FTC’s Threats: Some Short-Term and Long-Term Impacts for Dealers
By: Nicholas A. Bader
We have all seen countless articles, press releases, and solicitations regarding the ongoing push by the Federal Trade Commission (FTC) to cause dealers to adopt advertising and pricing protocols to comply with what they say the law requires. There is no need to rehash what has already occurred to this point. However the industry is left wondering, what is up next in this wave of enforcement threats and what does it mean for the industry? The impacts could extend beyond those immediately obvious. One expected outcome could be that the legitimacy of the automakers’ performance metrics are called into question.
The FTC, working in conjunction with state attorney generals, has a track record of obtaining large penalties against dealers they say violated these regulations. There was a recent, well-publicized example where the FTC and Maryland AG reached a settlement requiring restitution that could exceed $75 million in restitution to impacted customers, on top of millions in fines. With that as a backdrop, the warning letters sent in March caused much of the dealer community to take rapid steps to conform their advertising practices. This shift is anticipated to create inertia under which most/all dealers may eventually evolve. It too should cause automakers to conform their policies/practices to the new normal. The “warning letters”, which have now been made public by the FTC, appear to have either intentionally or unintentionally been aimed at many of the larger dealer groups in the United States. This no doubt contributes the rapid adoption.
Automotive retail is a hyper-competitive and dynamic environment where dealers are continuously stacked up against one another. This is true from the perspective of consumers who compare pricing/offerings between dealers. It is equally true from the perspective of automakers who continuously benchmark dealers against one another in geographic comparison sets. For this reason, the impetus for industrywide adoption could now reasonably be expected to move beyond the FTC’s threats themselves, to include the force of enforcement encouraged by the dealer community itself. For any given dealer who has reformed its pricing to include doc fees and other required items in their “all-in” pricing, that dealer has a vested interest in ensuring every other dealer it is compared to prices its vehicles in the same manner. This is because the conforming dealer would want to have a fair shake in the eyes of potential customers and a fair evaluation of performance by the automaker(s) they represent. Sure, no dealer wants to have to be the one to tattle on others, but it still may well occur. Any dealer sitting on the sideline wondering if the threats of enforcement are real, could reasonably expect other dealers to encourage enforcement. This will most likely come in the form of dealers reporting other dealers to the FTC or other regulatory bodies.
As referenced at the beginning, one potential near-term impact of the advertising evolution is that it will serve to undermine the veracity of the performance measurements being used by automakers. For every compliant dealer who receives a notice their sales performance (e.g., sales efficiency, sales effectiveness, RSI, DSE, etc.) is poor, there could reasonably be an argument that score is impacted by the noncompliant practices of other dealers. Since nearly all of the performance metrics compare a dealer to all of same-line dealers in their state, a group of one or more non-compliant dealers could skew the scores. How would it be fair to penalize or criticize a dealer for not undertaking illegal or deceptive activity?
Time will tell for sure whether the FTC makes good on its enforcement threats following the March warning letters, but with the high penalties that are at stake, dealers may wish to take the threats seriously and review their practices. Dealers who wish to ensure compliance or evaluate OEM performance measurements should seek experienced advice. BSM, like you, will be closely monitoring how this all plays out.