Main Body

Chapter 4: U.S. Automobile Dealerships: A Remarkable Achievement

As noted earlier in this writing, the primary business function of authorized dealerships has always been to deliver and service factory fresh automobiles to local buyers. Their successful roles in that regards not only demonstrate their long-term commitment to the specific manufacturers they represent; but also, the many customers they so proudly serve within their respective communities. However, those business responsibilities extend far beyond just providing and servicing a wide selection of quality vehicles. In a very true sense, their daily routine is a microcosm of business activities occurring throughout the industry at the same moment. Equally important, their everyday activities may afford the buying public some valuable business insight as to what may lay ahead for the domestic automobile industry especially as it attempts to cope with the many economic vicissitudes that are currently shaping our modern world.

Undoubtedly, a wide number of economic and financial considerations affect the daily decision-making processes. In this case, authorized dealers not only supply buyers with the car brands they both demand and want; but also, handle the numerous customer complaints and issues inherent in operating such a broad-based locally oriented business enterprise. Their interaction with the public requires a high degree of finesse at each-and-every level. To do otherwise would be less than prudent. Few others engaged in local retailing face such ennobling business challenges especially when it comes to distributing and maintaining the products they sell on a daily basis. Perhaps the complex nature of the commodity itself, and the high maintenance costs inevitably incurred over the lifetime of a vehicle, may lend itself to that kind of all-inclusive, highly visible business arrangement that presently exists between sellers and buyers. One strongly suspects that both factors fuel the fires of both as they go through their daily experiences.

For most people, procuring a vehicle is second only in importance to owning a home. A domicile, aside from any other pressing business, monetary or social concerns, affords its owner a certain degree of personal safety. It represents a haven against the ravages of Mother Nature. In a similar way, the automobile provides its riders a sense of comfort and security that only a private source of transportation like that can offer. Both the house and auto symbolize represent accepted, economic and social components of our highly dynamic, ever changing society. However, the similarities between them end there. In the case of home ownership, well-maintained properties generally increase in value over time, and especially those in choice residential neighborhoods. Regrettably, domestic autos rarely provide that same kind of guaranteed increase in value over time. Unless the vehicle, in question, is a vintage model such as a beautiful Packard 120, a sophisticated Lincoln Continental or a classic Pontiac GTO, it inevitably losses much of its original value once placed on the open road.

Costly items when first unveiled in the local showroom the majority of domestic-made vehicles lose their value quickly. Frequent repairs, due to harsh road conditions and severe weather, along with everyday wear-and-tear often precipitate that decline. In addition, better-equipped, more powerful versions of the same automobiles regularly replace less efficient, older models. It is part-and-parcel of a much larger business cycle, which has influenced the course of the domestic automobile industry for well over a century. Local dealers must constantly confront the many economic realities of car ownership as experienced through today’s unpredictable business climate. They must also handle the enumerable economic and financial pressures placed on them by their manufactures who insist upon increased annual car sales regardless of current market conditions.

At the start of the 20th century, major domestic auto manufacturers were not sure as to what kind of business relationship they should establish with their many distributors. Dealers were equally baffled as to which arrangements might best suit their needs. However, both parties agreed from the start that the automotive business was like no other domestic industry to date. Initially, some influential automakers and distributors strongly recommended adopting the business model first established by Montgomery Ward and Sears & Roebuck in the 1880s. Their thriving mail order business had served both those retailers quite well. The model they developed not only did away with the need for sales staffs and dazzling stores in key locations; but also, enabled them to advertise their many products through eye-catching catalogues that were sent directly to thousands of customers nationwide, courtesy of the U.S. mail.

Those distributors favoring that particular business strategy argued that the domestic automotive industry might want to develop a similar model that would ensure high returns with only a reasonable amount of investment upfront. Some even went so far as to suggest that manufacturers might consider shipping their new cars in specially marked kits to owners who would then assemble them in the convenience of their home. Perhaps some innovative new car buyer could even improve upon their vehicles at little additional cost. However, the majority of car makers thought that idea was highly impractical. For this mail order concept to work at all, it would require a less hands-on business approach on the part of the buying public. Its supporters proposed that car buyers must order fully assembled vehicles through special catalogues. However, instead of them place their orders through the factory they would rely on authorized agents to handle all the details. For a prearranged fee, those agents would not only process their order immediately; but also, track its progress and arrange for delivery. A modified version of the existing mail order business, it might have worked well as long as the number of new car orders sent to the factory remained manageable. However, inundating manufactures with large numbers of new car orders would undoubtedly place further economic strains on what was already an overburdened assembly line. If that continued indefinitely that would adversely affect the quality of the vehicle produced there, which in turn would lead to reduced new car sales. That must not occur.

Auto repairs represented another crucial issue requiring their attention. Specifically, would the agent responsible for placing the new car orders also handle maintenance issues, or would that person simply refer the car owner to independently operated local garages for their service needs? In addition, how long would average car repairs take, and how would the owner pay for them? In a similar vein, would the owner be financially responsible for virtually all repairs made on his or hers vehicle, or would the car makers provide some kind of limited warrantee-related protection? Lastly, who would manage new car warrantee details if manufacturers should decide to furnish some protection? Auto manufacturers had to address these issues and more first before adopting any permanent business model to follow.

