Roughly 16.4 million new cars and light trucks will be sold this year, virtually all through America's franchised new-car dealerships.
Local independent dealers provide the most competitive, efficient and consumer-friendly model for the buying, selling and servicing of cars--and policymakers should work to strengthen the franchise model.
New-car dealers compete fiercely for their customers' business, and that competition in sales and financing drives prices down. In many major metro areas, multiple stores across and within brands compete for the business of every customer, and that competition incentivizes the lowest-cost distribution model for virtually any consumer good anywhere.
So-called "middleman costs" are a myth in the car business. Margins in auto retailing are 1 percent to 2 percent compared to more typical retail margins of 12 percent to 15 percent.
Fierce retail competition between auto dealers drives down costs and profits. If factories owned all their stores, competition would be eliminated. Not only would all of the retail costs still exist--the land, buildings, workers and advertising--but the incentive to limit those costs would no longer exist. Meanwhile, consumers would have far less bargaining power because different stores would not be competing for their business.
Local dealers also provide great service to their customers, especially for warranty and recall claims. Because dealers get paid by factories to perform warranty and recall work, they take the side of their customers. That incentive does not exist with factory-owned stores.
Dealers also provide a huge economic benefit to local communities. While businesses on Main Street have been decimated in many local communities over the past several decades, dealerships are the backbone of many local economies. Dealers provide 15 percent of state and local tax revenue across the country. Local new-car dealerships employ more than 1 million people nationwide, providing well-paying jobs that average $52,500 in wages, plus benefits.
The benefits of the franchise model are clear, but ultimately it's up to each state to determine how new cars are sold and serviced and to enact licensing laws and consumer protection statutes that are best for its citizens.
Cars are special purchases, usually the second most expensive purchase a consumer will ever make. They require licensing and insurance to operate, financing to purchase, contain highly-regulated hazardous materials like fuel and batteries, and if operated incorrectly can hurt or even kill people.
For these and other reasons, the U.S. Supreme Court has upheld the right of states to regulate the buying and selling of cars and, through the legislative process, every state has found that the franchise model serves its citizens best.
Far-off manufacturers and regional managers cannot match the efficiency of local dealers, and in experiments where they tried--for example, in cities in California, New York, Oklahoma and Utah in the 1990s--manufacturers were unable to compete with local dealers.
No business model in America is more efficient, competitive or decentralized than the network of franchised new-car dealerships. The franchise model allows manufacturers to do what they do best: design, build and market new vehicles, instead of investing in a low return-on-investment, capital intensive retail business in which local businesspeople have a real advantage.
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Jonathan Collegio is vice president of public affairs for the National Automobile Dealers Association.
Editorial on 09/20/2014