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Dealer competition, not Tesla monopoly, benefits car buyers

Bobbi Jo Sparrow

Bobbie Jo Sparrow

What’s in 2.2 percent? As a percentage of total sales, it’s a number that represents the average pretax, net profit at U.S. franchised new-car dealerships, according to NADA Data 2014.

And what may be a startling fact is that the 2.2 percent profit, which accounts for sales in the new- and used-vehicle, service and parts departments, is more than a one-percentage point LESS than what many other retailers earn.

This figure has remained the same for the third straight year. And this dynamic is attributed to fierce competition at dealerships that benefits car buyers. In fact, a recent study from the Washington, D.C.-based Phoenix Center proves that price competition among auto dealers lowers car prices for consumers, often by $500 or more per car.

Employment at new-car dealerships is also at a near all-time high. Last year, more than 1 million people worked at dealerships across the country, which was higher than any other auto-related industry. Dealers, on average, employed 64 people per dealership in 2014.

Additionally, dealers pay one of the highest wages for any retail trade. Nationwide, the annual payroll last year was more than $58 billion—with employees, on average, earning more than $55,000 a year.

Clearly, the retail-automobile industry is a pillar of the nation’s economy, and the dealer-franchise network remains the best, most-competitive and most-cost efficient way to distribute and sell new cars.

So why would anyone want to upend such a system for Tesla’s attempt to gain special treatment and a vertical monopoly, a failed concept that was dispatched about a century ago?

Because it’s good for that company but bad for consumers.

Think about it. If a manufacturer like Ford (or Tesla) owns all sales points for a car and parts it can set the price without competition. But the independent dealer structure provides for many different dealers all selling Fords against each other. Tesla wants to avoid this more competitive structure so it can keep its prices as high as possible. They win. Consumers lose. In other words, they want a pricing monopoly.

We’ve been down this road before. Both GM and Ford experimented with factory owned stores in the 1990s. Before that, car companies in the early 20th century attempted to do the same. They subsequently abandoned these plans because they didn’t work. So why would we upend a successful Arizona and American system knowing how this story is going to end?

In Arizona, we have the highest number of employees per dealership in the United States with an average of 96 per dealership. Arizona auto dealers employ over 28,000 people statewide and generate approximately 28 percent of ALL retail sales tax revenue in the state that funds schools, public safety, roads and other government functions.   At a time of recovering state revenues why would we want to jeopardize this?

Car dealing is one of the most competitive businesses on the planet. Let’s keep it that way in Arizona rather than revert back to vertical monopolies and failed ideas from the past that are remarkably both anti-business and anti-consumer. Just because it is a relatively new car does not mean any of this is a new idea. Or innovative. Or good.

— Bobbie Jo Sparrow is president of the Arizona Automobile Dealers Association.

14 comments

  1. Tesla prices are kept in check by competing brands. Same for Honda vs Toyota vs Ford vs Chevy etc. If they decide to sell factory-direct, they can’t run amuck with pricing. Customers will defect to other brands.

    Also, Tesla isn’t trying to dismantle the franchise system. It just chooses to avoid it — for the moment, at least. Eventually, as sales volume increases, maybe Tesla will want independent dealers to shoulder some of the sales and service burden so the company can focus on engineering.

  2. So, if your system is so great, why should you care what Tesla does? Nobody has to buy a Tesla anyway.

  3. You seem to be implying that competition is only okay if it doesn’t disrupt the business model you like. Why can’t there be competition among business models, like we now have competition among schools systems?