Of course, early 20th century advocates of mail order service had not fully resolved those important details before presenting their proposal to major automobile manufacturers for their consideration. However, they firmly believed that any glitches that might develop could be resolved easily. Critics of that plan were not so sure. No one argued that the sheer magnitude of this undertaking behooved the auto industry to come up with a feasible, new way of selling and servicing its vehicles. They also knew that they could not engage in such an enterprise if they did not come up with a workable plan quickly. Where they differed was not whether they should develop a practical business plan? That was a given. The question facing them was what was the best way for them to achieve that goal? Ultimately, automotive experts overwhelmingly favored the local distributor model over mail order service. It was more efficient and faster than the U.S. mails, and it provided their customers with the personal touch. Those supporting the dealership model further contended that distributors should play a definitive role in any-and-all major decisions. Their particular business responsibilities should encompass much more than serving as intermediaries between the factory and buyers. At the turn of the 20th century, innovative leaders in the field strongly suggested that any future business connection between domestic car makers and their dealers should be both fair and honest, with neither group totally dominating the other. Explicitly defining each group’s business role upfront would make the process more evenhanded.

Those same specialists strongly advised that smaller distributors might want to exert any bargaining chips they might possess right now in order to safeguard their-own customer territorial claims against the possible intrusion in the future of larger, more affluent local dealerships. Over the course of time, the business responsibilities and roles of individual franchises would inevitably extend far beyond the rudimentary business guidelines first proposed during the initial years. Early promoters of the dealership model further insisted that local distributors should handle all aspects of auto sales and service. In essence, they must become one-stop service centers for the particular car brand they sold. Most of the early manufacturers listened attentively to the proposals brought forward by these newly emergent authorities. Through both trial and error, they eventually developed a reasonably effective business model that most everyone could live with now and in the future. The accepted business model combined the best of all proposals, as expounded by its leading advocates, during this industry’s formative years. In the end, most domestic car manufacturers agreed that full-service dealerships represented the most effective way to deliver and maintain their vehicles.

By the second decade of the 20th century, the domestic automobile industry had evolved into a multifaceted, highly successful nationally based retail entity. This embryonic model borrowed heavily at first from prototypes previously developed by successful mail order businesses and thriving department stores. In the final analysis, auto dealerships relied mostly on modified versions of successful retail models to create their own special tableau. No sooner were these business principles adopted before a new, equally baffling problem surfaced. As early as 1922, critics noted a growing disparity between the desire of local dealers to provide their customers with the best possible, lowest cost repair service vs. the equally pressing need to make decent profits on the work done in their respective shops. [1]

Often over worked and under paid, many honest dealers faced bankruptcy on more than one occasion. Being a brand new industry, struggling dealers had few business precedents to draw upon regarding how efficient, successful outlets should operate. They were completely on their-own. Wanting to do right by their car owners as a way of building up repeat business quickly led many distributors to undercharge for costly repair work. Such actions, on the part of many local dealers, had repeatedly undercut their already slim profit potential. If that unprecedented practice continued unabated, it would ultimately result in bankruptcy. Dealers needed to strike some kind of successful balance between these two financial extremes if they hoped to survive.

On a more positive note, the new positive service-oriented environment provided by automobile dealers nationwide, beginning in the 1920s, offered peace of mind to many squeamish new car buyers. Over time, successful local franchises struck a reasonable balance between the high costs of car repairs and their equally important need to maintain appropriate profit levels. Early manufacturers, such as Durant Motor Car Company, claimed that the high quality service offered by its six Cleveland affiliates was no accident. [2] That company claimed that its insistence on quality manufacturing and top-notch service markedly reduced both the expenses and time needed to keep their many vehicles operating at top efficiency. [3] The advertisement by Cleveland-based Main Service & Repair Center said much the same thing. Located at 2135 East 14th Street, just south of Playhouse Square, Main Service & Repair was an authorized repair shop for Peerless automobiles. It provided a full range of services including a cylinder grinding plant that featured the latest top quality machinery. [4]

Earlier demands for an equitable, open relationship between domestic car producers and their respective distributors never happened. Instead, the majority of domestic car manufacturers wasted little time before exerting their authority over their many affiliates. They micromanaged nearly every business aspect of their dealerships by claimed that they, and not their distributors, had assumed the bulk of the financial burden equated with operating such an enterprise. Therefore, it seemed perfectly logical for the manufacturer, not the dealer, to make the majority of business decisions affecting the future of their operations. Self-interest in most cases overruled other, more sensible business approaches that might have depended on greater direct input from their respective dealers. Fairness in business practices aside, most auto producers showed little, if any, remorse when it came to imposing harsh requirements and rules on their many outlets.

The term dealership in its strictest sense meant handler, not policy maker, and most domestic car makers followed that line of thinking to what they believed was its logical conclusion. They expected their distributors to act accordingly. Manufactures justified their meddling in the daily affairs of their dealers by claiming that they alone were the best qualified to deal with such matters, and that they, instinctively knew, what was best for their organization. Regrettably, that hard business line, instituted at the time of the First World War, did not soften much over time. In fact, it affected a wide range of business issues that, in retrospect, the local franchises might have handled better. One highly controversial matter that fitted into that specific category concerned the issues of profit potential and territorial boundaries. In theory, any dealer could sell any automobile anywhere as long as the manufacturer they represented did not impose any restrictions on such activity. However, practicality speaking that rarely happened. The need on the part of most successful automakers to preserve their corporate image at all cost, while still keeping pace with the latest design and technical innovations put most dealers in a very precarious situation when it came to them approaching their manufacturers on such sensitive business matters.

