CHARLOTTE, N.C. - Mercedes-Benz USA Inc. wants to lock its customers in a sweet, but tight embrace. So tight, that customers will turn their backs not just on competing makes, but also on alternatives to the Mercedes dealer body.
That includes such rivals as Internet-based marketers and big, publicly traded chains.
That goal is at the heart of a new program, called 'The Mercedes Experience,' which begins this week.
With it, Mercedes is betting that a controversial approach to one-price selling - with lower dealer discounts - will deliver loyal customers attracted to a long list of free customer services.
It is the most ambitious undertaking in the nine-month tenure of Mike Jackson as CEO of Mercedes-Benz USA. And it represents his company's defense against the forces of a changing industry.
Jackson, a former dealer, believes the Internet and big chains threaten the factory's control over the Mercedes brand and how customers interact with the brand.
'You have to address pragmatic reasons why people would go outside your retail organization,' Jackson said in an interview here.
Some parts of the new program are voluntary. For instance, Mercedes recommends that its dealers pay salespeople more salary and less commission, so there is less motivation to raise prices. Higher transaction prices mean more gross profit for the dealer and higher commissions for salespeople.
But there is nothing voluntary about the fact that Jackson slashed the dealer discount to 7 percent on all 2000 models. It was 13 percent plus a 3 percent holdback on 1999 models. The dealer discount is the difference between the manufacturer's suggested retail price and the wholesale price, expressed as a percentage of the sticker price.
Jackson sees lower dealer discounts as the next best thing to one-price selling.
Jackson wants to eliminate haggling from the retail transaction, but legally, Mercedes cannot fix retail prices. However, thinner dealer discounts make it harder for dealers to cut prices without selling cars at a loss.
That has upset some dealers, even though Mercedes says dealers stand to gain from the new program if it pays off with more floor traffic, higher volume and greater customer loyalty.
'I would not even call it a `few' malcontents,' Jackson said. 'You could count them on the fingers of one hand. The overwhelming majority of dealers are moving forward with us.'
Mercedes dealers were No. 1 in the country in gross profit per vehicle in 1998, according to the National Automobile Dealers Association. That puts Mercedes in a good position to make demands on its dealers.
Most dealers see the logic behind cutting discounts even if it is painful in the short run, said Chip Ott of R&S Imports Ltd., in Fort Washington, Pa., a member of the Mercedes-Benz Dealer Board.
'If I said we weren't a little anxious, that would be a lie. But I agree completely with the direction in which the company is moving,' Ott said.
At least one dealer, Tamim Shansab of Coast Automotive Group in Toms River, N.J., accused Mercedes of illegal price-fixing in a lawsuit that was filed last year.
In the interview, Jackson angrily denied doing anything illegal. He said Mercedes has been threatening to terminate Shansab for five years, which it did, last month.
The dispute began long before Mercedes hatched its so-called 'negotiation-free process' pricing for 2000, Jackson said.
Here are the details on the thinner dealer discounts:
Selling at sticker price, dealers can make a gross profit of 16 percent of the manufacturer's suggested retail price on 1999 models, said Joe Eberhardt, marketing vice president. That is, 13 percent at the time of sale plus a 3 percent holdback. The trouble is, few dealers can sell at sticker. That leads to wheeling and dealing, which Mercedes says its customers want to avoid.
For 2000 models, selling at sticker means a maximum gross profit of 9.25 percent of suggested retail, as follows: 7 percent at the time of sale; plus a 2 percent bonus for meeting all franchise requirements, such as exclusivity in the biggest markets; plus another 0.25 percent tied to high scores on customer satisfaction surveys, Eberhardt said.
Taking the C230 sedan as an example, Automotive News estimates that a dealer's potential gross profit would be cut by $2,055. The potential gross on the 1999 model was $4,992. The potential gross on the 2000 model is $2,937.
Mercedes held the line on prices for some 2000 models. It says any price hikes are more than justified by additional standard equipment.
If dealer discounts fall while sticker prices stay the same or increase only slightly, dealers pay more for cars. The Mercedes Experience is the trade-off.
For the 2000 model year, all dealers will earn the 2 percent bonus, but Mercedes will grade dealers against eight bonus criteria, Eberhardt said. For the 2001 model year, the bonus scores will count.
Eberhardt estimated that 90 percent of Mercedes dealers would earn the bonus right away. By next year, he said he expects all dealers to earn the 2 percent bonus.
The Mercedes Experience takes effect as of the 2000 model year, which officially begins for Mercedes this week. Several aspects of the program, including the lower dealer discount, already applied to the all-new 2000 S class sedan, which was introduced last spring.
LOTS OF FREEBIES
Now, for the entire 2000 lineup, other facets include:
Free roadside assistance - limited to gas, a jump-start or fixing a flat tire - for any Mercedes vehicle, no matter how old.
Free alternate transportation for service customers who have to leave their cars - again, without regard to how old the car is.
A service called TeleAid in every 2000 model, except the SLK and the M class, which get it for the 2001 model year. TeleAid automatically notifies the Mercedes Customer Assistance Center if an airbag deploys.
Four years or 50,000 miles of free scheduled maintenance. Mercedes says that's worth an average of $1,200 per vehicle.
Virtually unlimited customer choice in trim and equipment. 'Any car, any combination we can build in our factories, if it is federalized (for sale in the United States), you can order it,' Eberhardt said.
Consumers will have to pay an extra $1,000 to custom-order trim and equipment, instead of choosing from the Mercedes menu of option packages.
As The Mercedes Experience illustrates, there is no free lunch.