  4. It doesn’t take a lot of common sense to realize how ridiculous these arguments are.
    In what other industry does anyone argue that adding a middleman reduces price? Dealers compete to see how little cost they can ADD to the price of a car. It’s like two people go to the supermarket to buy a box of cereal for $5 then after competing with each other decide to sell that same box of cereal for $5.25. I’d rather just buy that box of cereal from the store for $5.00.
    I love the argument that if Ford (or Tesla) owns all sales points for a car it can set the price without competition. If Ford owned all the sales points and jacked up the price of their cars everyone would simply by a GM, Toyota, etc. It’s free markets that provide real competition and hold prices down.
    To the claim that dealerships provide jobs and support the U.S. economy, when was the last time someone said “No thanks, I’d rather not pay the sales price, I’d rather pay more to help grow the economy.”
    The bottom line is, if you want to buy a car from a dealer, great do it. But if you don’t want the services that a dealership offers you shouldn’t have to buy from them. Dealerships should survive because they offer a service people want and are willing to pay for, not because their lobby spends millions of dollars to preserve antiquated protectionist legislation.

  5. Do you car dealer cartels think that anyone is buying your BS?

    How about disclosing gross profit, not net profit? and how much you rip people off on services and parts?

    A DoJ study found that franchise dealerships cost consumers an average of 2,225$ per car. So how about you give me 100$ and I’ll save you 25$, deal? (And even then that 500$ is not due to competition between dealers but due to internet making consumers more informed, they still get ripped off though)

    As far as employment goes, there is no difference between a manufacturer owned dealership and a franchised dealership.

    If the franchised dealerships are the most cost effective and efficient as you claim they are, put that to the test. Let the free market decide. Not government regulation.

    Tesla is not asking for special treatment, they are asking for equal treatment. There is also nothing wrong with vertical monopolies. They are a natural part of an economy with many advantages and disadvantages and they benefit the economy. When the word monopoly is used, it often refers to a specific form of monopoly, that being horizontal monopoly and government granted monopoly.

    An example of a horizontal government granted monopoly is the franchised auto dealer cartel.

    A manufacturer either way keeps their price as high as possible to increase their margins (what caps that amount is competition from other automakers). Once their profit margins are set they include the invoice price to the franchise dealer. From there, the franchise dealer marks up the price. So when you negotiate with a franchise dealer, you are not negotiating a cheaper price, you are negotiating the franchise dealer’s commission. Most people would prefer to get invoice price from the manufacturer.

    As far as parts go, you can use OEM parts, no one is stopping that either. You can even get your car serviced in an independent Tesla certified body shop if you don’t like your local Tesla service center.

    What GM and Ford tried did not work because the franchised auto dealer sabotaged them. Since they made up the majority of GM and Ford’s sales, they eventually gave in because the risk was too much. Tesla has no franchise dealership leeches on them, so they can run the model more efficiently without any baggage. And guess what? It works. Tesla is rated #1 for service and customer experience.

    The state would still get the same state revenue whether it is run by a manufacturer or a franchise. Actually the state might get more revenue as it opens up more competition.

    Your ridiculous arguments have been made since the dawn of the human race, when an old dying method gets challenge by a new one be it stone carver or kerosene lamp salesman or that guy who walked in front of cars with a flag 100 years ago or the stables and whips for horses. The argument is always ridiculous like yours claiming how the government should continue/mandate you a monopoly and that you should continue to exist because jobs or state revenue or something silly like that. In reality, every single time it has been proven that the end result actually ends up with MORE jobs and MORE state revenue. So seriously, stop your BS. If you think you server a purpose, let the free market decide.

    Pretty much everywhere else in the world, these ridiculous anti-free market laws don’t exist. You lobbied these laws through bribing and abuse them beyond their intentions.

    And please, stop talking about what is anti-consumer. Every single consumer advocacy group supports direct sales of cars. Over 90% of consumers support direct sales of cars. You can only speak for your franchised auto dealer cartels, keep it that way.

  6. To expand on Richard’s point; consumers don’t get a get a better price when negotiating with a dealer. All negotiating with a dealer does is help you minimize the amount you overpay for your car.

  7. Ok–
    1. Profit is not a measure of value add to the consumer. Just because a business is not massively profitable, is not an indication that it is consumer friendly.

    2. Tesla does not have a monopoly (unless you think companies should never sell their own product), it competes against all car companies and their dealerships.