Auto franchises to ensure their financial solvency had to sell a high volume of new cars annually. At the same time, they had to maintain high quality repair service.
That was no easy task to accomplish each-and-every day. Surprisingly, important bottom line issues, like, that did not greatly affect domestic car producers at that juncture. They were far too busy updating their current assembly plants, improving product quality and developing new advertising ploys to worry about the daily problems affecting their many successful affiliates. Instead, business experts handled all those humdrum issues. Those specialists achieved their carefully articulated economic and financial goals by invoking their-own business approaches with no questions asked. For those approaches to work effectively auto manufacturers believed that they must maintain a carefully orchestrated balance between the numbers of dealers carrying their products within a targeted district and the projected customer increases for that same area over the next three to five-year cycle. That meant periodically increasing or reducing the number of those key affiliates to meet changing customer needs and wants. Recent new car sales trends and projected sales volume often determined which outlets remained opened and which ones did not. Decision-making of that nature often included a certain degree of business intrigue especially among unscrupulous dealers who repeatedly attempted to outmaneuver their closest and perhaps more honest immediate rivals.

One such case arose in 1908, when a Cleveland based dealer named Charles B. Shanks tried to infringe upon the sales territory previously awarded to the Auto Shop Company by the E.R. Thomas Detroit Car Company. Apparently, an earlier signed contract gave the Auto Shop the exclusive rights to sell that particular vehicle within that area for the next model year. In response, the owners of the Auto Shop demanded a commission on any of those cars not sold directly through its growing dealership. [5] Automotive experts often looked favorably on automakers who took a rather cavalier business approach when it came to awarding franchises specific territorial rights. They argued that reshuffling the lineup, every so often, represented a very effective way in which to minimize immediate overhead expenses without instituting punitive measures on traditionally high volume dealers. The money they saved from such prudent actions often went directly towards updating their current designs or improving their engine performance.

During the first decade of the 20th century, most domestic automotive leaders not only followed the cogent business advice described above; but also, whenever possible took those suggestions to the next highest level. In an attempt to better publicize the many car models they produced, many automakers regularly opened hundreds of new outlets in both large and small communities. They knew that many of those car outlets would ultimately fail. However, those corporate heads believed that easy public access to local dealerships was essential if their car company hoped to survive the on slot of competition posed by other, equally aggressive domestic manufacturers. [6] It was a chance they would have to take, whether they liked it or not.

The looming business question repeatedly facing most entrepreneurs wishing to enter this highly lucrative field was how does one go about establishing a successful dealership? From its inception, domestic auto manufacturers pursued certain highly enterprising individuals to represent them. It was not something that automobile manufacturers took lightly. Therefore, when it came to awarding their individual franchises most domestic automakers aired on the side of caution. Business leaders with strong financial backing from either local bank institutions or affluent investors most often received the nod from headquarters. Seasoned leaders came to the table with workable plans. They also had handled all the business prerequisites such as securing a dealer’s license, procuring surety bonds and obtaining comprehensive insurance.

As everyone in the business soon discovered, a prime location, more than any other single economic factor, assured potentially high volume sales. That realization led many shrewd distributors to choose large parcels on primary thoroughfares or near major intersections for their new dealerships. Similar to today’s sharp auto dealers, successful entrepreneurs, during the early years of the industry, maintained a careful balance between the numbers of vehicles required in their new car inventory vs. realistic sales possibilities. Thoughtfully analysis of previous and current new car sales trends enabled many to accomplish this difficult task with relative ease. Start-up costs also represented a formable challenge for many budding new franchise owners.

In today’s world, dealers often invest anywhere from $10,000,000 to $12,000,000. Like their successful predecessors, modern distributors often relied on proven financing schemes to increase their working capital. Their responsibilities as local entrepreneurs cover a wide range of business matters. They range from erecting new structures to complement present commercial structures to carrying a sufficient supply of new cars for sale on a moment’s notice. Frequently, the size of a showroom and service area indicates future sales potential. In particular, large, financially secure franchises often service much more than just their own brand of car. Interchangeable parts enable those dealerships to repair a wide assortment of both domestic and foreign automobiles right on site. Unfortunately, mounting operating expenses frequently trouble domestic auto dealerships even well run concerns. Those costs run the gamut from mounting personnel expenses and growing inventories to escalating costs for accessories and parts and higher taxes. In 2013, dealer expenses averaged more than $4,500,000.

Historically speaking, the personal business freedom once afforded the earliest distributors, in the form of non-restricted geographical areas, did not last too long. Auto manufacturers, as early as 1910, began opening numerous franchises in close proximity to each other. All those new distributors sold the same make of car. Over time, growing competition ushered in a far less compassionate approach from the front office when it came to awarding potentially lucrative individual dealerships. Sharing the wealth among competing affiliates by having them vie directly against each other for whatever customer business might exist within that area was a stroke of genius. This “Survival of the Fittest” business tactic seemed the perfect solution to this most perplexing problem. Domestic manufacturers contended that geographical restrictions would encourage local dealers to sell even more automobiles annually. The fear of possible elimination should their volume of new car sales suddenly decline would serve as the business catalyst necessary to promote brisk sales activity. They further stated that local dealers undoubtedly enjoy a decided economic advantage over other, more remote regional outlets in that, they alone, had the capability at any moment of initiating new business strategies geared towards the specific needs of their constituents.

In terms of advertising their many products and services, most local franchises depended on recommended trade associations to assist them in this endeavor. Large domestic manufacturers willingly provided that fee-based service to their distributors. Auto producers and their respective trade associations determined the specific cost each dealership would pay for that particular privilege. Individual local distributors ensured their long-term standing within their respective trade organizations by either paying the association, in question, a pre-determined amount on each new car they bought or by forfeited a percentage of that automobile’s purchase price. The Internal Revenue Service (IRS) officially categorized those trade associations as Section 277 operations, or non-profit organizations. [7] That meant that the majority of dealers could deduct the bulk of their annual contributions under a specially marked business category called “advertising expenses.” These deductions remain crucial in today’s market especially when it comes to selling a dealership. The more deductions allowed the better the chances for a higher value.

