Retail Front

Tesla Is Wrong, Franchise System Is Better


The biggest irony of the automotive industry is the companies that make cars and trucks don’t know how to sell them.

Would car buyers be better off if the dealer franchise system was dismantled? The public seems to think so.

Most consumers believe dealers are unnecessary middlemen who drive up the cost of vehicles. They’re enamored with Tesla’s way of selling cars in its own stores. But the franchise system actually is tilted in the consumer’s favor.

First, some history. Car dealers started banding together under the banner of the National Auto Dealers Association in 1917 partly to protect themselves from the capricious and arbitrary practices of automakers.

Back then, if the car companies found themselves stuck with excess inventory, they were known to take out newspaper ads announcing their dealers would offer discounts the coming weekend, with surprised dealers having no alternative but to go along.

Sometimes automakers would rent empty warehouses and dump excess production at bargain prices – competing directly with their own dealers.

After World War II, NADA began a lobbying effort to enact franchise laws in each state that prohibited automakers from selling directly to consumers. Today, every state protects those franchises. But now Tesla is beginning to carve out exemptions to those laws, with enthusiastic public support.

The public believes Tesla’s approach is better, but they are unaware of how the system actually works. Car buyers are under the misperception that dealers make hefty profit margins. But the average dealer actually made only a 2.2% pre-tax profit last year. Top dealers make about 5%.

Fascinatingly, TrueCar surveyed 5,000 consumers who were asked, “If we removed the dealer’s profit, what kind of tip would be appropriate to leave for the dealer?”

Most said they’d leave an 8% tip. One dealer half-jokingly told me he’d make a lot more profit if he just sold cars at cost and simply asked customers to leave a tip.

Profit margins are thin because dealers have to compete against each other, and this is especially true of dealers selling the same brand.

It’s so easy for shoppers to simply drive down the road looking for a better price. Do you think dealers would compete so heavily if they were factory-owned? No, the factory would set the price and there would be no negotiations – just like Tesla.

Dealers will happily take your used car as a trade-in, no matter what brand it is. They’ll pay you a wholesale price, then turn around and retail it in their used-car lot. Do you think factory-owned stores would be interested in selling used cars from another car company? Never. Just for kicks, go ask your Tesla dealer about handling your trade-in. They send you to AutoNation.

What’s more, dealers are consumer advocates when it comes to doing warranty and recall work because they get paid by the factory to do it. Do you think factory-owned stores would be so consumer-friendly? Of course not. Warranty and recalls would represent higher cost, not more revenue.

Speaking of company stores, over in Europe they have a kind of hybrid retail system, where factory stores are allowed to compete against the independent franchisees. It’s not working. Daimler is being excoriated by the analyst community, which is advising the automaker to dump its company stores. Why? Because they’re not very good at selling cars, and they all lose money.

That’s the biggest irony of the automotive industry. The companies that make cars and trucks don’t know how to sell them. I can’t name one top executive in the global industry who came up on the retail side of the business. Not one! They all think they know how to sell cars, but none of them has ever done it.

I admire Elon Musk’s we’ll-do-it-our-way approach, and besides Tesla is a niche player.

But the real danger is when Chinese automakers finally start selling cars in the American market. They could easily decide to side-step franchise laws because Tesla has set the precedent.

That could really wreak havoc in the car market, which would not be good for automakers or franchisees, but most importantly, it would not be good for consumers. Let’s hope the public wakes up before it’s too late.

John McElroy is editorial director of Blue Sky Productions and producer of the “Autoline” PBS television show and “Autoline Daily,” the online video newscast.

Discuss this Blog Entry 4

on Jul 31, 2014

Regarding that ominous final sentence:
Consumers should wake up and do what? Before it's too late for what?

on Jul 31, 2014

Good question, Robert; too late for what?

on Jul 31, 2014

It seems if everything concerning a manufacturer selling vehicles directly is so bad, the "free" market would correct itself. Franchise laws are in direct conflict with free market. I don't disagree that the independent dealer may be the best means of selling and servicing cars but why does the dealers union need so much protection provided by state laws that specifically limits competition and reduces the choice of the consumer. I think you hit the nail on the head when you explain the history of the franchise system. It is to protect the dealer (aka local business man that supports the local politician). It was not designed to protect consumers and still is not about consumers. The recent excitement concerning franchises is all about protecting the income of the members of the dealers union. I would even believe that this particular article is about catering to the dealers union more that providing real information on the pros and cons of the Franchise system.

on Aug 6, 2014

The history of manufacturers having a full supply line has been tested several times without long term success. Ford endeavoured to set this up globally and lost market share due to the lack of motivation at Dealer level. It effectively means greater overhead for the manufacturer and more layers of well paid management. It adds cost rather than removing it. Ownership of property and overheads are not able to be spread like the franchise Dealerships can economically achieve. The franchise system and independent selling and servicing operations are a proven success. Better customer interaction, with the teams rewarded and looking for more business. The manufacturer owned operation tends to lead to laziness and lack of focus with employees who are not motivated due to there being no Dealer Principal. The driving force is a Dealer Principal who has a vested interest in the business and who gets up in the morning firing on all cylinders and hungry to ensure the business is moving the numbers.
The Dealership franchises operations need to focus more on removing the ideology of stacking cars on the lot and waving them good bye - this is a fundamental error. The proof of success is in the retention of the customer through the life of ownership of the vehicle inside and outside of the warranty period. The loss of customers to independent service operations during their ownership is driven in many cases by the cost of servicing. Franchises need to fully take in the fact that once a customer always a customer and it is much easier to develop long term business with customers already using the product by keeping those customers informed and satisfied.
On the other hand manufacturers need to wake up to the fact that they are their own worst enemies when it comes to servicing their franchise dealerships. A core reason for customer loss is the cost of servicing compared with non franchise or independent operations. This comes down to a higher than mighty attitude that genuine parts are worth more than high quality 'aftermarket' products. If these on going parts were supplied and priced based on the service age of a vehicle suddenly the aftermarket parts wholesalers would be up against a strong and vibrant franchise selling genuine parts at pricing that is more than competitive with the aftermarket chains.
The Franchise system has long tentacles that does and continues to benefit the customer. Manufacturer direct supply and ownership adds huge investment. It is just to bigger process now and into the future. Better the manufacturer concentrates on developing the very best products and practices and assists Dealerships to be successful which in turn sells more product but above all keeps customers coming back.

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Blogs about automotive retailing, commenting on news impacting the business of selling vehicles.


Steve Finlay

Steve Finlay is the editor of WardsAuto Dealer Business magazine and a senior editor for His journalism career started 42 years ago as a crime reporter. A Michigan native, he likes...

Jim Ziegler

Jim Ziegler, president of Ziegler Supersystems, is a trainer, commentator and public speaker on dealership issues.
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