Pub. 2 Issue 3

8 www.glancda.org Executive Summary For manufacturers and consumers alike, the automotive franchise system is the best method for distributing and selling new cars and trucks. For consumers, new-car franchises create intra-brand competition that lowers prices; generate extra accountability for consumers in warranty and safety recall situations; and provide enor- mous local economic benefits, from well-paying jobs to billions in local taxes. For manufacturers, the franchise system is simply the most efficient and effective way to distribute and sell automobiles nationwide. Franchised dealers invest millions of dollars of private capital in their retail outlets to provide top sales and service experi- ences, allowing auto manufacturers to concentrate their capital in their core areas: designing, building and market- ing vehicles. Throughout the history of the auto industry, manufacturers have ex- perimented with selling directly to consumers. In fact, in the early years of the industry, manufacturers used three methods to sell vehicles, some- times concurrently: (1) factory-owned stores, (2) independent distributors under contract and (3) independent franchised dealers. Manufacturers quickly learned that the franchise system worked best. Franchise agree- ments ensured adherence to brand standards and consistency. Manufac- turers also realized that independent, entrepreneurial franchise owners—all of whom had made significant finan- cial investments into their businesses and communities—were much more highly motivated and successful retail- ers than factory employees or contrac- tors. That’s still true today, as evidenced by some key findings of this study: • Today, the average dealership requires an investment of $11.3 million, including physical facilities, land, inventory and working capital. • Nationwide, dealers have invested nearly $200 billion in dealership facilities. • Annual operating costs totaled $81.5 billion in 2013, an average of $4.6 million per dealership. These costs include personnel, utilities, advertising and regulatory compliance. • The vast majority—95.6 percent—of the 17,663 individual franchised retail automotive outlets are locally and privately owned. They generate billions in state and local taxes annually and provide significant employment opportunities that help build goodwill in the community. • Manufacturers benefit from the high return on capital invested in manufacturing vehicles, as opposed to the low margin of retailing them. • Dealers bear the cost and risks of these investments— at virtually no cost to the manufacturers—and provide a vast distribution channel that benefits the consumer. Auto Retailing: Why the Franchise System Works Best Overview “The prejudices of some political writers against shopkeepers and tradesman are altogether without foundation. So far from it being necessary to tax them or to reduce their number, they can never be multiplied so as to hurt the public though they may be so as to hurt one another.” (Adam Smith, The Wealth of Nations) These words remain as true today as when Adam Smith wrote them 200 years ago: retailers compete fiercely for customers, and that competition is good for everyone, not just consumers. There are few industries with as aggressive or economical a retail model as the auto- motive franchise system. Far from being mere “middlemen,” franchised dealers provide a wide range of services that are essential to the effective and efficient distribution of motor vehicles and, in support of those services, invest millions of dollars of private capital into retail outlets. Most of these retail outlets are privately owned, representing not large corporations but individual, family-run businesses that are locally based.