Some auto industry executives are suggesting that the time-honored car dealership franchise model in the United States may be out-of-date and question its effectiveness. They have publicly asserted that this traditional channel for mass-market vehicles is significantly more expensive on a per vehicle basis than the direct-to-consumer (DTC) approach used by newer brands like Tesla, Lucid, and Rivian.
Our latest research shows that just isn’t the case. While the modern dealer franchise model may have started in the early 20th century, it remains more cost effective than the direct-to-consumer route and the agency model of distribution that some legacy brands are experimenting with outside the US. Our analysis, commissioned by the National Automobile Dealers Association (NADA), is based on an intense analytical examination supported by actual US auto sales and distribution cost data from thousands of dealers.
How franchised dealerships drive cost efficiency in the US auto market
Currently, there are some 18,000 franchised automotive dealerships operating in the US today. These dealers play a critical role in the retailing of new vehicles produced by domestic and foreign manufacturers for the US market. The modern dealer franchise model emerged as the early auto manufacturers sought ways to expand their distribution networks and reach large numbers of customers efficiently while focusing their efforts and capital on product development and manufacturing.
Our research emerged in response to the oft-repeated but not yet proven assertion that the dealership model is more expensive. It proved this assertion to be incorrect. In fact, it is the traditional franchised dealer channel that has a lower net cost of distribution than direct and agency-like (“hybrid”) channels when operating at mass market scale in the US.
Two key aspects show why dealer channels outperform direct sales
1. Direct sales and dealerships share similar cost efficiencies
First, we remove from consideration the impact of non-channel-specific factors, which are often conflated with channel choice, distorting the true “cost of the channel.” What are commonly touted as advantages inherent to the DTC channel turn out to provide the same benefit regardless of channel selection, and thus cannot be counted as a benefit inherent to any specific channel. For example, low advertising spend or minimal inventory investment are choices made “upstream” of channel selection and, as such, their savings cannot be credited to channel strategy. When the impact of these non-channel-specific strategies is removed, our study found that dealers cost about the same in terms of gross distribution cost per vehicle as an equivalent direct or hybrid channel.
2. Net cost of distribution is the key metric for channel success
Second, we remind the industry that the net cost of distribution, defined as gross channel cost offset by the incremental value delivered by the channel, is what matters. This, in our view, serves as an optimal metric for channel comparison because every channel type both incurs cost and generates value. For example, the DTC channel delivers the value of eliminated intra-brand price competition, while the dealer channel delivers the value of customer-by-customer price optimization. When the relative value each channel delivers is accounted for, this study found that the net cost of distribution per vehicle is lower for franchised dealers than for the DTC channel.