When selling a dealership, the seller agrees to liquidate all assets and available stock to the buyer. Within this context, goodwill is a material asset attributed to existing, profitable distributors. As part of a sale contract, both parties consent to uphold a non-competitive covenant along with a consulting agreement. A non-competitive covenant guarantees that the seller will not compete against the purchaser. In exchange, the seller will receive additional compensation for providing that additional service. Simply stated, the seller will not open the same name-brand franchise within the same geographic area to the possible financial detriment of the current buyer. [8]

For the record, this covenant should be considered capitalized and a deduction taken for amortization. This occurs whether any of the added expenses equated with the agreement have been deducted or not, pursuant to IRC 162. In terms of the consulting agreement, itself the seller, for additional compensation, will provide the purchaser assistance on specific duties for a limited time frame upon finalization of the sale. It further assumes that the seller and buyer will honor their full financial obligations as specified in their contract. Another assumption is that the buyer’s costs are compensation, and, as such, may be deductible using the agreed-upon accounting method as first established by the purchaser. [9] The buyer of the specific dealership amortizes both goodwill and a non-compete covenant over a determined 15-year period. The seller further recognizes that the total amount received for the inclusion of the set, non-competitive covenant is regular income, while the amount gained from selling goodwill is subject to full taxation under the law. It is capital gains income with specified tax exemptions as spelled out under the provisions of IRC 197(f)7.

The sales contract should define any-and-all prices paid to the seller through a specified, non-competitive covenant. It should also distinguish itself from any other goodwill received. That covenant might also include an additional provision in the event of a breach in contract, or if the seller, in anyway, might fail to comply with the terms as laid out in the document. Intense conflicts, throughout the 20th century, regarding the legal privileges and business responsibilities between sellers and buyers necessitated such formal action. That kind of well-defined, legal protection safeguards all parties involved by significantly lessening the possibility of wholesale fraud. [10]

If the process of selling and buying a franchise may appear perplexing to the average consumer, successfully marketing its many products and repair services is equally as baffling. The need of dealers to market their many products and services repeatedly to a growingly more sophisticated customer-base compels distributors to rebrand their vehicles and services regularly. This unending obligation is not a new business phenomenon at all. It began in the days of the Ford Model T as car makers increasingly focused their efforts towards the many needs and wants as expressed by their loyal buying public. During the mid-1920s, the seven Greater Cleveland Studebaker dealers banned together in order to better advertise their affordable, high quality repair service. They informed their customers that their dealerships not only provided quality lube and oil jobs daily; but also, handled other things such as wrecked cars. They also charged a flat rate for all repair service done. [11]

E.J. Arnstine Studebaker Dealership
E.J. Arnstine Studebaker Dealership

Quality and versatility became bywords of successful 20th century auto dealers nationwide. Nowhere was that more in evidence than during the post-war years when competition among the many dealers reached a new high. To illustrate this last point, Bass Chevrolet, at 2954 Mayfield Road, reminded its many customers, in the late 1940s, that its factory-trained mechanics could handle nearly everything from bodywork, electrical systems and front wheel alignments to ignitions, lubrication and motor repairs [12] Birkett L. Williams Ford, at 4601 Euclid Avenue, advertised high quality car repainting jobs beginning at $59.50. [13]

Forty-five years later, John Lance Ford, at 23775 Center Ridge Road, took quality repair service to a new, high level when it unveiled its-own special drive-in service center. This state-of-the-art auto facility, with its computerized record system, guaranteed quick repair service. [14] What was true for repair services was equally valid for new car sales. In order for domestic dealerships to make that all-important new car sale, its sales representatives frequently appealed to the particular vanities of their customers. For example, luxury manufacturers most often emphasized snob appeal, while inexpensive car makers stressed product dependability. As the industry became more sophisticated, many domestic carmakers redirected much of their efforts away from the practical side of owning and operating their vehicles towards some of the more aesthetic considerations inherently found in their many fine automobiles.

The emotions of early 20th century auto buyer’s ran especially high during the negotiation process. The local press tried to downplay such emotions by played a crucial role in determining which vehicles the public might want to purchase. The Cleveland Plain Dealer, periodically focused its attention on the many perplexing issues that faced the current buying public. For example, one article would describe the importance of shopping around before purchasing any vehicle, while another would strongly suggest that a potential new car buyer contact the Better Business Bureau regarding the reliability of the dealership in question. Asking customers sitting in the distributor’s waiting room about the dependability and quality of that dealer’s repair shop would also help in that final determination. [15]

Effective marketing strategies upfront have always been essential whenever one is considering purchasing a new car. The public is nobody’s fool when it comes to the buying or leasing of domestic vehicles. They know what they want, and how much they are willing to pay for it. The more positive the public perception of a particular car maker, the greater the chances its dealership will have in not only making the final sale; but also, following it up with quality repair services. Developing effective new marketing tactics became even more critical during periods of recession when the very survival of certain auto brands might weigh in the balance. Repeatedly drawing the public’s attention to the latest new entries is fundamental for any successful distributor. Well placed advertising campaigns that publicize celebrity appearances, end-of-the-month specials, year-end clearances, customer giveaways and popular door prizes may indeed tip the scales in favor of one outlet over another. Once a specific car maker gains the public’s trust, then its affiliates must offer those “niceties” that distinguished them from their nearest competitors. Shrewd automobile manufacturers sometimes may seek out business advice from their high volume dealerships especially regarding effective new marketing strategies. Sharp dealers know exactly what their customers want and need better than anyone else working in the field.

