Pub. 4 2014 Issue 4

19 cars a year. (Rubenstein, 2001) This new level of investment and production meant that by the 1920s consumers had significant choice in the automotive market and OEMs needed retail sales outlets that could push these vehicles out to consumers. These market changes–combined with the simple realities of increasing competition–meant that selling directly to the public was increasingly a distraction and a hindrance to OEMs. Manu- facturers were fixated on design and production, on increasing labor strife and on product cycles that had become ever more complex to manage. The additional burden of finding suitable retail locations, funding thousands of them, and then recruiting and incenting sales staff was simply too cumbersome. This was especially the case when independent dealers were ready, will- ing and able to handle all these functions in addition to fund-of their own pockets. The use of independent dealers also afforded OEMs another advantage: speed. It was not only simpler but far faster to set up franchised dealers in exclusive sales territories. Competition was and remains intense among independent retailers and is best illustrated by both the lagging profits of automobile dealers and the steady decline in automobile retail outlets. Automotive industry profits rose steadily, from $38 mil- lion in 1914 to $1.3 billion in 1956. Meanwhile dealership profits declined, from about 33 percent in 1914 to 5 percent in 1956. (Rubenstein, 2001). By 2007, profits further to 1.0 percent dur- ing the recession and then rising slightly to only 2.2 percent in 2013. (NADA, 2014). Dealer investments to facilitate these sales are considerable (see chart at right). Dealers invest an average of $11.3 million in each individual dealership. These investments can be broken down into three categories: (1) the actual physical facilities and the land on which dealers operate, (2) inventory and (3) work- ing capital. • Most dealerships require several acres of land in addition to a retail store, service bays and storage areas. These OEM requirements are fully funded by the individual dealers at an average per-franchise cost of just under $3.1 million. • Dealers also carry all of the inventory costs of the vehicles on their lots. Dealers pay immediately for their inventory at the railhead. The costs to carry this inventory are not born by manufacturer and amount to an additional $5.9 million. • OEMs have specific requirements for dealer working capital. Typically, an OEMwill require that dealers carry net working capital investment equal to two months’ parts inventory plus the value of two months’ new-and used-vehicle inventory. In addition, more working capital is required to fund receivables due from the OEMs, customers and finance companies. The average dealership has just over $2.2 million in working capital. These investments by dealers represent only the capital re- quired. In addition to these costs, dealers also incur large operat- ing expenses (see chart at bottom of page 4). Personnel costs for dealers in 2013 averaged over $1.9 million per dealership, over $33 billion collectively. In addition, training for these employees, whether sales staff, or back-office operations, was over $800 mil- lion nationally. Our dealers know their markets better than we ever can. They compete against one another to provide Toyota customers with the best buying and service experience possible. Toyota, Lexus and Scion dealers are among our most valuable business partners. They are the experts at every aspect of selling and servicing our products. Our dealers have invested so much of their hard-earned money–and sweat equity–into their businesses. When they succeed, we succeed. JIM LENTZ, CEO, TOYOTA NORTH AMERICA n Franchise System — continued n Franchise System — continued on page 21