Mercedes dealers’ legal action against Daimler will set benchmark for valuation of franchise arrangements

The giant German automotive group Daimler has radically changed the arrangement with its Australian dealers slashing the value of a Mercedes dealership.

Mercedes dealers are suing the Germans for $650m in damages in a case that will set the benchmark for the valuation of hundreds of thousands of franchise arrangements around Australia.

The Australian government legislation to protect franchisees is now going to be tested in the courts because Mercedes franchise deals were very similar to most other franchises around the nation. Franchising in Australia is a $155bn industry employing more than 500,000 Australians so this is a landmark case.

If the German giant can radically change the arrangements to slash dealership values without compensation then so can every other franchisor in Australia which will make banks reluctant to finance those buying franchises and therefore slashing values.

Meanwhile from January 1 buying a Mercedes car is going to be a very different experience because the German manufacturer will set the selling price and competitive negotiations with dealers will end. The turmoil likely to follow in the Mercedes dealership network gives its rival BMW a unique opportunity to regain market leadership in Australia.

Until now Mercedes dealership franchises were among the most valuable in Australia and often sold around the $15m to $20m range.

Australian families often borrowed large sums from banks to fund those purchases believing that the success of Mercedes in Australia would continue well in the future so the goodwill value in their franchise agreement was safe. They believe they are now set to suffer huge capital losses because the goodwill in the business has been substantially reduced by the Germans without compensation.

The five level state-of-the-art Mercedes-Benz Brisbane dealership. Picture: Supplied

Like most other Australian franchises all Mercedes franchises were renewable every four years and they were all set to roll over on December 31 2021. The routine rollovers had taken place for many decades so successful Mercedes dealers were not apprehensive. They looked forward to another bumper 2022.

The Germans had alerted them at conferences that they were looking at a different arrangement but verbal assurances at the time made the dealers confident there would be no fundamental change in the value of dealerships. .

Then a couple of months ago came the bombshell. From January 1, the Germans declared that the existing Mercedes franchise arrangement would be radically altered. The Germans and not the dealers would set the selling prices and the dealers would receive a small commission on the sale.

The existing arrangement where the dealers negotiated prices with buyers in a competitive market would end; dealers would shift from being independent self-run businesses to become agents of Daimler which would own the customer data bases and effectively manage the business.

The dealers were told to sign or the franchise would be cancelled. They claim they signed under duress.

The dealers would still be free to operate in the used car and servicing space but both those areas of activity depend on the volumes created in the new car market place.

The Australian families who owned these dealerships were deeply shocked because not only had many paid large sums for goodwill but they had invested in land, facilities and staff training on the basis that the franchise arrangement with the Germans would continue

Some 40 Mercedes dealers from all around Australia — 80 per cent of the total — have lodged proceedings in the Federal Court seeking $650m damages for loss of goodwill. The coming together of such a big proportion of Australian motor dealerships in an action against a German giant the size of Daimler has no precedent in Australian franchising.

Australian franchising legislation provides that renewals must be conducted in good faith and under terms that are fair and reasonable. The Australian families who own the dealerships are claiming that the Germans’ new arrangement was not fair and reasonable and not undertaken in good faith.

It will be a matter for the Federal Court to determine the exact facts and whether the actions of the Germans slashed the value of goodwill as the dealers claim and created a breach of the act and therefore damages must be paid.

If the court holds the that the actions of the Germans are in accordance with the act then the precedent so set will reverberate around the nation because it means that any franchisor can radically change arrangements on renewal date.

Banks have being happy to fund well qualified people buying franchises believing they were entering into what was, in practice, a long term arrangement. Once funding is restricted then the value of the franchises falls sharply.

And it is also a tragedy. If we go back 30 or so years the leading brand in BMW/Mercedes area of the prestige car market was BMW. A so called “BMW Beamer” was a prized possession and Mercedes did not have anything like the same rankings of BMW in the prestige market.

But over the years Daimler improved the Mercedes product and brilliant marketers we‘re attracted to Mercedes dealerships and together they outflanked BMW.

But in recent years BMW has greatly improved its product range and encouraged dealers to invest in the in their facilities and service and create a partnership — just as Mercedes had done in decades gone by.

BMW will be encouraged by the fact that when last July Honda undertook a similar change in its dealership relationships it caused a fall in Honda market share. But of course it‘s too early to tell whether that is a long-term trend. But Honda dealers did not combine to issue proceedings against the Japanese for damages.

Mercedes standing in Australia will now be challenged by the fact that it’s prized dealer network stumped up the money to fund the legal costs required for such a major action against a company as powerful as Daimler.

And the Germans are taking a big risk. Many Mercedes buyers are successful small and medium business proprietors who relate to the families behind the dealerships who are now suing the maker of the cars.