    3. Company owned stores in many sectors has been beneficial to consumers. Look at tech–Apple began doing this, and go ahead and ask most apple customers about the value this adds to their experience. Yes, it permits the company to charge more, because it is more customer focused and the customer is willing to pay for that.

    4. Employment is important–however, it is equally true that efficiency and productivity growth is equally important. Tesla may hire fewer people per store, but this will over time increase the efficiency and productivity of the company. This will be value that can be passed back to the consumer.

    5. Car dealerships hold car manufacturers hostage through a series of laws that limit what a manufacturer can do. This adds cost to the entire auto industry, and likely impedes innovation, makes the car manufacturers less customer oriented, and creates barriers of entry into the auto industry.

  8. When I bought my my Toyota from the dealer I went in there with the CarMax price for the same new car in Illinois (one price shopping). I had to struggle with the stupid sales man and “manager” for hours and hours for them to finally accept that car max price. If I lived in Illinois I could have just walked in there and walked out in a few minutes. Ask me which would be better?

    When I ordered my Tesla I selected exactly what I wanted and the price was right there. A month later I got my car delivered to my door.

  9. Interesting article. The Tesla Model S is one of the best cars ever built. Pretty much everything about it is head and shoulders better than a car with an internal combustion engine. While you mentioned that battery powered cars was a failed invention of a century ago, we are all now living with the consequences of how ICE cars “won” the battle and are now the #1 polluters on the planet. PLEASE stop crying about the dealer model and get your manufactures to step up and build some electric cars that people want to purchase. BMW 80 miles of range, Nissan 80 miles of range, many plug in hybrids 25-30 miles of range. If your manufactures build a car with 300-400 miles of electric range with top performance people will buy it. You can only imagine the markup that the Model X would receive if it were sold new from a dealer, in fact I once ordered a Nissan GTR and when the car was ready to be picked up the nice dealer who was selling it to me said “while you ordered he car, we can’t get any more of them this year so we are adding a $20k premium. No thank you!

  10. Since when does government forcing consumers to buy through a dealer save them money?

  11. Bobbie Jo Sparrow’s argument is a joke. The car buying experience is intentionally miserable because of people like her.

  12. So I’m wondering what the intent of Ms. Sparrow’s article is?

    Is it justification for the auto dealers associations across the country buying off legislators, to pass laws that are anti-competitive, by out lawing purchases of cars outside of a dealership?

    That is in fact what the auto dealers association did years ago in Arizona.

    As it turns out, not only is that corrupt, it is most likely illegal in a free market society like ours, (I believe I will do the research and publish the names of all the politicians in the State of Arizona who agreed to pass this legislation).

    Also as it also turns out, it is not working. How many Tesla Model S sedans have you seen on the road in Arizona? There are several thousand, and that number is growing and will grow exponentially now that the Model X is out.

    You see, you just can’t tell an Arizonan they can’t log on to the internet and buy whatever they want. That’s called freedom Ms. Sparrow.

    Would we like it to be less cumbersome? I guess so but I had no problem test driving a Model S out of the Tesla store at the Scottsdale mall. It didn’t matter to me that the gentleman working for Tesla couldn’t “sell” me the car. He is allowed to tell me all about the features of the car, which along with my previous knowledge of the Model S was just fine with me. When I’m ready to buy my Tesla, I will have no problem doing so on-line.

    The dealership only business model has sailed Ms. Sparrow. You can’t stop people from doing business on-line, no matter how many politicians you have purchased to pass your ridiculous laws.

    Keep this in mind. Apple will be releasing their electric car in a couple of years. Are you ready to take them on? Good luck with that. I’ll but front row seats while you try to mess with Apple. I guarantee you that outcome will be a blast to watch for all zero emissions drivers around the world. You see, in the age of the internet, you get to make fools of yourselves in front of billions of people.

    Also keep in mind that the “affordable” Tesla Model III will be on sale in 2017. You won’t just see a few thousand Model S sedans and Model X CUV’s, you will see tens of thousands of Model III’s on the road and there is nothing you and your old dealership way of doing business can do about it.

