“Don’t feed the dealers”: how and why cars become more expensive and what to do about it

There is an acute shortage and rapid rise in car prices all over the world. But in Russia this process has its own characteristics. We explain what is happening on the market, when this will end, and what to do if you really need a car.

What's happening

In January–September, the average price of both new and used passenger cars in Russia increased by approximately 20%. The average price of a new car is close to 2 million rubles, and that of a used car is over 600 thousand.

Market participants and analysts cite the shortage of automobile chips, which caused interruptions in production (the global decline in output due to a shortage of chips is estimated at almost 8 million cars) and an increase in manufacturer prices, as the determining market growth factors. The secondary market has experienced both a peak in demand from buyers desperate to buy a new car and a collapse in supply due to people not wanting to sell a car without a guarantee that they can replace it with a new one.

But there is one more factor: in Russian dealerships it is now almost impossible to buy a car with standard equipment without waiting several months (during which the price of the car will rise): in showrooms, buyers are offered only cars with dealer-issued additional options (“extras”) that add to those recommended by the manufacturer priced at hundreds of thousands of rubles. As Kommersant calculated, since 2019, the volume of additional options when purchasing a car has increased fivefold on average, reaching 200–400 thousand rubles per car. And in some cases, buyers also complain about the impossibility of buying a car for cash (but only with a loan issued from a car dealer).

This is due to an “honest” increase in prices or markups, but the financial performance of car dealers in the first half of the year grew much faster than the market. Sales of new cars “in units” in Russia in the first half of the year increased by 37%, and the revenue of the top 50 largest dealers jumped 2.5 times, to 1.2 trillion rubles. There are no summary statistics for the third quarter yet.

Seller vs buyer

This year, the car market is a seller’s market: people are still ready to buy cars at increased prices, VTB Capital analyst Vladimir Bespalov explained to The Bell. “Inventory at dealers is not growing, cars are selling out very quickly. Some buyers are forced to wait several months to purchase a car. This largely explains the negativity that is beginning to appear towards dealers. When there is a general shortage of cars, only expensive cars with a large number of additional options remain available in the dealership centers themselves,” says Bespalov.

The issue is the dealers' policy, says Sasha Stolyarov, editor-in-chief of Blog.autospot.ru. “It’s now very difficult to buy a car without additional features. Car dealers inflate the price tags on cars with the help of the notorious mats, protections and nets in the trunk at once for half a million or more. Hence we have monstrous markups on models with the greatest demand. For example, dealers sell the highly sought-after Toyota Land Cruiser 300 with a recommended retail price of 7–8 million for 12–13 million rubles,” says the expert.

It's a matter of dealers, says executive director of Keles Rus (the official distributor of mass-segment Chevrolet in Russia) Vadim Artamonov. Manufacturers, according to him, raised prices by an average of 10%, dealers - by 20-30%, and for some models due to "additional additions" - by 50-60%. “Obviously, production itself could not become so expensive,” he notes.

What car dealers say

Market participants surveyed by The Bell refer to objective factors - and to the fact that expanded “extras” are part of the new market reality.

Rolf said that the shortage of cars intensified in the fourth quarter, and their shortage is compensated by the sale of used cars. The company associates the rapid growth in revenue at dealerships with the low base effect of the pandemic year 2020 and rising prices. According to Rolf Marketing Director Vitaly Shonia, additional services “allow us to offer customers better prices for cars,” and the decision “in any case remains with the client.”

Avilon points to rising prices (by 2.5-15% since the beginning of the year) and high demand as factors for revenue growth. The dealer believes that the reason for the rise in prices is inflation, model year updates and car shortages. Avilon did not comment on the imposition of “extras” when buying a car.

AutoSpetsCenter sees a new reduction in the availability of cars for a number of brands - but does not deny the practice of dealers imposing services on customers. “Now there are facts on the market confirming both the imposition of services and “consumer extremism.” This is the prose of life. The seller always tries to sell at a higher price, the buyer always tries to buy at a lower price. This has always been the case,” Andrei Terlyukevich, general director of AutoSpetsCenter, told The Bell.

The Avtodom dealership admitted that if previously 20-30% of cars were sold with extras, now 99% are sold. “This is the new normal in the market. The client practically cannot refuse them, since the “extras” are already installed on the car. Now cars have up to 15% of their price due to additional equipment or financial products,” says the company’s general director Andrei Olkhovsky.

How are they doing?

The Russian car market stands out from the global ranks, as confirmed by publications in foreign media. In the USA, where the rise in car prices has become one of the main factors of inflation, dealers stimulate pre-orders and refuse discounts - but there are no mass reports of mark-ups. In conditions of physical shortages and rising prices, buyers went to the secondary market, after which used cars (unlike Russia) rose noticeably more than new ones - by 32% compared to 7%.

