Cliff Banks - The Banks Report

Dealers are a Monopoly? Come On, Man…

December 1, 2015 — Apparently, someone recently declared it to be open hunting season for the media on car dealerships. Recent stories include claims of racism (in the Huffington Post) due to dealers fighting against the CFPB’s efforts to curtail financing profits to claims yesterday in the Daily Signal that removing the dealership monopoly from the sales process would save consumers $1,950 on each vehicle purchase.

These are just two examples of many stories slamming dealers over the last several weeks. We all know there are bad apples in this industry– but there are unsavory characters in every business. But they aren’t the majority, despite what the media likes to write.

It’s one thing to attack less than ethical practices or people, but the media is going after the business model — and is relying on faulty data and perceptions of the industry, unfortunately.

After reading yesterday’s piece in The Heritage Foundation’s Daily Signal, I about had enough. The opinion piece was written by intern Max Lies.

It was somewhat surprising, because The Heritage Foundation is a conservative organization and one would think the dealership business is a model it would celebrate. Alas, that’s not the case.

So I responded — below is part of my response to the unfortunate piece:

I read with disappointment the commentary regarding dealerships one of your interns, Max Lies, published yesterday on the Daily Signal.

The words that came to mind while reading the piece were “uninformed” and “hatchet job.”

It certainly is not in line with what your stated objective is on your website: “We are committed to news coverage that is accurate, fair and trustworthy.” 

Furthermore, you imply your reporting is “thorough, honest and responsible.” Although it is an opinion piece, Mr. Lies fell far short of that standard today. A little more research perhaps would have provided Mr. Lies with another perspective. Unfortunately, he took the approach others in the media have recently — and it’s the same old “pile on dealers,” approach. 

He essentially is arguing for the removal of dealerships. He claims consumers would save $1,950 off the purchase of a vehicle if the dealership monopoly was removed. (Although he fails to provide any documentation for his dollar figure, I assume he’s relying on an outdated study – I could not find his dollar figure in any of the studies I’ve read that argue similar premises).

As support for his premise he mentions a direct-to-consumer initiative General Motors tried in Brazil in which he claims customers saved 6% off the cost of the vehicle.

Here are some counterpoints to Mr. Lies’ premise:

Dealers are not a monopoly. There are approximately 18,000 different new-car dealerships in the U.S. Despite some market consolidation, most of these dealerships are independently owned businesses (that are classified as small businesses).

It is true, six publicly traded dealer groups own a combined 950 or so dealerships. But even then, the stores for the most part, operate as independent businesses run by an entrepreneurial-minded general manager.

 The point is, dealerships compete vigorously with each other in their local markets. Removing them would eliminate competition, not create it.

 As an example of this the Ford Retail Network, an initiative Ford began in 1997 in which it took ownership of several dealerships in five separate markets, essentially eliminating competition among its stores in those markets.

 The goal was to sell cars at fixed prices with salary staff not paid on commission. After two years, Ford moved back toward commission sales staff along with variable pricing. Not long after that, it exited the retail business completely.

 Ford lost market share in each of the five markets while the dealerships it owned lost money.

 The lesson was, eliminating dealers from the equation simply transfers the costs of retailing to the manufacturer. It will not reduce the costs of retailing. But it will eliminate competition.

 Instead of numerous independently-owned businesses competing with each other, we would be left a manufacturers controlling all of the stores selling their brands.

The Brazilian example Mr. Lies uses to support his premise actually supports our premise. If had done a little more research, this would have been evident.

 Mr. Lies is referring to GM’s Celta initiative, which began in 2000. The automaker attempted for six years to sell the Celta online directly to consumers using distribution centers to stock the vehicles which would then be shipped to dealerships for delivery.

 The initiative cost GM so much money, it abandoned the effort in 2006.

 Unfortunately, so-called experts still point to the Celta as an example of manufacturers successfully eliminating the dealership in the sales process, when it was actually a failed experiment.

 Frankly, dealerships are the type of businesses The Heritage Foundation should be celebrating. 

  • Dealership owners generally are politically conservative.
  • Many of them are second, third and fourth generation owners.
  • Dealers are entrepreneurs – many of whom have taken out second and third mortgages to help finance their businesses. They have assumed all the risk in building their businesses.
  • The approximately 18,000 new-car dealerships in the U.S. employ more than one million people – in addition to supporting numerous ancillary local businesses such as landscapers, vending machine operators, construction firms etc.

Probably more than any other business sector, dealerships best represent and embody the American entrepreneurial spirit. Yes, there are some bad characters, but most dealers are outstanding citizens who work hard and care deeply about giving back to society.Many have phenomenal stories to tell of how they’ve reached their level of success after starting with nothing.

These are businesses that should be celebrated, not eliminated. And certainly, from the perspective of The Heritage Foundation, the American car dealer is exactly the type of business person it seeks to defend and celebrate.

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