    If I were you, I’d look up what’s called “disruptive business models and technologies”. It’s about to bite you if you don’t plan for it.

  13. ” — Bobbie Jo Sparrow is president of the Arizona Automobile Dealers Association.”

    And there you go.

  14. …. and the President of the Arizona Automobile Dealers Association is calling the ONE company that exclusively makes their cars in the United States a “monopoly?”

    Well Bobbie Jo, I’d say that you need to reassess what works best for America. Is it a giant conglomeration of cars made everywhere but here, (including GM, Ford and Chrysler by the way), or is it a ground breaking American car company like Tesla?

    I forgot to mention one more detail about the supposedly “profit restricted” dealerships Ms. Sparrow represents and that is the fallacy regarding that whole premise.

    Dealerships know they can sell their cars just above cost, (which I doubt they do much), because they make their money on the back end. Gas cars require a nauseating amount of maintenance, which the dealerships basically get rich providing.

    Over years past I constantly had my gas cars in for regularly scheduled “maintenance.”

    Oil changes, lube jobs, transmission checks, fluid changes and on and on. That was for some of the most reliable cars on the road at the time, Toyota. I was amazed at how many times I would spend 500.00 to 1,000.00 a visit just to keep my regular maintenance up to date so my extended warranty would remain valid.

    Not so with my electric car. In the 4 years we have owned our Nissan LEAF if have less than a total 300.00 in maintenance in it. There is no fuel system, no exhaust, no oil, no lube, (it has a permanently sealed lube system from the factory), no transmission, no engine, etc. It’s got an electric motor, a battery, a battery management system (computer), and that’s about it. If your thinking I don’t drive it much, think again. We just passed 66,000 miles on the odometer. We only drive our hybrid 2% of the time.

    The problem for dealerships right now is not competition from Tesla direct sales, although that will clearly become a problem down the road. The problem is, the gas cars they sell are old, unreliable, expensive to operate pieces of junk, that require tons of money to maintain, which makes the dealerships really rich and politically powerful…. for now.

    Think about it. If you by a gas car today for $20,000, you will put another $40,000 into it in gas oil and maintenance over the life of the vehicle. That’s making the $23,000 we paid for our LEAF looking pretty cool.

    The solution is not to go after the American car manufacturer of the future. The solution is to start to transition now by producing a range of EV products and phasing out all the gas products.

    Do you really believe for a minute a huge milti-billion dollar multi-national corporation like GM could not build a huge electric pickup truck with 10,000 lb. towing capacity and a 500 mile range by next year if they wanted to?

    The answer is, they absolutely could, and they know it. Instead they trickle things out like the Volt, not a pure EV but a nice step in the right direction, and the Bolt, a really nice 200 mile range EV that is coming in 2017, but they still refuse to really aggressively transform their entire fleet.

    Back to that truck. Look at the ViaMotors PHEV if you think EV trucks are a pipe dream. Again, it’s not a pure EV but it is a 100mpg PHEV that will turn the truck world on it’s head once it’s in full production.

    The next step GM should be taking is a 500kW battery, 1000 hp 2000 ft lb torque truck. Think that’s not possible? Think about it, there is a reason a diesel electric train gets it pulling power from electric motors. All that’s left is perfecting the battery part of the equation.

    If the dealerships want to sit around a whine about Tesla, watch Tesla build whole fleet of electric cars, including trucks, while GM and Ford sits on their hands. In the meantime, all you try to sell now is that old gas, large format junk you have always sold.

    I guess the mystery for me is, why? Are you really that afraid of the future? Too busy colluding against Tesla? Whatever. The auto industry is now in the tech world. Stand still too much longer and you will get run over by a company that doesn’t have giant gas stations at the back end of their factory, to fill the tanks of their old gas cars as they come off the line. All they have to do is charge the battery packs…. with solar panels…

    Good luck competing with that….

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