In a very true sense, business relations between domestic manufacturers and their many dealerships have not always been especially amicable. Many of those business disputes between them stemmed from long-term disagreements often related to such things as awarding geographical districts. Insightful dealers often found that a correlation existed between mounting business pressure placed on them by their auto suppliers to fulfill certain pre-set new car sales quotas vs. the growing numbers of competing affiliated franchises within that same designated area. Those same distributors further concluded that if car producers decreased the number of their affiliates, within that same set district, that new car sales volume for those remaining dealerships would undoubtedly increase significantly. However, few manufacturers believed it. Instead, they did just the opposite by inundating highly populated areas in particular with numerous new dealerships each selling the same brand. The results were often disastrous especially for those dealers with only modest sales records.

Whatever the ultimate fate of a particular dealer, within an over-crowded field might be at any given time, one thing stood out. The percentage of profit for competing dealerships, who sold the same brand within the same district, dropped from 33% in 1914 to 5% by 1956. It finally bottomed out at 2.2% in 2013. Putting aside those sustained profit losses resulting from over saturating certain select markets, domestic automakers, with few exceptions, rarely deviated from that traditional business strategy. Beginning in the 1920s, major automakers wrongly believed that limiting the area of their dealerships would stimulate, rather than retard potential new car sales growth, since those franchises would be compelled to come up with effective new ways to sell their products on a regular basis. They viewed fierce competition among authorized franchises as positive for manufacturers and dealers alike. Furthermore, corporate executives repeatedly expounded what they believed to be the many psychological advantages of adhering to such a rigidly enforced business tactic.

They falsely assumed that the majority of the buying public wanted to purchase their cars from smaller, rather than larger, dealerships. Much of the basis for their argument stemmed from several informal customer surveys conducted after the First World War. The majority of their findings supported the contention that smaller geographical areas were better for both customers and dealerships. These studies concluded that there was a direct business correlation between customer services offered by an individual dealership vs. its size. Those distributors serving small areas generally provided much better service than those found in large markets. Supposedly, smaller dealerships also conducted themselves in a more professional manner than their regional counterparts.

There were other reasons why many car makers wanted to establish more than one franchises within a set geographic area. Such actions sent out a positive message to potential buyers. The growing number of new dealers selling their brand of car within a small district must mean that the manufacturer, in question, not only produces top quality vehicles; but also, that the growing demand for its many models led corporate officials to open additional outlets to better serve the needs of the public. The idea behind their action was both simple and direct: more dealerships better customer service. That logical thinking might have been valid in the nation’s top markets where the number of possible new customers was theoretically endless and competition was all around you; however, it rarely proved true in less populated communities where the number of potential new car buyers and competition remained small. Another claim brought forth by some growing companies was that numerous dealerships, selling the same car brand in a small area, would lead to greater cooperation among affiliated distributors if problems should arise. Again, that might have been applicable in large market settings, but rarely panned out in smaller communities.

In a perfect world where a limited number of high quality automobile producers dominated the market, the idea of spreading the wealth more evenly among additional distributors might have made perfect sense. Theoretically, there would be plenty of economic and financial opportunity for everyone involved within this growing industry. However, the real world was quite different. Most manufacturers soon set aside their sophomoric ideas in that regard once the harsh economic realities resulting from relentless competition began to undermine profit potential for manufacturers and dealers alike. Practically speaking, this no holds barred competition that pitted like-dealerships against each other for an increasingly smaller rather than larger percentage of the local economic pie just did not work.

Although many dealers complained about these imposed limitations, they usually remained loyal to the individual manufacturers they served. That being said those same automotive producers exacted a heavy toll from dealerships who failed to follow other established corporate dictates. That pressure to conform no matter what might be happening business wise within a dealership was sometimes very unfair. For example, one universally applied corporate mandate, which insisted that dealers continually maintain a high number of new cars on their premises regardless of present economic conditions, seemed overbearing for many to tolerate. Car makers rarely considered the negative business impact that such a demand might have especially on low volume affiliates. In fact, many dealers have faced bankruptcy due to unexpected economic reversals, seasonal new car sales fluctuations or price overlaps.

National economic downturns continue to concern dealers to the present day. According to a 2008 study, the average franchise carries anywhere from a 60 to 90-day supply of new vehicles at any given time worth an estimated $5,000,000. For those dealerships barely able to meet their annual quotas, that over supply of new autos intended for a local market, that may or may not materialize, might spell financial disaster. To casual observers, who might be unaware of how that distribution process operates any sudden increase in a dealer’s new car inventory might suggest that something is very wrong financially with the dealership in question. In their minds, large inventories demonstrate business ineptness on the part of the local dealership. The buying public might wonder why that dealership is not trying to sell more cars as a way of lessening its debt, a debt generated, in part, by the sudden influx of unsold vehicles evident in its many lots. What those outsiders might not realize is that a sudden surge in sales at that dealership, prompted by special in-house rebates or manufacturer’s promotions, might reduce or even possibly eliminate any recently accrued debt resulting from this sudden increase in its new car inventory.

