Which franchise model do automobile dealerships usually follow?

In the early twentieth century, independently owned automobile dealerships were a rarity. Automakers sold vehicles through department stores, by mail order and through the efforts of traveling sales representatives. The prevailing delivery system was direct-to-consumer sales.

In 1898, automobile enthusiast William E. Metzger established what is generally believed to be the first car dealership, a General Motors franchise. See, The First Century of the Detroit Auto Show, p.265, Society of Automotive Engineers Inc., Pennsylvania, January 2000. Today, tens of thousands franchised auto dealers conduct business across the United States.

Direct automaker-to-consumer sales are now prohibited in almost every state by franchise laws requiring that new cars be sold only by licensed, independently owned dealerships. The specific prohibitions in these laws vary from state to state, but most are based on two underlying principles. The first principle is that allowing automakers to sell cars directly to customers will endanger the businesses of automobile franchisees, which presumably do not have the economic resources to compete with manufacturers on vehicle pricing. The second principle is that consumers need a knowledgeable, independent sales intermediary who is capable of guiding individuals through the buying process and can later be called on for support in the event of difficulties with the vehicle.

The promotion of these principles is evident in various state franchise regulations. New York State, for example, has its Franchised Motor Vehicle Dealer Act (see, NY Vehicle and Traffic Law, Title 4, Article 17-A), which prohibits any automaker from possessing ownership in a dealership offering its vehicles. Massachusetts General Laws, Part I, Title XV, Chapter 93B, has a similar ban on manufacturer-owned dealerships. In Texas, the sale of new cars is strictly controlled by Occupations Code Title 14, Subtitle A, Chapter 2301, which provides that a manufacturer or distributor may not directly or indirectly own an interest in a franchise or non-franchised dealership.

There have occasionally been challenges to the franchise distribution model for automobiles, but it has, for the most part, been accepted by automakers, dealers, and consumers. Recently, however, a nascent automaker’s attempts to bypass franchised dealers in favor of direct to consumer sales have resulted in legal skirmishes with regional automobile dealer associations in New York, Massachusetts and Texas and other states.