Pub. 4 2014 Issue 4

21 Dealers also advertise heavily. In addition to the spending by OEMs, dealers spent $7.6 billion on advertising in 2013–more than $21 million per day. Finally, there is a regulatory cost burden faced by dealers. This includes complying with local and state ordinances, federal trade regulations and occupational health, safety and environmental requirements. These costs are estimated to be nearly $3.2 billion for all new-car dealerships. The costs of owning and operating a dealership are separate from the costs of operating an automobile OEM. Indeed, the total investment by dealers in property, facilities and working capital exceeds the total investment by each of the OEMs themselves. This is not a matter of happen-stance. As the vehicle-distribution channel developed over time, the OEMs learned the advantages of being inherently occupied with achieving high returns on invested capital by making cars over investing in low-margin retailing. On occasion, a glamorous idea grips the mind of automotive executives and lofty ideas of dealer inefficiency and rent capture captivate their expectations. Yet dealer margins are slim, and the operations themselves require large-scale investment and careful planning. OEMs that have attempted to launch branch systems or pooled vehicle-distribution centers have failed miserably. The most cited case–the Chevrolet Celta program in Brazil– was a dismal failure for GM. Selling directly to the public proved a burden on corporate offices, and it suffered from constant resource allocation issues, something with which no independent dealer ever struggles. There were also questions about the management of financing, delivery and inventory carrying costs. Indeed, the program proved so costly it was abandoned within only a few years. In contrast, dealers voluntarily take on these burdens from automotive OEMs. Dealers are in the business of selling, so re- source allocation is never an issue. Inventory of new vehicles is merely a cost of doing business, and dealers represent the largest single point chain of financing anywhere. Conclusion Efficiency and efficacy are constant questions for consum- ers and retailers: is the current system of independent dealers efficient and effective? Clearly, dealers take on a large financial burden to run stores, create pleasant retail environments and train staff. Is it more efficient for an automotive OEM, burdened by the capital-intensive needs of large-scale manufacturing opera- tions, to recreate such a system? Historical evidence suggests the answer is clearly “no.” Few, if any, OEMs make good retailers; the businesses re- quire vastly different skills, investments and incentive structures. Manufacturing lends itself well to the system of scientifically measured quality, quantity, and safety. Retailing lends itself to the inducement of consumer behavior melded with the irrational and unscientific emotional buying experience. The success of some OEMs in operating retail outlets should not be confused with a renaissance of efficiency in the market- place for cars. Anyone can sell an item where demand exceeds supply. The true test of a retailer comes when competition leads to supply exceeding demand. The U.S. has a free automotive market where competitive forces inherently come to bear in all segments with time. The question should not be about what inef- ficiency a committed dealer brings to her or his brand but rather what inefficiencies and overhead does an OEM bring to its retail operations.  Selected References Rubenstein, J. M. (2001) Making and Selling Cars: Innovation and Change in the U. S. Automotive Industry. Baltimore: The Johns Hopkins University Press Epstein, R. C. (1928). The Automobile Industry Its Economic and Commercial Development. New York: A. W. Shaw Company. National Automobile Dealers Association, NADA (2014). NADA Data. McLean: National Automobile Dealers Association Data for this report was derived from dealer financial statements that are provided to NADA on a monthly basis from several OEMs as well as directly from dealers themselves. The numerical figures in this report Data source: NADA Industry Analysis Division (Tuff) are derived from direct line items contained in the financial statements as well as from composite calculations from several individual metrics. n Franchise System — continued