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Dealer jitters at non-renewal of long-standing retailers
23 Feb 2010
By JOHN MELLOR
SEEMINGLY high-handed dealer dismissals of car retailers by car distributors have come under scrutiny in federal parliament, the Australian Competition and Consumer Commission (ACCC) and the Supreme Court of Victoria after several long-standing Queensland dealers were terminated.
The moves, which will spook banks lending money to long-standing dealers for facilities upgrades and other improvements to the franchise (see comment story), include the ending of long-term relationship with the Mercedes-Benz dealer in Cairns, in North Queensland, and an abrupt termination, with effectively only a week’s notice, of a Nissan dealer in Brisbane’s south (see separate story).
In the case of Mercedes-Benz in Cairns, Mercedes-Benz Australia/Pacific has ended a 36-year arrangement without any reason being given to the dealer.
The dealership was owned by long-standing motor retailers, the Irelands – one of the most highly-respected dealer families in Australia.
Mercedes-Benz handed over the franchise to the Trinity Motor Group which will benefit from the 36 years the Irelands put into building the Mercedes customer base in the Cairns region without having to pay the Irelands any goodwill.
The outrage in dealer and political circles spilled over into the senate when the issue was raised in a recent senate economics legislation committee hearing during an appearance by the ACCC chairman Graeme Samuel on February 10.
Left: Senator Ian Macdonald. Below: ACCC chairman Graeme Samuel.
Addressing Mr Samuel, Queensland senator Ian Macdonald said that he was aware that the ACCC had been involved in “alleged unconscionable conduct by Mercedes-Benz in relation to franchisees”.
He said he had written to the ACCC “about Mercedes-Benz franchisees in Cairns Queensland”, but the “focus of the ACCC seems to be to protect private citizens from big business”.
Senator Macdonald asked: “Is there any culture or principle or ability of the ACCC to look at protecting small business from big business in relations to the franchisees? I know you are aware of alleged misconduct by Mercedes-Benz in any number of ways but it seems very difficult for you to take action.”
Mr Samuel said in part that the ACCC had “a whole area that deals with the issue of small business and its potential mistreatment by big business”.
But he added that the Trade Practices Act was also clear, wanting to “promote competition and not protect any business, be it big business or small business, from the rigours of fair and lawful competition”.
Senator Macdonald asked if the act contained any amendments that might enable the ACCC “to more closely look at what seems to be very unconscionable conduct by, in this case, international corporates in relation to franchises and the fact that they do not seem to have any obligation to act fairly in their contractual dealing.”
Mr Samuel said the issue had been the subject of many federal and state reviews with the latest review by an expert panel due to be finished “in the very near future”.
Under the Mercedes-Benz dealer agreement, it is possible for Mercedes-Benz to issue a ‘Notice of Non-renewal’ up to 90 days before the end of each calendar year. If such a notice is not issued, the dealer agreement continues for another 12 months.
But the reason for the dismissal of the Ireland’s in Cairns remains a mystery.
The Ireland’s dealership was holding average national market share for Mercedes and Mercedes rural Queensland and had normal CSI scores.
A letter to customers obtained by GoAuto said that year-to-date November 2009, Ireland’s Mercedes-Benz van salesperson was the highest placed regional van salesperson in Australia, at 227 per cent of target, and the sales manager was placed eighth nationally of all regional van sales managers in Australia at 156 per cent of target.
Mercedes-Benz wrote 15 months ago to say that it would not renew its agreement at the end of 2009.
According to the letter to customers, when the Ireland’s asked for a reason, Mercedes simply refused to give an answer although the dealership received indications from Mercedes employees that it was nothing to do with performance or facilities.
A person familiar with the matter said: “They just decided not to renew them.”
When the Ireland’s sought an explanation it was given one meeting with Mercedes-Benz in Melbourne, but it said that Mercedes refused to state a reason in that meeting or since. Mercedes executives said they had no desire to air “dirty washing”.
GoAuto understands from legal circles that failing to give a reason is a legal tactic to ensure that Mercedes-Benz does not give the dealer any starting point or grounds for taking court action.
Lawyers told GoAuto that by sticking to a script prepared by the legal advisers, Mercedes executives are kept out of legal harm’s way even though their actions in not giving a reason for the dismissal could be seen by most fair-minded people to be unconscionable in a moral or ethical sense.
Repeated emails and phone calls to the recently departed Mercedes boss in Australia, Wolfgang Schrempp, eventually elicited a letter saying he would not meet with the Ireland’s and that he would not discuss the matter further.
Some dealers have described the issue as “terrifying”.
They say that if the Ireland’s had a history of non-performance or a string of unresolved CSI complaints the factory’s action would be legitimate.
But it is the act of terminating in the absence of anything of that nature and not giving a reason that has shocked dealers.
This means that any dealer, no matter how successful, could get a letter with three months notice telling them that they are not continuing on the whim of someone at head office.
One leading dealer, who asked not to be named, told GoAuto: “You basically eliminate all the value in someone’s life’s work. It is just remarkable that they can have the ability to do that.
“What is even worse is that aside from being left with an expensive showroom dedicated to the brand, you are basically having all the goodwill in the customers you have been building over 30 years passed on to another dealer in the same town and not receiving a penny for it.”
The dealer told GoAuto that Canberra politicians needed to look at the fact that the people making these decisions about Australian dealers were employees with little stake in the local retail car industry, often foreign nationals, and often just passing through on their career path.
“But they are playing with the livelihoods of people and families that have spend lifetimes and make long-term investments building up customer bases for the benefit of themselves and of the franchise only to have it cut from under them by someone who will undoubtedly have moved on within a relatively short time.
“The whole thing is just sheer madness.”
Comment by JOHN MELLOR:DEALER agreements that contain “sudden death” renewal triggers of just 90 days will place the funding of future dealership upgrades at risk.
The issue has come to the surface with two recent moves against long-standing dealers which are likely to spook banks funding the multi-million dollar upgrades demanded by distributors.
These investments are underway all over Australia. It seems every dealer is spending. Just three dealers visited recently by GoAuto are making investments of $2 million and $6 million on showrooms and the third committing $19 million to a completely new facility on which he was requiring $9 million from the bank.
But if long-standing dealers of substance can be taken out by the factory with no reason with as little as 90 days notice factories need to think through the exposure that puts the entire retail car industry in terms of its banking relationships.
Banks require certainty.
Funding of premises upgrades are made on the basis of returns over seven to 10 years to pay off the investment in a well-run dealership. But banks will not approve funding for dealers with a 90-day notice period hanging over their heads every 12 months.
So as distributors seek to make their dealer agreements increasingly subject to short-term termination triggers, they need to understand that they will imperil the chances of dealers being able to fund premises upgrades they require.
The federal government came to the rescue of dealers when GMAC and GE Money pulled stock funding because Canberra came to understand the large investments in premises and people made in every dealership in every electorate in the country.
But dealers are also exposed to the whims of people at the franchise office with no investment in these businesses who can take out a business in any community in the land – now apparently without even saying why.
Canberra needs to step in to at least create a code that will prevent such agreements being put in place and forced on dealers who fear they will lose their businesses if they don’t cave in and sign.
Yet, if anything, GoAuto has been told things are worse under the Rudd government.
The industry is claiming that previous laws that would protect a dealer from having to sign contracts with such short notice periods were recently changed by Canberra and state governments, leaving dealers at the mercy of the whims of their factories.
The unfair contracts law has been gutted and the small business and competition policy minister Craig Emerson has shelved amendments that were supposed to help franchise holders because, the industry says, he does not think they are needed.
Clearly they are.
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