Tightly controlled sales quotas in theory lessen its long-term negative impact. Beginning in the 1920s, some manufacturers justified the use of annual new car sales quotas by claiming that they not only precipitated high sales volumes; but also, helped to differentiate successful from non-successful outlets. Annual quotas quickly became the bane of existence for most dealers. Failure to meet pre-set business goals often meant losing the franchise in question. That had not been the case, prior to the First World War, when the majority of domestic car makers automatically renewed their dealer franchises at the end of the calendar year. [16] Automatic renewal afforded a certain degree of business security especially for low volume distributors. However, franchise renewal guarantees like that had all but disappeared by 1925 as auto manufacturers routinely terminated their least profitable outlets. A little known clause hidden in most contracts called “just cause,” enabled auto manufacturers to act in such a ruthless way. Such callous procedures only softened after the Second World War when some domestic automakers began to extend the length of franchise contracts from one to five years. [17]

Carmakers may have still reserved the right to terminate agreements at will; however, many franchise contracts, starting in the 1950s, included a new provision aimed directly at another equally bothersome problem namely safeguarding dealership succession. In the scheme of things, domestic manufacturers rarely, if ever, concerned themselves with the economic, demographic and financial changes affecting their individual franchises especially those located in more remote districts. Most legal departments in those companies firmly believed that the ironclad agreements they had made with their dealerships were above reproach, and that any economic or financial crisis that might arise, over the course of the year, could be easily resolved through in-house arbitration. That confident business attitude prevailed right into the Viet Nam War era. Regrettably, unremitting rivalry, throughout the last quarter of the 20th century, waged primarily by highly successful import auto manufacturers undermined Detroit’s dominance. Not certain as to what they should do to combat this growing menace, Detroit’s Big Three opted to conduct business as usual. They reasoned that if their present business strategies proved ineffective, then they could simply overhaul their operations to better suit their needs in the future. That kind of business thinking seemed credible especially in the 1970s and 1980s.

Detroit’s Big Three in the 1970s and 1980s had agreed independently not to give in to the many economic and financial pressures placed on them by their many foreign competitors. Mounting debt played a big part in their decision. Detroit’s Big Three knew that public and private lenders, in that era, expected rapid repayment on all loans and they intended to meet their obligation no questions asked. One way in which to decrease some of their outstanding debt rapidly involved eliminating as many low volume dealerships as possible. Reducing the number of franchises may have lessened overhead expenses temporarily; however, that action, in itself, was insufficient over the long run. Detroit’s leaders needed to institute more drastic budget cuts if they hoped to decrease their debt appreciably. Many of the remaining dealerships, in the late 1970s and early 1980s, did not help Detroit’s cause. Their insistence on monetary assistance was something that Detroit’s Big Three was ill prepared to give them at that juncture. The economic problems plaguing many locally based dealerships ran far deeper than was first imagined. Detroit’s insistence on using stopgap business measures as a way of building up temporary liquidity, while still adhering to obsolete business practices was no longer a viable option. Heightened competition originating from successful foreign manufacturers acerbated this already sensitive financial situation.

Irate domestic dealers demanded much more from their individual car makers than an onslaught of conflicting orders and endless promises of better times just ahead. As stated earlier, they needed direct financial assistance. The reluctance of Detroit’s Big Three to address their concern in a straightforward manner forced many affiliates to sue their parent company for damages. The amount of legal grievances filed against domestic auto manufacturers increased steadily in the 1970s and 1980s to reach a new high point during the 1990s. Many of those complaints focused on the hated arbitrary clauses and unfair business practices initiated by domestic auto manufacturers on so many different levels. One continual source of irritation between dealerships and car manufacturers concerned the role distributors should be playing in their corporation’s decision-making process.

During the first half of the 20th century, legions of accountants and program directors had rubber-stamped nearly all decisions approved by their individual Boards of Directors. These program heads, with the strong backing of their respective boards, believed that they knew what was best for their affiliates. Furthermore, they claimed that they were the ones, not the dealers, who understood the multifaceted economic forces that were shaping our international market. Corporate directors conceded that individual dealerships might enjoy a decided upper hand when it came to handling daily issues; however, they knew next to nothing when it came to the many economic and financial entanglements influencing present global conditions.

Detroit’s Big Three remained vehement that their many distributors leave the bulk of corporate decisions to the company’s knowledgeable experts. However, wise that advice might have been at that moment, the stark economic realities that had unfolded throughout the 1980s and 1990s showed the shortsightedness of such parochial business viewpoints. The new, fast-paced global market posed a wide array of extraordinary new economic and financial challenges never envisioned by Detroit’s highly conservative top leadership before. Specifically, the various business predicaments that arose at the time of the Millennium would have been far less severe had Detroit’s Big Three adopted a more proactive business stance when they had the chance to do just that in the 1970s and 1980s.

Those early 21st century dealerships that had specialized in selling domestic automobiles insisted upon greater control of their daily operations. They no longer accepted outdated business methods that had deliberately minimized their growing potential within the evolving national automotive scene. These dealers wanted the same kind of economic and financial independence afforded other, outside retailers. They further demanded that previously acclaimed distribution models must be either completely updated or totally discarded. Dealers held out virtually no hope for compromise on those controversial issues. For the most part, Detroit’s Big Three refused to acquiesce to their growing demands by their many outlets for greater autonomy and more input on the corporate decision-making process itself. Its board members even went so far as to label some of the dissenting dealers as “renegades.” In their minds, it was simply a matter of principle and tradition. Car makers generally defended their narrowly defined viewpoints by arguing that outsiders might construe any relinquishing of power by them to their individual dealers as a sign of internal weakness. The slightest perception of corporate weakness, in turn, might prompt unsubstantiated rumors concerning the future prospects of those car manufacturers. Detroit’s Big Three made it quite clear that it would not tolerate such actions.

Detroit auto giants insisted that their many distributors should try whenever possible to dispel any unfounded business rumors that might spread discord among their rank-and-file. None of the domestic automakers appreciated the kind of negative publicity resulting from spreading such rumors especially when there was no true to them. Furthermore, corporate leaders would no longer tolerate unauthorized policy changes enacted by what they considered ruthless, unprincipled independents. Detroit officials claimed that such unwarranted business actions might seriously undermine the many positive economic and financial strides they had made collectively in recent years.

