Franchise system has many benefits for consumers and communities

At first blush, Great Clips and Singer Sewing Machines don’t have much in common with Ford or General Motors. Actually, they all are rooted in a business model that originated in Europe in the Middle Ages, but really got going in the United States in the mid-1800s. They all are franchise businesses. 

These days, more than $1 trillion in goods and services are sold through more than 300 different types of franchise businesses in America. Few are more important to the American economy than automobile dealers. 

Isaac Singer is considered the spiritual father of American franchising. He lacked capital and because home sewing machines weren’t widely accepted yet, he had a tough time marketing them. His answer was to franchise his brand in 1851.Great Clips and other chain beauty salons are descendants of a franchising operation begun by a housemaid in the 1891. Martha Matilda Harper started with her own secret shampoo formula and less than $400 in capital. By 1929 Harper had licensed more than 500 independently owned-and-operated salons throughout the U.S. She had a standardized textbook for operators and brought her operators together for a convention once a year to share ideas, receive additional training and get fired up.

General Motors helped get the wheels rolling in 1898 when it licensed its first dealer, William E. Metzger of Detroit.  In 1908 Henry Ford, who was producing Model Ts on America’s first assembly lines, also started franchising dealers. The modern automobile dealership is essentially the same franchise model that has carried through the years.

The franchise model allowed manufacturers to choose their dealers to whom they gave exclusive rights to certain territories. In return they shifted the responsibility for providing the land, buildings and inventory to dealers. Dealers also assumed most of the costs of marketing and advertising, display, providing parts, service and fulfilling warranties, taking in trades and arranging financing, although they had to follow the manufacturers’ requirements. Dealers paid all their employees and the taxes.

By the end of the 1950s Americans’ love affair with the automobile was in high gear and there were almost 50,000 U.S. automobile dealers. That number has declined considerably, largely because of the huge capital requirements that accompany owning a franchise automobile dealership. In 2012 there were 17,540 new-car dealerships in the U.S. Even a small dealership requires an investment of between $12 million and $16 million. Some newer facilities cost even more. No successful auto manufacturer could or would want to assume the financial burden of taking over those operational.

Moreover, it would not benefit consumers or their communities if dealerships were turned into factory-owned businesses. As franchises, automobile dealerships display manufacturers’ signs and logos, but the majority of them are owned and operated by local people. That means that there is a real person there who cares about the business’s reputation and the quality of the products and services provided. Local dealers know and understand their community’s marketplace.

Local ownership means that money stays in local communities. New-car dealerships provide jobs for about 15,000 Coloradans, and generate annual incomes with an overall economic impact of more than $1.5 billion. Colorado dealerships add almost $420 million in annual revenue through taxes collected or paid. And there’s a huge multiplier effect from the products and services dealerships buy and the ancillary businesses that support the cars and trucks they sell – gasoline stations and car washes, for example.

Colorado’s automobile dealers historically have been among the most active businesses in local communities, too, sponsoring charitable causes from animal shelters to hospitals to neighborhood schools and athletic teams. They participate in service clubs and other civic-minded organizations. It’s good business, but it’s also part of belonging to a community and giving back something for its loyalty to them. 

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About timwjackson

Working every day for a better Colorado.
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2 Responses to Franchise system has many benefits for consumers and communities

  1. Tom Mechanoguy says:

    You say “No successful auto manufacturer could or would want to assume the financial burden of taking over those operational [sic].” Why, then, do dealers need franchise laws to prevent auto companies from doing just that? Do manufacturers not also have an interest in preserving their brand reputation? Do jobs and tax dollars just disappear when facilities are owned by a manufacturer instead? If franchise dealers really are better for the customer, why are dealers so afraid of Tesla experimenting with distributing cars without them? (When they have no franchise dealers to compete with, and their cars’ low maintenance requirements finally make service infrastructure affordable to the manufacturer.)

    This is America, you are free to conduct your business how you like, but please don’t tell others how to conduct theirs.

    • timwjackson says:

      Thanks for your comment and interest in the issue of franchise new car dealers and franchise laws that protect consumers across the country. It is my belief that the 50 state legislative assemblies across the country have come to the general conclusion that consumers are best served by the local dealer with roots and significant investment in the community versus a manufacturer(s) based in Detroit, Tokyo, Stuttgart or Seoul. Its not so much that dealers need the laws as it is that consumers needs the laws.

      You asked, “Do manufacturers not also have an interest in preserving their brand reputation?” Yes sir, they absolutely do. I don’t think my piece indicated otherwise. Regardless of franchise laws, auto manufacturers have a number of ways to ensure their protection of brand reputation. Dealers also play a big and important part in that role.

      You asked, “Do jobs and tax dollars just disappear when facilities are owned by a manufacturer instead?” No, indeed they don’t just disappear when facilities are owned by manufacturers, though many of the net assets are generally not located outside the manufacturer facility regions. Certainly manufacturers have a huge concentration in job creation and tax generation in locales housing their factories.

      You asked, “If franchise dealers really are better for the customer, why are dealers so afraid of Tesla experimenting with distributing cars without them?” The concern on my part, and many within the industry, is that if Tesla were to fail as a company, or their products fall significantly short of expectation (beyond that of range anxiety), their is a potential for significant ill will on the part of their consumers and the community. If/when Tesla fails and/or their products fail, there wouldn’t be anyone left in the community to support the cars that are already in the fleet, already in service, already sold.

      Because this is America, I’m free to have my beliefs and advocate those as public policy. Because this is America, you can too. If/when you do advocate with public officials, you will need to use your name and provide your background. Why don’t you do that in your blog post responses? It would, I think, add credibility to your opinion and effectiveness.

      Tim Jackson

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