Ford CEO Asks Dealers to End Markups, Plans Punishment

You’re probably well acquainted with dealer markups by now. Supply shortages created during the pandemic have left the world with fewer automobiles and car dealerships are taking full advantage of the elevated demand. As you might have expected, this trend resulted in plenty of people overpaying or becoming cautious of a market they now see as wildly predatory.

Car manufacturers have begun asking dealerships to take it easy on the price gouging. General Motors made its plea last week and Ford has followed up by reiterating its own concerns during the company’s Q4 2021 earnings report. The Oval is worried that dealer markups are tainting its relationship with customers, with top executives making casual references to the trend back in November. Ford CEO Jim Farley is now telling dealers that they need to cut it out lest they be punished by the manufacturer.

Ford also has concerns that price spikes will permanently taint the introduction of electric vehicles. It already wants dealers to include a no-sale provision on the upcoming F-150 Lightning similar to what happened with the GT supercar. While this has been challenged by consumer advocates and the right-to-repair movement, the fear that the first batch of all-electric pickups will be purchased with markups only to be flipped by private sellers asking even more remains very real.

Meanwhile, domestic automakers are starting to realize that they can’t operate at limited capacity indefinitely and that their current lineups might not be ideal for the times. I’ve often griped about the inherent dangers of manufacturers becoming fixated on high-margin SUVs and pickups. Once the economy hits a snag or fuel prices start approaching $4 per gallon, some people will start looking down-market and embracing smaller vehicles with better fuel economy.

We now appear to be approaching that scenario. But the industry is also on the cusp of selling mainstream and commercial EVs with larger price tags. Ford’s Lightning is supposed to start at $40,000 while the liquid-fueled F-Series begins at $30,000. Granted, the electric option is supposed to help customers recoup the higher point of entry by having lower operating costs and less maintenance. But it takes years for those savings to add up, leaving customers to weigh lower monthly payments against not having to pay at the pump.

“In the spring, we’re in the middle of launching F-150 Lightning. Few people ask us any more about why we phased out sedans, and many more asking when they could take delivery of the new Bronco or Maverick or Lightning. So we’re doing everything we can in our powers to increase our production and break constraints. We don’t like making our customers wait, and we’re taking action to ensure that they don’t pay unreasonable markups,” Ford CEO Jim Farley explained during the end-of-year report.

“We have very good knowledge of who they are. And their future allocation of product will be directly impacted because of that policy. And we’ve seen really quick action by our team. On the BEV side, this is quite an important topic because the margins that we want to build to in BEV are gonna be heavily dependent on a different go-to-market and customer experience. I won’t go into any more than that, but this is a quite important lesson for us of the franchise system and the way we will manage going forward.”

Mr. Farley did not explain what constituted unreasonable markups or exactly how it planned to tailor its management of the franchise system for electric cars. But he did repeat that the automaker believed only around 10 percent of dealerships were over the line during a recent interview with Fox Business, presumably indicating some willingness for price increases:

Farley’s warning came shortly after Ford head of sales Andrew Frick sent a letter to dealers stating that they could lose F-150 Lightning allocations if they tried to get reservation holders to pay additional fees for the electric truck.

Barclays analyst Brian Johnson has suggested the value of markups being applied by Ford dealers is worth upwards of $3.6 billion.

Farley added that it will be particularly important for the company to address pricing concerns about electric vehicles while rivaling the likes of Tesla and Rivian that operate direct-to-consumer sales models.

While markups can be modest, helping to absorb lost revenue from underwhelming sales, that’s not what’s happening. Many dealerships are simply adding tens of thousands to the sticker or in-demand models and refusing to sell anywhere near MSRP on everything else, resulting in record-breaking profits for larger retailers (backed by data from the North American Dealers Association). Meanwhile, smaller stores serving isolated communities averaging modest paychecks have been struggling.

Though it’s pretty hard to see the factory as the hero. Automakers have also taken advantage of the situation by eliminating incentive spending and rejiggering production schedules to prioritize vehicles with the fattest margins. Component shortages resulted in assembly lines being repeatedly idled while pandemic protocols sent many workers home — helping to reduce overhead.

Manufacturers may also use the dealer pricing to rationalize direct-to-consumer sales. With haggling having been largely abandoned over the last two years, the franchise model is making less sense to consumers with lowered expectations and automakers are becoming aware of this. This has created an opportunity for manufacturers to begin selling the idea of factory direct, negotiation-free sales as an improvement. Though that doesn’t automatically mean it would be, especially if there’s a chance for the market to return to the prior state of normality.

[Image: Ford Motor Co.]