Ford, GM are cracking down on dealers for inflating prices — Quartz

The average price of a new car in the US is higher than ever before, and some of the biggest automakers are starting to blame the dealerships that sell their vehicles.

At Ford, for example, the average vehicle transaction price is growing faster than the revenue the company earns on car sales, according to the analytics firm JD Power, meaning dealers are pocketing a decent chunk of the company’s profits.

About 10% of dealers in Ford’s network charged more than the suggested sticker price last year, the company’s CEO James Farley said on Feb. 3. Farley warned dealers they could potentially receive fewer models. General Motors issued a similar warning to dealers inflating car prices last month. Relationships between automakers and dealers are shifting as GM and Ford compete for customers in a historically tight market.

Dealer markups intensifying due to supply-and-demand issues

Automakers typically recommend a retail price when they sell their vehicles to dealerships, but dealers are not obligated to adhere to it. Over the past year, automakers have struggled to produce enough cars to meet customer demand due to a microchip shortage and other supply chain constraints. As a result, prices of both used and new vehicles have risen to historically high levels. The average new US car sold for more than $47,000 in December, according to Kelley Blue Book, more than $6,000 higher than the previous year.

Whereas it was once rare for dealers to sell cars above their sticker price, that trend started to reverse last year. 80.3% of car sales in the US went for more than their suggested retail price this past January, compared to just 0.2% of car sales in 2019.

While most cars are affected by price markups nowadays, the models seeing the most significant price markups in the US tend to be more expensive than the average vehicle to begin with. Mercedes-Benz recommends dealers charge $168,868 for its luxury G-Class car, for example, but dealers currently charge customers $176,299 on average.

GM, Ford face competition from automakers who sell directly

As the US car market accelerates its transition to electric vehicles, both GM and Ford face competition from rival automakers like Tesla, which sells directly to customers rather than going through dealerships.

Meanwhile, the popularity of new cars introduced by traditional automakers to better compete in the EV market is fueling some dealers’ rationale for price gouging. Last month, Ford warned dealers specifically against raising prices for its the electric F-150 truck, following reports that they were being advertised as high as $30,000 above their sticker price, and at least one dealer reversed course.