Mercedes Benz Australia says old car sales model is failing

Mercedes Benz said it has a legitimate commercial interest to protect its business in Australia from sweeping changes to the way cars are sold and car dealers need to change with the times.

Mercedes Benz Australia said market forces and technological changes in the industry had forced it to change its approach to selling its cars.

Mercedes Benz Australia says sinking profitability for car dealers, changes to consumer tastes, online disruption and rising dissatisfaction from shoppers forced it to change its business model, sparking a $650m legal battle with dealers.

In an eight-page response filed with the Federal Court late on Monday, Mercedes Benz Australia said market forces and technological changes in the industry had forced it to change its approach.

It said from January 2017 to December 2019 the Australian auto market was in decline, with a 10.6 per cent reduction in the sale of new vehicles in 2019 compared with 2017. From 2017 retailer profitability was in decline, with average dealership net profit as a percentage of total revenue falling from 2.6 per cent in the first half of 2015 to 0.7 per cent in the second half of 2019.

The court filing from Mercedes Benz warned that gross profit per new vehicle sold for the average retailer fell by 98 per cent between 2015 and 2019.

Mercedes Benz said it had identified a number of factors contributing to the “state of decline” or representing a “threat to the future sustained success”. These included changing consumer expectations and behaviour which had lifted the importance of Mercedes Benz’s online presence, customer unhappiness with the “negotiation stage” of the buying process, inter-brand competition impacting Mercedes Benz’s market share, the presence of online disrupters and the erosion of dealer profitability.

“Mercedes Benz had a legitimate commercial interest in making changes to its business model in an endeavour to improve customer experience, reduce operating costs, protect dealer and Mercedes Benz Australia profitability, protect the brand against disrupters and position Mercedes Benz Australia and its dealers for future sustained success against physical and digital competitors,” the Mercedes Benz court filing states.

It said its structure and agreements with car dealers might need to change “from time to time” to reflect market forces.

Mercedes Benz said an agency model would facilitate its objectives in a way that was not feasible under the existing dealership model. It argued in its court filings that it gave significant notice to dealers about the proposed introduction of the agency model, consulted widely with them and presented various potential models to dealers.

The court documents reveal that around September 2018 Mercedes Benz Australia established its ‘‘retail of the future working group’’ and following extensive research it decided to inform car dealers in February 2020 that the agency model would be introduced in 2022. Continuation with the Mercedes Benz network would be at the complete discretion of each dealer.

Mercedes Benz said several features of the new agency agreement that benefited dealers were incorporated by the carmaker after collaboration with dealers.

The court action was launched by 41 of the 53 Mercedes dealerships in Australia which claims the shift to an agency model “substantially” diminishes the goodwill of their businesses.

A spokeswoman for Mercedes Benz Australia confirmed it has filed its concise response in the Federal Court on Monday.

“We developed Retail of the Future in consultation with our passenger car dealer network in response to changes in the industry, consumer behaviour and in the way new passenger vehicles are sold.

“Our objective is to establish a solid foundation for continued success in Australia for both our brand and our retail partners – now and into the future.”