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What Is the Difference Between a Franchise Dealership and an Independent Dealership? by E.M. Rawes
- 1Franchise vs. Dealer
- 2The Average Start-Up Costs of a New Car Dealership
- 3How Much Does it Cost to Open a Car Dealership?
- 4The Difference Between Franchise Dealers & Private Dealers
In the early 1900s, before automobile dealerships existed in abundance, manufacturers sold vehicles by mail order, through retail department stores, through traveling salesmen, and above all, through wholesale distributors. The first car dealership ever was established by William E. Metzger in 1898 when he obtained a franchise to sell for General Motors. As of 2010, over 18,600 franchise dealerships operate in the U.S. This number does not include all of the independent dealerships that also operate in the U.S., according to Francine Lafontaine and Fiona Scott Morton authors of "State Franchise Laws, Dealer Terminations, and the Auto Crisis" in the Journal of Economic Perspectives.
Dealerships with names such as "Billy Bob Ford" or "John Doe Mazda" are franchise dealerships. These dealerships have a contract with an automobile manufacturer that allows them to sell its products.
Dealerships with names such as "Jim's Used Cars" or "Jack's Auto World" are independent dealers. An independent dealership generally has one or more locations where it holds its inventory. These dealers have no affiliation or contract with any manufacturer.
A franchise dealer purchases inventory from the manufacturer. The average new car dealership holds a 60- to 90-day supply of new cars and it invests an average of $4.9 million (as of 2008) in this inventory, according to the National Automobile Dealers Association. A new and used car franchise dealership also obtains inventory from customer trade-ins. An independent dealership obtains its inventory from customer trade-ins, auctions, private sellers and other sources. An independent dealer generally does not, however, buy direct from the manufacturer.
Tom Lacey discusses the training requirements in independent and franchise dealerships in his 2007 Dealer Business Journal article entitled "Independent Service vs. Franchise." He affirms that franchise dealerships must adhere to any employee training requirements set forth by the manufacturer. This may include online and classroom technician training programs and service advisor training. Service managers must also understand the manufacturer's warranty and how to govern it. As long as the independent dealership follows any applicable laws, it determines its own training standards.
The manufacturer sometimes requires franchise dealerships to provide special waiting areas for customers where they can have a cup of coffee, sometimes even cookies or muffins. Sometimes the manufacturer requires shuttle buses and loaner cars, Lacey informs. While most dealerships -- franchise or independent -- value customer service, these little extras are expensive for the dealership. Independent dealerships always have a choice regarding extras they provide for customers.
Dealer Business Journal writer Peter Salinas interviews dealership managers and owners in his 2007 article entitled "Franchised and Independent Dealers Benefits and Weaknesses of Both Business Models." Interviewee Jason Willis, partner at Donald Craig Motor Co. Mazda-Suzuki in Mooresville, North Carolina, has been in the business for almost two decades. He asserts that independent dealerships are not treated as well as franchises by finance companies and floor planners. Some finance companies will not even to do business with an independent dealership even if it has strong financials.