Mercedes snips dealer margin to pay for EVs

To help cover the enormous expense of plunging into electric vehicles, Mercedes-Benz will tap an outside financial resource: its dealers' profit margin.

The automaker told U.S. dealers this month at its national retailer meeting in Las Vegas that it will cut their margin by half a percentage point, to 13 percent. The reduction will come out of the dealers' 6 percent "trade margin," which is the difference between a vehicle's invoice and its sticker price.

Mercedes also committed to not cutting the margin further for five years, sources told Automotive News.

Daimler plans to invest more than $46 billion between 2022 and 2030 to develop EVs and become an all-electric brand in markets ready for the switch.

Mercedes will launch its first battery-electric model in the U.S. next month, the EQS sedan. It will be followed by two electric utilities and a midsize sedan next year. Mercedes also expects to bring its second-generation EQC crossover and an electric C-Class sedan stateside by mid-decade.

Mercedes' focus is on profitability and recouping some of the development cost of switching to EVs, said Jeff Aiosa, owner of Mercedes-Benz of New London in Connecticut.

"They're looking at every opportunity to offset that expense, and the margin cut is one way to do so," said Aiosa, who is also the Mercedes brand representative for the National Automobile Dealers Association.

A Mercedes spokesman declined to comment on what was discussed at the dealer meeting.

But Mercedes-Benz USA CEO Dimitris Psillakis had said that the transition to EVs would not affect retailer margins.

"We're not after dealer profitability," Psillakis told Automotive News in May. "I see that the priorities for the dealer might change in the future, having to push one or the other technology. The margin is a performance driver, so it's related to some performance criteria, which will be adjusted to the electric product."

To soften the blow and nudge dealers to get on board with the electrification strategy, Mercedes told retailers it will offer new bonuses on sales of EVs and certified pre-owned cars.

The manufacturer has also simplified the margin structure, reducing the number of performance criteria that dealers must achieve to earn their bonus money.

"That's the control that the manufacturer has never wanted to relinquish, Aiosa said.

"At least there's an opportunity to offset."

The margin clip is well timed.

Dealer profitability across the industry is soaring because of limited inventories caused by the global shortage of semiconductors and other materials.

Return on sales for Mercedes dealerships nearly doubled to 6.4 percent from 3.3 percent pre-pandemic, dealers were told at the meeting.

"Dealers are making more money than they've ever made in their lifetimes," said Patrick Womack, dealer principal of Mercedes-Benz of Billings in Montana. "So if there was any time to get a margin cut pushed across the line, now is the right time."

While surging profitability might have muted dealer opposition to the margin cut, retailers may feel different once cars start flowing again.

Current profit levels are not sustainable long term, said Garth Blumenthal, CEO of Unstoppable Automotive Group, which operates a Mercedes store in Temecula, Calif.

"Mercedes made decisions based upon a short-term, highly unusual set of circumstances," Blumenthal said. "I think the economy's going to turn on us in the next year to 18 months."

Mercedes is bullish in its new direction with electric vehicles. It told dealers that the overall EV market in North America is expected to grow 850 percent over the next six years. EVs will account for half of Mercedes' global production by 2025.

"We're going to sell the hell out of these vehicles," Psillakis said, according to dealers.

To help sell those EVs, Mercedes is tackling two major customer concerns with the new technology — reliability and charging.

The automaker will offer two-year leases that include scheduled maintenance and free fast charging. Bundling the lease with services could help lessen the risk of the new technology for the consumer.

"The customer has nothing to lose if he does the two-year lease," Womack said. "All he's got to do is put new tires on and insure it."