NADA-commissioned study defends dealer franchise model

With Tesla founder Elon Musk challenging the traditional franchised dealership model in multiple states in order to expand his direct-to-consumer sales strategy, the National Automobile Dealers Association (NADA) and state dealer associations have been forced to defend the value of the franchise model. NADA has commissioned a study as part of its efforts to promote the model.

According to the study, written by industry analyst Maryann Keller, managing partner at Maryann Keller & Associates, the franchised network model provides more price competition, a more efficient distribution network, and better aftermarket service.

“Franchised new-car dealers provide the best, most efficient and most cost-effective way to sell and distribute new cars in America, and we’re proud of our businesses and business model,” said NADA President Peter Welch.
“NADA’s efforts will set the record straight about the benefits of the dealer franchise network for consumers, manufacturers and local communities everywhere. New-car dealers provide the best and most efficient way to buy and sell cars for both consumers and manufacturers, despite the misinformation and misconceptions that have surfaced over the last several months.”

According to the study, Auto Retailing: Why the Franchise System Works Best, the model benefits both manufacturers and consumers.

OEMs avoid the large capital expense of owning and running the dealerships. They reap a higher margin from manufacturing the vehicles, compared to the low margins from retail. They also bear no risk and little cost in the retail process.

Dealers also provide services that manufacturers would struggle with, including handling trade-ins, financing, interacting with state motor vehicle departments, test drives and document management.

"If you are going to sell cars to ordinary people, then you have to provide all of the services and functionality that they require," Keller says. "They are not going to wait six months to buy a car. Are you going to tell me that Americans are going to place an order and wait, and everybody has great credit and they won't have a trade-in? If that were the case, then maybe online purchasing and delivery would work. But Americans are diverse in their needs in terms of shopping for a car. The car will have to be fulfilled in the real world, and the real world requires all of these services like financing, and trade-ins, and service, and DMV paperwork that have to organized and performed."

Financing and trade-ins are one area that dealers have a unique specialization in, and that Tesla, given the high-end nature of its vehicles and the lack of a large number of used Teslas, hasn't had to face directly yet.

"Who is going to buy a used Tesla?" Keller says. "In the case of any other brand, it's the dealer. He will buy it because he knows he can sell it. But if you own a Tesla, who is your customer? What happens when a Tesla has a few hundred thousand miles on it? A dealer will buy a car like that because he knows he can get a customer for it. The Tesla model now is targeted at selling to first-time owners who can afford them."

Dealers provide broad service footprint

Service remains another critical sticking point, particularly when it comes to delivering warranty and recall repairs. Because of the existence of the franchise dealer network, owners can have their vehicles serviced at affiliated dealerships across the country, regardless of where they purchased the car. There is immediate access to factory parts, along with factory-trained technicians.

According to Keller, the large recall events in the U.S., in which millions of vehicles are affected at a time, could only be handled by the large network of franchise dealers. Since recalls represent a cost to manufacturers, dealers provide a more neutral point of contact for these repairs. They are incentivized to make sure owners have the repairs done correctly.

"Warranty repairs, technical service bulletins and recall repairs are all incremental expenses to the OEM," Keller says. "Who will be the better customer advocate, the dealer or the manufacturer?"

Tesla is taking a boutique approach to service that includes over-the-air software updates, mobile technicians that come to owner's homes, loaner cars, and other perks. Currently, most Tesla owners in North America are within 100 miles of a service center, although the company is building out the network.

The OEMs, Keller says, have approached service smartly, offering tire programs, encouraging dealers to open quick-lube services, and offering prepaid maintenance programs. "That's part of brand building," Keller says. "All of these initiatives have more benefits, and cost the manufacturer very little. It keeps the customer coming back to the dealer, and that has a lot of influence over the perception of the brand because customers are more likely to get their routine maintenance done if its going to be done for free."

According to the report, a factory-owned system would inherently have fewer stores to provide sales and service. In countries where factory ownership is permitted, factory stores are concentrated in large cities

"I can't see how an auto company would be as efficient in terms of actual capacity to service the customer base," Keller says. "The franchise system is already stressed by the need to not only support the existing fleet of product, but also support brands that are no longer in production like Saturns and Pontiacs and Hummers."

Previous direct models failed

Keller also points out the failure of several OEM-led direct sales efforts. In fact, when defending the Tesla position, several studies have cited GM's Chevrolet Celta program in Brazil as an example of how direct-to-consumer sales can work better than the franchise model. GM sold the car online in 20 configurations from a regional plant. But Keller points out that the program suffered from resource allocation issues, and the online channel was eventually abandoned altogether in 2006. The Celta is now sold through local dealers.

The Ford Auto Collection program in the 1990s sold cars at fixed prices from company-owned dealerships, which reduced competition and eliminated some stores in consolidated markets. The consolidated dealerships typically earned less than their privately owned counterparts, and even posted losses. Brand share also fell in the five cities where the program was implemented. Ford eliminated the fixed price system within two years. GM scrapped a similar program in 2000.

"There was no way for a corporate bureaucracy to react to small but important changes in the local marketplace that influence prices from day to day," Keller says.

Other online attempts at direct car sales like CarOrder.com and CarsDirect.com also floundered.

"They made assumptions that the auto industry would provide them cars, and they could sell them in any configuration they wanted," Keller says. "They really lacked a fundamental understanding of how Americans buy cars."

You can download the full report here.

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