Factory Pricing Decision Will Test Dealership Efficiencies

April 22, 2015

Here we go again. Another factory messing with dealer margins.

This time it’s Fiat Chrysler, according to an Automotive News article.

The upshot: The factory is raising invoice prices by 1 percent, while leaving itsFiat-500c-Abarth-1 Manufacturer’s Suggested Retail Prices (MSRP) unchanged. The end result, of course, is less available front-end margin for dealers.

Such is the life of a franchise dealer. At any moment, the factory can fundamentally change the rules of the retail game.

Of course, Fiat Chrysler’s decision will sting some of its dealers worse than others, particularly those in markets where the invoice-to-MSRP margin is almost irrelevant due to fierce competition.

In some cases, however, the pain for these dealers will largely be on paper, thanks to the prevalence of “below the line” monies that, as one analyst put, are intended to make dealers “whole.”

But here’s the kicker: The article says Fiat Chrysler’s decision is an attempt to increase its profit margins, given higher operational and supplier costs it’s absorbed in recent years.

Fair enough, I suppose. But wouldn’t it be better for dealers if their factory partners would first strive to improve margins through greater efficiencies, rather than simply passing along higher costs (and smaller margins) through increased invoice prices?

This question seems especially relevant given the reality that today’s market doesn’t afford dealers the luxury of raising their prices when they’d like a better bottom line. More and more, the pathway for dealership profitability and prosperity lies in efficiencies—those who retail and service a greater number of vehicles in the least amount of time invariably come out on top of their less-efficient competition.

Perhaps that’s the point of Fiat Chrysler’s decision. By shrinking dealer margins, they are effectively forcing their dealers to become more efficient, whether they like it or not.