Pub. 2 Issue 3

11 FALL 2014 The costs of owning and operating a dealership are separate from the costs of operating an automobile OEM. Indeed, the total investment by dealers in property, facilities and work- ing capital exceeds the total investment by each of the OEMs themselves. This is not a matter of happenstance. As the vehicle-distribution channel developed over time, the OEMs learned the advantages of being inherently occupied with achieving high returns on invested capital by making cars over investing in low-margin retailing. On occasion, a glamorous idea grips the mind of automotive executives and lofty ideas of dealer inefficiency and rent cap- ture captivate their expectations. Yet dealer margins are slim, and the operations themselves require large-scale investment and careful planning. OEMs that have attempted to launch branch systems or pooled vehicle-distribution centers have failed miserably. The most cited case—the Chevrolet Celta program in Brazil— was a dismal failure for GM. Selling directly to the public proved a burden on corporate offices, and it suffered from constant resource allocation issues, something with which no independent dealer ever struggles. There were also questions about the management of financing, delivery and inventory carrying costs. Indeed, the program proved so costly it was abandoned within only a few years. In contrast, dealers voluntarily take on these burdens from automotive OEMs. Dealers are in the business of selling, so resource allocation is never an issue. Inventory of new vehicles is merely a cost of doing business, and dealers represent the largest single point chain of financing anywhere. Conclusion Efficiency and efficacy are constant questions for consumers and retailers: is the current system of independent dealers efficient and effective? Clearly, dealers take on a large finan- cial burden to run stores, create pleasant retail environments and train staff. Is it more efficient for an automotive OEM, burdened by the capital-intensive needs of large scale manu- facturing operations, to recreate such a system? Historical evidence suggests the answer is clearly “no.” Few, if any, OEMs make good retailers; the businesses require vastly different skills, investments and incentive structures. Manufacturing lends itself well to the system of scientifically measured quality, quantity, and safety. Retailing lends itself to the inducement of consumer behavior melded with the ir- rational and unscientific emotional buying experience. The success of some OEMs in operating retail outlets should not be confused with a renaissance of efficiency in the mar- ketplace for cars. Anyone can sell an item where demand exceeds supply. The true test of a retailer comes when compe- tition leads to supply exceeding demand. The U.S. has a free automotive market where competitive forces inherently come to bear in all segments with time. The question should not be about what inefficiency a committed dealer brings to her or his brand but rather what inefficiencies and overhead does an OEM bring to its retail operations. Selected References Rubenstein, J. M. (2001) Making and Selling Cars: Innovation and Change in the U. S. Automotive Industry. Baltimore: The Johns Hopkins University Press Epstein, R. C. (1928). The Automobile Industry Its Economic and Commercial Development. New York: A. W. Shaw Company. National Automobile Dealers Association, NADA (2014). NADA Data. McLean: National Automobile Dealers Association. Data for this report was derived from dealer financial statements that are provided to NADA on a monthly basis from several OEMs as well as directly from dealers themselves. The numerical figures in this report are derived from direct line items contained in the financial statements as well as from composite calculations from several individual metrics.  lex to manage. The retail locations, fund- cruiting and incenting ome. This was espe- ers were ready, willing s in addition to fund- utlets, most often out pendent dealers also peed. It was not only ised dealers in exclu- e among independent th the lagging profits y decline in automo- y profits rose steadily, n in 1956. Meanwhile ut 33 percent in 1914 001). By 2007, profits cent, before declining ssion and then rising ADA, 2014). se sales are consider- t an average of $11.3 hese investments can (1) the actual physical operate, (2) inventory ing for these employees, whether sales staff, or back-office operations, was over $800 million nationally. 0 $50 $100 $150 $200 Working Capital $40.3 Inventory Investment $104.5 Facilities and Land Investment $54.5 Data source: NADA Industry Analysis Division (Tuff) Total U.S. Dealership Investment (in billions) AUTO RETAILING: WHY THE FRANCHISE SYSTEM WORKS BEST 4 are slim, and the operations themselves require large-scale investment and careful planning. OEMs that have attempted ers efficient and effective? C financial burden to run store ments and train staff. Is it m OEM, burdened by the ca scale manufacturing operati Historical evidence suggest Few, if any, OEMs make require vastly different skills, i tures. Manufacturing lends it tifically measured quality, qua itself to the inducement of c the irrational and unscientific The success of some O should not be confused with marketplace for cars. Anyone exceeds supply. The true tes petition leads to supply exce free automotive market whe come to bear in all segments not be about what inefficienc her or his brand but rather w does an OEM bring to its ret Selected References Rubenstein, J. M. (2001) Makin Change in the U. S. Automotive In University Press Epstein, R. C. (1928). The Autom mercial Development. New York: National Automobile Dealers Ass McLean: National Automobile De Data for this report was derived are provided to NADA on a mon as directly from dealers themselve are derived from direct line items as well as from composite calcul 0 $20 $40 $60 $80 $100 Utilities $1.3 Data Processing $2.0 Advertising $7.6 Rent & Equivalent $7.3 Other Expenses $29.6 Personnel $33.7 Data source: NADA Industry Analysis Division (Tuff) ada.org/GetTheFacts | AUTO RETAILING: WHY THE FRANCHISE SYSTEM Total U.S. Dealership Expenses (in billions)