Non-alternative “extras” are not popular in the USA, and the dealer markup in the country is now on average about 3-8% of the recommended retail price (RRP), whereas last year it was negative. This, however, does not exclude premiums of up to 100% for the scarcest cars.

The market in the United States is partly stabilized by direct sales of manufacturers, which until recently were practically prohibited (for antitrust reasons). So far, they have been legalized and are about to be legalized in 12 states, in which independent dealers are threatened with complete exclusion from the sales chain. Tesla was a pioneer here, suing for the right to sell cars directly in most states, and the pandemic only accelerated this process.

Several manufacturers in Russia have the option of direct sales (Hyundai, Renault and BMW), but they are modest (about 3% of cars sold) due to the reluctance of customers to buy cars “without touching them” and the powerful dealer lobby. Companies that do not want to quarrel with dealers leave the function of ordering and payment to online channels, but the same “officials” handle the transfer of cars to customers.

Dealers directly sabotage direct sales, and in some cases they set prices, writes Autoreview. As a result, for example, “a new Duster was discovered on the Renault website for 1 million 772 thousand rubles (of course, with extras), while according to the price list, even the top version with all options costs only 1 million 557 thousand,” - notes the publication. Hyundai dealers went even further, complaining to authorities about the manufacturer's online platform as a threat to jobs.

When will it end?

In Europe, car sales had fallen for four months in a row by October, and in October they fell by 29% year-on-year to 800 thousand. However, analysts expect that this is the lowest point of the car market, and the situation will begin to improve in November. GM also hopes that the deficit will be overcome in the new year.

All The Bell's interlocutors agree that cars in Russia will continue to rise in price in 2022, albeit not so quickly. “I would say that car price increases next year will be only slightly higher than inflation, but no higher than the level we saw in 2021. Both automakers and dealers have already normalized their margins at the expense of consumers, and there is no point in further sharply increasing prices,” says Vladimir Bespalov.

Avilon does not expect a quick correction of the situation with semiconductors and expects prices to rise by another 5% in the coming months. According to Olkhovsky from Avtodom, the “buyer’s market” will not return until the second quarter of 2023, and in 2022, cars could rise in price by 15% or even 25-27% under unfavorable circumstances. Rolf expects a price hike for brands at the beginning of next year and points out that a car is becoming an investment: it happens that the purchase does not become cheaper when leaving the showroom.

“The premium segment and the “Chinese” segment still have room to grow, and mass models already seem to have reached their psychological price ceiling. Although if anyone expects that car prices will suddenly creep down next year, I hasten to disappoint you - no price reduction is expected. By the New Year, they can still grow into the most popular models, and in January-February it will be possible to play football in dealer warehouses. After the holidays, production usually slows down due to the weekend. Plus, many of our factories constantly announce the suspension of conveyors,” explains Sasha Stolyarov from Autospot.

Dealers will act “to the extent of their arrogance and ambition” until the shortage completely disappears, predicts Vadim Artamonov from Keles Rus. “If there is a surplus of cars, dealers will accumulate stocks of unsold cars due to huge markups and automakers will begin to put pressure on them,” says the expert. “But for now, the turnover of dealer warehouses is already high, which means they can increase their profits in different ways. Conventionally, before the dealership had 100 cars in stock, but now there are only 50. And in order to maintain the margin, the dealer simply doubles the markup.”

What to do?

“Autoreview” advises to still bargain with the dealer, but not even for the price, but for its indication in the purchase and sale agreement (after which it becomes a document with which you can go to court if the conditions are violated). In addition, in the current market, you need to visit as many dealership centers as possible, and not disdain “refused” cars or even a trip to a neighboring city.

If the manager directly says that he will not sell the car without “extras,” this may become a reason for a complaint to Rospotrebnadzor. The regulator will not oblige you to sell a car at the recommended retail price, but it can issue a fine for imposing a service of up to 500 thousand rubles, and this is also an argument in the dispute, the publication notes.

If the client only managed to get an appointment in the queue without the price and deadline for receiving the car, you need to think about the terms of “delivery”, and they will depend on the overpayment and the model. Waiting three months for a Lada Vesta at current inflation, if the additional payment for it is about 50 thousand rubles, hardly makes sense. But if we are talking about 500-800 thousand rubles, which are asked to the RRP for a popular crossover like the Kia Mohave, it may make sense to wait. “If you can’t afford to replace your car, don’t feed the cunning dealers,” sums up Autoreview.