Pub. 4 Issue 4

10  EARLY AUTO RETAILING IN LA — continued from page 8 display. These cars were called “demonstrators” because cus- tomers could test drive prior to placing an order. Some dealers represented two or even three brands. As the market expanded and the manufacturers introduced more models, dealers were often required to purchase more demonstrators in order to allow customers to try touring cars, roadsters, sedans, and other mod- els. As cars became more dependable, quality service became a more important feature of dealership services and facilities were expanded to include service bays and bins for parts inventory. The rapid growth of the auto market forced dealers to relocate to larger facilities. Soon Figueroa and Flower Streets became the newAuto Row of Los Angeles, with Franklinmoving to 10th and Flower, Stutz building expansive new facilities on Figueroa and Washington (currently Downtown LA Motors), and finally as far south as Figueroa and Jefferson with the building of Tupman Ford (currently Felix Chevrolet) in 1920. Wholesale and Retail in Cash Unlike other retail industries, wholesale sales from the factory to dealers were done on a strictly cash basis. Generally dealers had to agree in advance to purchase a certain number of cars per year and pay an advance deposit of 2%, 5%, or 10% of the purchase price. Manufacturers shipped cars to dealers on a “sight drafts against bill of lading” or COD basis. Dealers were required to pay the balance due in cash prior to taking delivery. Forcing dealers to pay in cash for wholesale product compelled the dealers to sell for cash only to retail customers. Dealers often faced serious cash flow problems. They paid deposits for cars that might not arrive for several months. Car sales were highly seasonal. The new selling season began in September and approximately one-fourth of the inventory was sold by Thanksgiving. Sales dropped sharply until March, when they started to inch upward. Sales grew steadily in April and May, peaked in early June, and collapsed in July and August. In September a new cycle began again. The wide swings in the seasonal cycle were softened by the weather in Los Angeles, but only flattened in the 1920s with the advent of the “closed car” with wood or metal tops permanently attached and suitable for cold weather conditions. Dealers Offered Early Installment Plans • As early as 1914 and 1915, dealers began to experiment with various ways sell cars on installment. As the car market expanded beyond the affluent class of customers, dealers competed for new car sales by accommodating certain customers who were unable to pay cash. Many customers used their cars for business and wanted to pay on installments that came out of their monthly business revenue. Banks proved ill-equipped to assist the peculiar capital needs of auto dealers. Encouraged by themanufac- turers to sell more new cars, and knowing that they were competing with other dealers, they began to accept 66% to 75% in a down payment, with the balance to be paid as “promissory notes” in three months or in two payments at three months and six months. As this practice invited a certain amount of risk, it was up to the dealer to decide whether the customer merited such treatment. As early 1916 and 1917 a small group of finance companies began to step into the gap between commercial banks and the vast majority of customers who did not have the cash to purchase a new car. Usually, the buyers paid 30% to 50% down in cash and deferred the balance with a schedule of payments spread over five to sixteenmonths. The benefits to dealers were significant. They received cash for every sale, freed capital for other uses, and were relieved of the onerous chore of collecting payments. By 1925 75.5% of all cars, new and used, were sold on the installment plan. Auto finance companies also began to help some dealers to buy their vehicles from the factories with wholesale financing, which soon came to be called “floorplan assistance” or “floor- ing.” Although not widely used in the first decades of the industry, “flooring assistance” did provide a bridge between dealers and commercial banks and allowed dealers that used it to improve their cash flow and partially overcome the seasonal nature of the business. Dealers became bolder in selling more cars on installment plans as they competed aggressively for customers. They began trimming back down payments from the original 66% to 40% to 50% to 33% to 20% and sometimes as low at 10%. Meanwhile the time granted for payment was often extended to 18months. More and more customers fell behind in their payments and defaulted. After several dealerships and finance companies went out of busi- ness because of these practices, the National Automobile Dealers Association (NADA) and the National Association of Finance Companies reached agreement on a recommended formula of 33% down payment and no more than 12 months of payment. • General Motors broke new ground in auto financing by establishing the General Motors Acceptance Corporation