Automobile manufacturers carefully pointed out that their reinterpretation of classic vertical integration had prepared the stage for many of the current economic and financial gains occurring throughout the domestic arena. In reality, any of those economic and financial gains, they so proudly claimed as their-own, came with a hefty price, namely purposeful sacrificing many of their traditional, low volume dealerships. Detroit’s Big Three ability to survive this latest wave of foreign competition, occurring throughout the 1980s and 1990s, did very little to improve its overall economic and financial condition. In fact, the dwindling customer-base had led to the demise of many of their oldest, most reliable local outlets.

The new Millennium found shrewd domestic dealerships repeatedly challenging the highly outmoded business models still utilized by many auto producers. Modern critics argued that the growing confusion, evident throughout today’s domestic auto scene, due in large measure to inconsistent policies emanating from Detroit, has discouraged many traditional auto leaders from setting aside their many outdated management approaches to embrace the entrepreneurially inspired models that have characterized the successful import car business for more than two decades. Known for its resourceful use of capital, this new worldwide entrepreneurial spirit sanctioned open discussion among distributors, marketers and manufacturers.

Under this more open-end arrangement, each member lent its expertise to the others with the full intention of manufacturing the best possible products at the cheapest cost. No one company dominated that group’s inner circle. U.S. automotive experts observed those developments with keen interest. They said it was imperative for Detroit’s Big Three to develop a similar working partnership as soon as possible. These domestic leaders further stated that any hostility between domestic auto manufacturers and their many franchises must end now if Detroit’s Big Three intended to remain competitive in the 21st century. Encouraging more direct dealer participation in the corporate decision-making process represented a major first step towards attaining that desired economic and financial parity.

Leading domestic dealers made it quite clear that the kind of unquestioned decision-making power, wielded by the majority of U.S. car makers for the entire 20th century, would no longer be acceptable with them. They said that Detroit’s Big Three must come to grips with the shortcomings of exercising undutiful executive power without seeking any meaningful feedback from their many representatives. It was wrong. Overseas auto dealers concluded that their actions were unfathomable given today’s highly sophisticated business climate. Automotive experts fully recognized the irony of Detroit’s Big Three trying to compete effectively in a modern world, while continuing to expound such arcane business principles.

Throughout the 1980s and 1990s, critics repeatedly pointed out that much of the financial success recently enjoyed by Detroit’s Big Three was little more than pure luck. It did not stem from any enlightened breakthrough in business thinking; but rather, the culmination of a series of favorable economic developments seemingly unrelated to anything Detroit did directly. In reality, much of their recent success originated from innovative local dealers, and not inspired board members from Detroit who had somehow managed to cut their general costs significantly. Although Detroit’s Big Three appreciated the unceasing dedication, displayed by many of their profitable franchises, their new pro-active business stance, in itself, did not seem to quit earlier open hostility. As late as 1985, domestic automobile manufacturers failed to admit the many economic and financial difficulties that faced many of their smaller distributors, some of the same dealers who had bravely tried to compete against the growing number of fast selling popular imports. Some kind of financial help, perhaps in the form of significant, direct subsidies, might be very much in order here. However, nothing transpired.

That was most unfortunate in that the lack of direct financial help by Detroit’s Big Three did not help to stimulate new car sales in the least. Had Detroit offered some immediate financial assistance, struggling dealerships might have construed such action by the home office as a sign of good faith. However, Detroit’s Big Three rarely offered any substantial relief to its many distributors and most especially low volume outlets. Those same forgotten dealers, which had struggled so courageously to fulfill their annual quotas, now faced even grimmer prospects as the Millennium unfolded. Many of the more successful dealerships had turned around their misfortune by offering fantastic deals on both new and used vehicles. The high volume of sales generated by those phenomenal deals enabled them to reduce their debt substantially. Just such a business scenario, occurred in the 1990s, when a well-known Cleveland dealership called Friedman Buick lowered its finance rates to 4.8% on certain select models. [18] Its business turnaround was phenomenal.

That new low interest rate offered by Friedman Buick represented a major departure from other General Motors dealerships, in that same area, whose interest rates for car loans ranged anywhere from 8.5% to 9%. [19] That lower interest rate on certain car loans was a stroke of good luck for Friedman Buick. The 1990s saw other pressing economic problems come to the fore. Many of those issues centered on the growing necessity of most dealerships to maintain decent profit levels in the middle of an ever-dwindling local market. That problem was compounded even further by the urgency placed on Detroit’s Big Three to better handle the many complaints lodged against their outlets by disgruntle customers. Some of those complaints focused on less-than-honest negotiation practices that had been occurring among unscrupulous dealers.

Many purchasers had claimed that some unprincipled sales representatives had compelled some new car buyers to purchase expensive accessory packages in the hope of securing low interest loans. Manufacturers responded to such accusations by saying that they did not condone such actions and that there was no connection whatsoever between the price of a vehicle and the interest rates charged by the dealer for that specific automobile. Critics challenged that very notion by suggesting that trouble often set in when a new car owner met with his or hers financial officer to sign the final papers only to discover that the actual price of the new vehicle that he or she had just purchased was higher than the agreed-upon price made with the sales representative. [20]

Those kinds of unethical business practices had mostly disappeared by the Millennium due primarily to a more sophisticated buying public who would not tolerate such underhanded actions. As stated earlier, the prolonged investment made by most large domestic carmakers, during the first half of the 20th century, afforded them virtual control over the daily business activities of most of their affiliates. Maintaining authority over their many distributors enabled those manufacturers to institute harsh contract restrictions, many of which were unbreakable. The possibility of losing their franchise, at any given moment, based on a perceived or real infraction weighed heavily on the minds of many reputable auto dealers. It also served to keep violent protests against their specific manufacturer to a minimal. In the past, many shrewd distributors had attempted to offset their mounting overhead costs by investing in other, lucrative outside enterprises.

