Price gouging or business survival? Updated 3/27/2022

If you peruse many dealership web-sites you'll see that they've tacked on a surcharge. Some call it a 'market adjustment.'  

It isn't unusual to see a markup on hot selling model that is also in short supply. But until recently you never saw a markup on every single vehicle on a dealer's lot.

Now admittedly these are not normal times. We've been through 2 years of a pandemic, supply disruptions, and a shortage of computer chips. Drive by many dealerships and you see almost empty lots. 

Ford and General Motors have warned dealers to stop charging above the sticker price (https://www.wsj.com/articles/ford-gm-warn-dealers-charge-above-sticker-price-and-face-repercussions-11644323580). This doesn't seem to have deterred some dealers. 

Recently I saw an ad by a dealer who puts a market price adjustment on all their cars so I called them on it. I actually got a response. I'm not naming the dealer but this is their reply:

"Bruce, we are sorry you feel that way about the dealership. Unfortunately we have been forced to scale our business with substantially less volume of vehicles because of the global chip shortage. Our choices are either increase the margin on the few vehicles we have available or scale back the entire business to be profitable on half the volume. Nobody has a clear picture on how long the shortage will last and we have decided to preserve the 80 employees working at the dealership and increase the margin on the vehicles we have to sell. It has been difficult to survive on half the expected volume. However, we understand and respect your opinion.

Bruce, Ford knows the percentage of dealers forced to charge more than MSRP is way more than 10% as quoted in the article. I think that is why GM was quoted as blaming a "minority of bad actors" in the GM quote. We have tried to keep our margins reasonable and adjust regularly based on units we are able to acquire from the factory. I think if you researched pricing across the Ford Dealer body, we are much lower than most. We currently have less than 30 new Ford's available for sale on our lot and under normal market conditions we would have 150 new vehicles for sale. What Ford and GM are not talking about in the articles is they have done the same strategy with their margins. They have virtually eliminated the normal incentives on vehicles increasing their margins substantially to make up for the reduction in volume, while the dealers are trying to survive on the manufacturer suggested retail price. For example, the average incentive spend for Ford vehicles has traditionally been 5-6k per unit. That incentive is paid from the manufacturer to the customer to reduce the price of the vehicle in the form of rebates and interest rate reductions. Instead, the manufacture is taking the lack of incentives to the bottom line. They could prevent the necessity of the dealer to increase margins by giving half their normal incentive spend to the dealership for margin, but they have decided they need to margin to survive themselves. Since they have the ear of the media, the other side of the story never seems to get any attention. With that said, it has been a difficult time for all, and we hope things begin to normalize soon."

I have sympathy for the dealers, really I do. But it seems to me that at least this dealer is making his customers pay for a fight with Ford; "They (Ford) could prevent the necessity of the dealer to increase margins by giving half their normal incentive spend to the dealership for margin, but they have decided they need to margin to survive themselves." 

Then there was a post on Nextdoor (again no names and I'm not picking on Ford):

"W O W! Talk about price gouging! Was at (unnamed dealer) Ford today. Looked at a Escape hybrid. Window sticker was $35,119. They offered $6,500 for my trade. My math indicates that would leave a balance of $29,422. After “talking” to the manager he says they can do the deal for $44,000! That pure profit of over $14,500. Add to that the retail on my trade was at least $10,000 for additional profit of $3,500 or $18,000 profit on a single deal. You know supply and demand."

I have worked in dealerships as a mechanic (years ago) during up times and down times. It always seemed that when sales were booming the 'back shop' was barely tolerated. But when sales were lagging repairs, whether warranty or not, the Parts & Service departments were expected to carry the dealership. 

Finding a dealer that isn't going to gouge you is not impossible. Here's an ad from an unnamed Ford dealer offers no additional markup.

I know of no other business that charges more during a downturn. Imagine if your local fast food restaurant added a 'market adjustment' to every item on its menu because business was slow. It just doesn't work that way. Normally a business increases prices when their costs go up.

I understand supply and demand, I understand that when supply goes down and demand stays steady or increases prices may rise. But talking a long range approach might serve these dealers better. There is a reason why, according to one study, that "87% of American adults dislike something about the process of purchasing a vehicle at a traditional car dealership."

To add to the perception of greediness by auto dealers there is a movement in some state dealer associations for dealers to get paid for work they do not do. Many auto makers now are capable of performing updates to your car's computer over the air, a warranty job formerly done by dealership technicians. This does not mean they want to charge the customer, they want to be able to charge the auto maker for the update as a warranty repair even though they didn't do a darn thing.

For decades dealerships have tried to improve their image. But when it comes right down to I have seen a huge change. 

I, like so many, dread buying a new car. I don't like sales people in general, and auto sales people are often the worst. I've found them often to be pushy and ignorant about the product they sell. I have a friend who drove almost 400 miles to find the car he wanted at a deal he was willing to accept. 

I know what I want in a car yet when I've actually talked with a sales person, an internet sales person, they kept trying to upsell me into something I did not want. 

So my opinion is that dealers have earned their reputation. 

3/27/2022 - Today my wife and I went new car shopping. We're not ready to buy, just checking out some possibilities. We are both aware that now is not a great time to be car shopping but our newest car is 20 years old and although the major mechanicals are okay it's starting to need repairs.

We're retired and although we're doing okay we watch our money. So we're looking for our last new car that is in a price range we feel comfortable with. Yet we do not want a bare bones car. And we want a car, not a SUV/Crossover. Yeah we're picky. 

Today we went to a local dealer today just to check things out. Nothing in our price range on the lot but some on order. That's fine. The salesperson was fine, not pushy. But what got us was a car with price of $23,500 out the door was $34,239. That's one hell of a markup.

Now it wasn't all a dealer markup, it did include sales tax (8.25%) but come on. 

Then I heard from a friend who was looking for a little motorcycle/scooter. MSRP is just over $1,800. The dealer wanted $4,000! 

So to all the dealers out there taking advantage of these trying times - We will not forget you.