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Dealer markups are at an all-time high and manufacturers aren’t pleased about it.
Why Prices Are High
As you may be aware, prices across the economy have been on the rise. Year-over-year inflation numbers have been running above 8 percent for some time. Pandemic related scarcity has combined with government stimulus to create a classic mismatch between supply and demand. And one sector where this dynamic has been most stark and visible is the auto industry.
As we’ve written here and here, a global shortage in microchips has led to major disruptions in automotive manufacturing resulting in halted production lines, dealers’ lots left half empty, and a general shortage of new vehicle inventory.
This supply-side deficit has, naturally, led to an increase in prices as consumer demand for new cars has remained robust. And it’s not just new cars, either. The used car market has seen an even greater rise in prices as new car shoppers shift to the used market in search of a better deal.
While manufacturers have raised prices moderately, both for opportunities sake and to maintain profitability in the face of lower volumes, much of the rise in prices has come on the dealer side of the equation, including in the form of dealer markups.
What is a Dealer Markup?
A dealer markup is at least part of the cost of a vehicle beyond the MSRP (manufacturer suggested retail price). These dealer markups can be found on the second of the two window stickers (the first carrying the MSRP and trim specifications). A dealer markup will often carry language like “local market adjustment” or, more transparently, “additional dealer markup/profit.” Under more typical circumstances, dealers apply a markup to highly desirable new vehicles, like those first-year C8 Corvettes.
But at least anecdotally, dealers across the country have taken to ballooning these markups on those desirable vehicles and applying them across their lineup, jacking up the price of more mundane fair like Hyundai Elantras, for example. And when these data points begin to coalesce, you go from mere anecdotes to hard facts.
Indeed, many of the industry’s more popular and desirable offerings are consistently seeing markups of 20-30-percent. This is where we see the V8-equipped Jeep Wrangler frequently listed for nearly $30,000 above MSRP or the “affordable” new Ford Maverick listed for 30-percent above MSRP.
Manufacturers Aren’t Happy About It
So, despite the low inventories, US dealers have seen some of their highest margins ever in the past year. Partly this is just how supply and demand interact, and while price gouging writ large in the economy is probably a political canard, at least in the case of US car dealers, it looks like individual actors are indeed taking advantage of the situation. (The oil industry may be another, as we note here.)
Rather than allow the market to settle (by seeing demand decline in the face of soaring prices), manufacturers are trying to address the problem of high markups head on. GM, Ford, and Hyundai are just a few major carmakers who’ve written sternly worded letters to their dealer networks warning against excessive markups.
In his letter to dealers, Ford CEO Jim Farley ominously noted that the company knows which dealers are the worst offenders and threatened that “their future allocations of product will be directly impacted” as a result. Similarly, Hyundai called out practices like listing one price on a dealer’s website and presenting a different number once the shopper is at the dealership.
Both Ford and GM said they specifically worry about the excessive markups when it comes to their new slew of EVs coming to market. GM’s North American President Steve Carlisle made clear the company would take a dim view of dealers inflating reservation prices on upcoming EVs as well as significant markups form MSRP.
The worries about EVs are well founded. Electric vehicles already tend to command a price premium over their internal combustion counterparts. Because of the chip shortage and related supply chain issues, EV output has been flagging. This supply crunch couples with “hot-new-thing” desirability to make EVs a particularly prime target for high markups. The result, as GM points out, could be retard EV adoption just as the industry is attempting a historic shift toward electrification.
How Buyers Can Respond
So, what’s a car buyer to do in the face of large dealer markups?
First, compare prices in your area. This should include cross-shopping vehicles from the segment you’re interested in. This means looking at the Honda CR-V and Subaru Forester if you’re thinking of buying a Toyota RAV4.
Next, you can look for and ask about manufacturer incentives that can help offset a dealer markup. Manufactures offer cash incentives for recent college graduates, military veterans, as well as “conquest” incentives for buyers who are switching brands and brand loyalty incentives.
Another thing to keep your overall cost down is to closely examine your purchase agreement and ask questions regarding additional charges like protection plans, gap insurance, extended warranties, and documentation fees.
If you’re shopping for a new car, you can also shift over to the used car market. While the gap between new and used cars isn’t what it was previously, you can still find good deals out there. A good bit of negotiating advice is to look up the trade-in/part-to-party sale value of the vehicle you’re shopping for. Typically, dealers are looking for at least a $1,500 to $2,500 profit on a used vehicle. Knowing how much they spent on a vehicle can help you know how much wiggle room you have on the final sale price.
The same can go for new cars, but this time you’ll want to research the inventory price dealers are paying for a model. The gap between that number and the MSRP is their initial profit margin, further bolstered by any dealer markups.
The best bit of advice can also be the hardest to adopt, patience. Do your research, shop around, and be ready to wait if finding the best deal possible is your top priority. Unfortunately, untangling global supply chains will take years, and as a result, car prices are likely to stay above “normal” for some time to come.
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