Most domestic car makers disapproved of such business actions. General Motors Corporation, Nash Motor Company and Packard Motor Car Company expressed their displeasure, in that regard, in the 1950s. They viewed such wanton behavior as a flagrant violation of existing contract agreements. As was pointed out previously, many franchise arrangements not only required corporate headquarters to approve all outside business investments; but also, afforded them the prerogative to retaliate against those distributors who knowingly and willingly breached their contracts. If that was not enough of a business burden for them to bare most domestic auto producers, into the 1950s, charged distributors the highest possible freight costs for car shipments regardless of the actual distance between the factory and outlets involved.

Hoping to reduce the number of legal grievances filed against them during the post-war era, Detroit’s Big Three developed its-own special Dealer Relations Boards. [21] Modeled after other, successful arbitration boards, these groups dealt with some very sensitive issues. Those delicate matters affecting carmakers and dealerships alike ran the gamut anywhere from a breach of contract, lost commissions and non-delivery of auto orders to territorial disputes, unfair labor practices and unexpected financial losses due to sudden franchise termination. Most distributors preferred to present their arguments in front of the Dealers Relations Board, rather than, seek out costly legal alternatives available through the courts.

The fact that distributors rarely won in the courts may have accounted for their reluctance to pursue that specific option. In fact, most judges favored manufacturers over dealers declaring that business missteps, more often than not, stemming from the improper actions of the dealers themselves, accounted for their present financial predicaments. In addition, car dealers fully knew that most contracts they signed contained restriction clauses that among other things automatically waived their rights to sue the parent company for lawful damages. Setting aside liability issues and the right to sue in the courts, existing anti-trust laws could have worked in favor of the dealers had they been able to demonstrate conclusively that they had been the victim of constraint of trade and that it had resulted from specific, unlawful actions taken against them by their automaker.

The Day in Court Bill of 1956, that had allowed automobile dealers to take their disputes against their suppliers directly to court, did not prove to be the panacea that everyone had hoped it would be when first passed by Congress. [22] Although this federal act along with other similar bills, passed on the state level, had reduced the frequency of incidents in which car manufacturers meddled directly into the daily affairs of their many dealers, it still did not stop that practice entirely. Beginning mid-century, the unpredictability of the domestic automotive industry, prompted by what seemed on the surface to be insurmountable business and legal entanglements, and compounded even further by the unique nature of the commodity sold and serviced, baffled the buying public. The relationship between auto manufacturers and dealers differed greatly from other typical retail store examples. Even those retailers stymied by legitimate franchise restrictions, enjoyed a certain amount of business autonomy when it came to purchasing and distributing their merchandise and services. That was not true for the majority of auto dealers whose manufacturers repeatedly challenged every business move they made.

Those arbitrary, and at times, counter intuitive policy changes placed local dealerships in a very tenuous business situation as they strove to do the right thing for their many customers. Putting that aside, how did this embryonic business relationship, carefully cultivated between Detroit’s Big Three and their many affiliates, influence the economic prosperity and financial security of the industry as a whole? In addition, what do their acerbic actions say about the enduring effectiveness and quality of their many business policies, and how did those actions directly influence the distribution process itself?

  1. Fred E. Kingsbury, “Automobile Manufacturers and Dealers of Nation are Studying Service Problems,” The Cleveland Plain Dealer, October 8, 1922.
  2. Bill Vance, “Durant Motors’ Fall Doomed the Star,” The Cleveland Plain Dealer, September 5, 1993.
  3. “Just a Real Good Car, Durant,” The Cleveland Plain Dealer, February 4, 1923.
  4. “Main Service and Repair Company,” The Cleveland Plain Dealer, April 6, 1924.
  5. “R & L Electrics, Safety and Convenience,” The Cleveland Plain Dealer, June 28, 1908) (“Automobile Dealer Franchises,” 1175.
  6. Robert Schoenberger, “How Dealer Cuts Affect You Experts Discuss Impact of Chrysler, GM Showroom Closures,” The Cleveland Plain Dealer, May 20, 2009.
  7. U.S. Department of the Treasury Internal Revenue Service, New Vehicle Dealerships, Audit Technique Guide (ATG)
  8. Ibid.
  9. Ibid.
  10. Ibid.
  11. “Studebaker builds for permanence in Cleveland, Fine one-profit cars plus factory service,” The Cleveland Plain Dealer, August 25, 1925.
  12. “Bass Chevrolet Motors, Inc.,” The Cleveland Plain Dealer, October 24, 1947.
  13. “Makes Your Car Look Like New,” The Cleveland Plain Dealer, March 13, 1949.
  14. Donald Sabath, “John Lance Ford Unveils New Drive-In Service Center,” The Cleveland Plain Dealer, December 26, 1993.
  15. Christopher Jansen, “Dealers need comparison,” The Cleveland Plain Dealer, August 11, 1988.
  16. “Automobile Dealer Franchises,” 1145.
  17. Ibid. 1146.
  18. “Known for the Best Deals in Town, Friedman Buick 4.8% Financing Available on Select Models,” The Cleveland Plain Dealer, January 3, 1990.
  19. Donald Sabath, “Dealers Say Lower Rates No Help to Auto Sales,” The Cleveland Plain Dealer, December 5, 1991).
  20. Christopher Jensen, “Solving dealer disputes Autocap panel’s rulings satisfy many frustrated buyers,” The Cleveland Plain Dealer, October 13, 2002.
  21. “Automobile Dealers Franchises,” 1148.
  22. “Day in Court Act fought factory coercion,”