for customers buying through an agency model was price transparency – as long as they didn’t overpay.

“It’s a pattern that’s coming, but that doesn’t mean dealers have to lose,” he said.

“Going forward, as dealers do their part, they will also need to be compensated – and what they receive should cover the costs.”

“Not the company we recognised”

Bob Craig and Mercedes file
Bob Craig owned a Mercedes-Benz dealership for 48 years.(ABC News: Hamish Cole )

As online direct sales increase and more businesses bypass resellers and maximize their profits, the agency model represents the end of an era for industry veterans like Mr. Craig.

“In a country town, the car dealership — not just Mercedes, but every franchise — is a big part of the community,” Craig said.

“Our customers are our friends and they (the dealers) are part of the fabric of our city.

“I don’t want to be the grumpy old man who sold himself [of the dealership].

“But in recent years, that’s not the company we’ve recognized.”

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