SIC 5511 Motor Vehicle Dealers (New and Used)

 
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SIC 5511

This classification is comprised of establishments involved in the retail sale of new automobiles and light trucks. These establishments are franchised retail outlets for domestic and foreign automobile manufacturers. Products include passenger cars, pickup trucks, and minivans. Many establishments also sell used vehicles, replacement parts, tires, batteries, and other automotive accessories. In addition, many operate service departments.

NAICS CODE(S)

441110

New Car Dealers

INDUSTRY SNAPSHOT

New car dealerships traditionally are comprised of three profit-making departments: new car sales, preowned car sales, and service and parts. The number of new car dealerships has declined steadily since the late 1980s. According to the National Automobile Dealers Association (NADA), as of January 1, 2002, there were more than 20,000 total new car and light truck dealerships in the United States. Automotive dealers employed a record 1.3 million workers in 2003, with an average annual salary of $41,340 and a total payroll of $50 billion.

The new car and truck sales category is one of the largest within the retail sector. Despite a decline in the number of dealerships, new car dealers achieved healthy combined sales increases in the early 2000s. 2003 sales were the fifth highest ever at $700 billion, with new vehicle sales of 16.6 million. New car dealers also sold 19.5 million used vehicles during the year, for an average price of $13,500. Profit in both used vehicle and parts and service departments rose over the 2002 levels, but new vehicle department profits were down.

ORGANIZATION AND STRUCTURE

Despite the large numbers of automobiles sold in the United States, auto manufacturers had relatively few customers. Manufacturers' customers consisted primarily of their franchised dealers. Dealerships purchased cars and light duty trucks from manufacturers, and in so doing they obtained ownership of the vehicles. The millions of people who made retail auto purchases were customers of the dealerships, not the manufacturers.

Because the car-buying public made purchases from franchised, individual dealers, manufacturers had no authority to establish fixed vehicle prices. Manufacturers were able only to suggest retail prices because price fixing was forbidden by law under statutes prohibiting the restraint of trade. Dealers, who were independent businesses, were legally free to negotiate selling prices with their customers.

Many new car dealerships were members of the National Automobile Dealers Association (NADA). NADA was formed in the post-Depression era to represent dealers' interests in coping with legislative issues and in negotiating areas of concern with manufacturers. In 1988 NADA members accounted for 79 percent of the nation's dealers. NADA membership steadily increased and by 1992 accounted for 83 percent of U.S. new car dealers, representing about 19,500 franchised new car and truck dealers. By late 2002 this number had fallen slightly to 19,400.

Another organization representing the interests of some automobile dealers was the American International Automobile Dealers Association (AIADA). In 2002 AIADA claimed membership of 10,000 American-owned businesses that sold and serviced automobiles with overseas nameplates. AIADA's mission was to represent its members' views on issues such as U.S. trade policy, domestic content requirements, taxes, fuel economy, and antipollution legislation. AIADA also undertook studies of the positive aspects of international automobile trade, focusing on its benefits to U.S. consumers, the national employment situation, and the economy.

BACKGROUND AND DEVELOPMENT

Early in the twentieth century, carmakers became increasingly proficient at producing automobiles. Mass production techniques necessitated mass distribution, which led to the development of a system of selling cars through dealers who held exclusive franchises.

During the early decades of the 1900s, market conditions, which were driven by excess demand and limited supply, left dealers largely unprotected against territorial infringement and forced them to accept whatever conditions a manufacturer offered. Under a typical franchise agreement, a dealer was limited to selling a specific line of new cars, usually the products of one company. Dealers were required to accept vehicle quotas, and the quota limit was established by the manufacturer. Dealers were required to pay for cars upon delivery, and manufacturers held the right to cancel dealer franchises.

The pre-existing availability of a widespread dealer network helped some of the major automakers become established during their early years. For example, before he entered the automotive industry, William C. Durant (who went on to become the founder of General Motors Corp.) sold carriages and wagons through a network of Durant-Dort dealerships. When Durant assumed control of Buick in 1904, the Durant-Dort dealerships began to sell Buick automobiles. In 1906 they sold 1,400 vehicles, and in 1907 they sold 8,800. Studebaker, another company with prior experience selling wagons and carriages, also entered the automotive industry with a pre-established, widespread network of dealers. Other car manufacturers developed dealership networks by granting franchise rights to independent selling establishments. Most new car dealers also provided repair service for the vehicles they sold. Packard, in 1903, became the first company to offer factory training for repair personnel.

The Ford dealership network developed quickly in response to the popularity of the Model T. By 1914 the company boasted 7,000 dealers. In order to help owners keep their cars running, Henry Ford pressured his dealers to stock replacement parts. The practice became an established industry standard that others followed.

The practice of making financing arrangements for new car purchases also began during the early decades of the twentieth century. The idea of financing was not unique to cars. Isaac Singer helped increase sales of sewing machines during the middle of the nineteenth century by offering financing. Studebaker embraced the concept in 1911, and General Motors established the General Motors Acceptance Corporation in 1919. Although Henry Ford held a personal bias against granting credit to customers, many Ford dealers offered the service.

By the middle of the 1920s, three out of four new car purchases were made on the installment plan. A typical agreement called for a down payment of one-third of the purchase price with the remaining balance to be paid over a 12-month period. In 1925 auto dealers made an estimated $2.5 billion in loans to finance new car purchases. The repossession rate was 2.09 percent.

By the 1920s the practice of trading in an old car and using it as a down payment on a new one was also well established. By the end of the decade, approximately 80 percent of new car purchases involved trading in an old car. Profit on preowned cars was small, and dealers disliked preowned cars because they took customers away from the more profitable new car market.

Other changes also occurred within the auto market during the 1920s. While previous decades had seen demand exceed supply, the market became saturated, and the supply of new cars began to exceed demand for the first time. Ford, struggling with financial restructuring and facing a depressed market for its products during 1920 and 1921, raised money by shipping unwanted vehicles to its dealers, who were required to buy them or lose their franchises. Although the practice bankrupted some dealers, most were able to sell the extra vehicles, and the cash flow enabled Ford Motor Company to survive its crisis.

Ford dealers, however, continued to lose sales during the mid-1920s, as Americans shopped around for cars. Other manufacturers had instituted annual model changes featuring innovations and offering speed, comfort, and styling in addition to mere transportation—which had been the Model T's claim to fame. An estimated 70 percent of Ford dealers lost money in 1926 as a result of lagging Model T sales. Ford dealers asked Henry Ford to produce a new model, and in 1927 the company announced plans that brought the Model T era to a close. The Model A appeared for the 1928 selling season.

Enthusiastic interest in Ford's new model netted deposits on 125,000 units, sight unseen. When sample models were manufactured and displayed, the American public gathered to see them. In places where no actual model was available, people lined up to see photographs. According to one estimate, 25 million...

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