Answers to FAQs About Why Dealers Exist

A great misconception is that dealers add costs to the distribution chain. Nothing could be further from the truth.

Michael Charapp

December 17, 2013

4 Min Read
Answers to FAQs About Why Dealers Exist

Questions about the vitality of franchise laws are a staple for critics of car dealers. Detractors ask:  “Why are these laws necessary? Aren’t they outmoded?”

Dealers should catalog the benefits of franchise laws in case they must defend them before a state legislature, in a letter to an editor or even at a cocktail party. Here are some answers to frequently asked questions.

Why do the franchise laws even exist?

State legislatures have enacted the laws to protect consumers and to ensure healthy competition.

Wait. Franchise laws protect consumers?

Absolutely! Lawmakers recognize it is best to have dealer owners with local knowledge, ties and interests. When the going gets tough, a multinational giant can simply close a local outlet. That is not an option for a local businessperson who owns a car dealership.

When the going gets tough, a local businessperson just cannot close the doors and move on. The dealership probably represents the bulk of the dealer’s assets and closing would likely be ruinous.

The same is true even for public dealership companies who must have local operators based on requirements of the franchisors. The franchise laws present the best opportunity to ensure local ownership and operation of dealerships. They also provide price competition factory outlets would not.

With the impact of the Internet, why are brick-and-mortar dealers even necessary? Can’t manufacturers sell directly over the Internet?

Selling a motor vehicle is a complex activity. No other sale of a consumer product involves state and federal laws as heavily as vehicle sales. Specific and detailed legal requirements must be followed.

Moreover, a vehicle sale involves a number of related activities including display and delivery; financing services; sales of related products; handling trades; assisting governmental transactions such as registrations and tax collections; and performing warranty service, recalls, repairs, and maintenance on increasingly complex vehicles in the locale of the dealer’s customer base. A brick-and-mortar dealer is best suited to serve customers.

Can’t manufacturers do these things themselves?

Yes, but the investments in creating such distribution and repair capabilities would be in the billions of dollars. That is why the dealer franchise system developed.

The domestic manufacturers and the distributors of foreign nameplate vehicles understood that they could not themselves provide the benefits dealers offer such as retail sales, customer care and warranty services. The investment would have been too great, the personnel count too staggering and the management responsibilities too daunting.

Aren’t the franchise laws for protection of dealers?

That is an element. But what’s wrong with that? There is an economically defensible reason for today’s dealer franchise system.

Manufacturers and distributors depended on dealers to invest the money and effort to build an efficient retail and service model. The system allows automakers to concentrate on what they do best – building vehicles – while dealers concentrate on what they do best – retailing vehicles and serving customers.

Why should dealers who risk their family fortunes run the risk of having their franchises terminated and businesses ruined at the whim of a franchisor? Why should dealers be subjected to competition of direct manufacturer sales when factories think it suits them? Why should dealers be starved of popular models a manufacturer wants to distribute directly while being left with those the manufacturer cannot sell as readily?

Don’t the franchise laws cost consumers money?

One of the greatest misconceptions held by critics of the franchise system is that dealers add costs to the distribution chain. Nothing could be further from the truth.

If a factory owns a dealership, it still must invest millions (with shareholders expecting a return); hire and pay personnel; cover rent, utilities, taxes and maintenance for facilities; and pay for everything else required to operate the business.

If anything, dealers save money for the manufacturers. Operations by remote multinational giants will likely raise the costs of doing business over those of local dealers who understand how to control expenses.

Dealers provide an immediate outlet for vehicles and parts by buying and paying for them even before they arrive at the dealership. Manufacturers do not have to carry the costs of inventories on their books. Far from injecting additional costs, dealers represent a cost savings in the overall system.

Michael Charapp is a lawyer who represents auto dealers. Based in McLean, VA, he is at 703- 564-0220 and [email protected].

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