Pub. 2 Issue 3

10 www.glancda.org by 1930, Ford’s Rouge River complex in Michigan employed tens of thousands of people and produced hundreds of thou- sands of cars a year. (Rubenstein, 2001) This new level of in- vestment and production meant that by the 1920s consumers had significant choice in the automotive market and OEMs needed retail sales outlets that could push these vehicles out to consumers. These market changes—combined with the simple realities of increasing competition—meant that selling directly to the public was increasingly a distraction and a hindrance to OEMs. Manufacturers were fixated on design and produc- tion, on increasing labor strife and on product cycles that had become ever more complex to manage. The additional burden of finding suitable retail locations, funding thousands of them, and then recruiting and incenting sales staff was simply too cumbersome. This was especially the case when indepen- dent dealers were ready, willing and able to handle all these functions in addition to funding inventory and constructing retail outlets, most often out of their own pockets. The use of independent dealers also afforded OEMs another advantage: speed. It was not only simpler but far faster to set up fran- chised dealers in exclusive sales territories. Current status Competition was and remains intense among independent retailers and is best illustrated by both the lagging profits of automobile dealers and the steady decline in automobile retail outlets. Automotive industry profits rose steadily, from $38 million in 1914 to $1.3 billion in 1956. Meanwhile dealership profits declined, from about 33 percent in 1914 to 5 percent in 1956. (Rubenstein, 2001). By 2007, profits at dealerships had declined to 1.5 percent, before declining further to 1.0 percent during the recession and then rising slightly to only 2.2 per- cent in 2013. (NADA, 2014). Dealer investments to facilitate these sales are considerable (see chart at right). Dealers invest an average of $11.3 mil- lion in each individual dealership. These investments can be broken down into three categories: (1) the actual physical facilities and the land on which dealers operate, (2) inventory and (3) working capital. • Most dealerships require several acres of land in addition to a retail store, service bays and storage areas. • These OEM requirements are fully funded by the individual dealers at an average per-franchise cost of just under $3.1 million. • Dealers also carry all of the inventory costs of the vehicles on their lots. Dealers pay immediately for their inventory at the railhead. The costs to carry this inventory are not born by manufacturer and amount to an additional $5.9 million. • OEMs have specific requirements for dealer working capital. Typically, an OEM will require that dealers carry net working capital investment equal to two months’ parts inventory plus the value of two months’ new and used-vehicle inventory. In addition, more working capital is required to fund receivables due from the OEMs, customers and finance companies. The average dealership has just over $2.2 million in working capital. These investments by dealers represent only the capital required. In addition to these costs, dealers also incur large operating expenses (see chart at bottom of page 4). Person- nel costs for dealers in 2013 averaged over $1.9 million per dealership, over $33 billion collectively. In addition, training for these employees, whether sales staff, or back-office opera- tions, was over $800 million nationally. Dealers also advertise heavily. In addition to the spending by OEMs, dealers spent $7.6 billion on advertising in 2013— more than $21 million per day. Finally, there is a regulatory cost burden faced by dealers. This includes complying with local and state ordinances, federal trade regulations and oc- cupational health, safety and environmental requirements. These costs are estimated to be nearly $3.2 billion for all new- car dealerships.  Auto Retailing — continued from page 9 “. . .EVEN A MAN WHO MAKES A ‘FAIR TO MIDDLING DEALER’ LIES DOWN AND QUITS COMPLETELY WHEN PUT IN CHARGE OF A FACTORY BRANCH—WHERE THE URGE OF ACTUAL PERSONAL INCENTIVE IS LESS STRONG.” (EPSTEIN, 1928).