Pub. 4 2014 Issue 4

14 AUTOMOBILE DEALER NEWS ILLINOIS www.illinoisdealers.com 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 account- ability for consumers in warranty and safety recall situations; and provide enormous local economic benefits, fromwell-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 experiences, allowing auto manufacturers to concentrate their capital in their core areas: designing, building and marketing vehicles. Throughout the history of the auto industry, manufacturers have experimented with selling directly to consumers. In fact, in the early years of the industry, manufacturers used three methods to sell vehicles, sometimes concurrently: (1) factory-ownedstores, (2) independent distributors under contract and (3) independent franchised dealers. Manufacturers quickly learned that the fran- chise system worked best. Franchise agreements ensured adher- ence to brand standards and consistency. Manufacturers also realized that independent, entrepreneurial franchise owners–all of whom had made significant financial investments into their businesses and communities–were much more highly motivated and successful retailers than factory employees or contractors. 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 n Franchise System — continued on page 17