Car Dealerships in the United States
The landscape of automotive retail in the United States has evolved from simple mail-order catalogs and traveling representatives to a complex system of licensed franchises. While early automakers sold vehicles directly to consumers or through department stores—such as Sears, which sold a gasoline-engined high-wheeler in 1908 and the Allstate starting in 1951—the industry eventually shifted toward a specialized dealership model.
The first dedicated car dealership was established in 1889 by Fred Koller in Reading, Pennsylvania, selling vehicles from Cleveland, Ohio. This marked a pivotal shift away from the traditional sale of horse-drawn carriages. By 1903, the industry expanded rapidly, with William L. Hughson opening the first Ford dealer in San Francisco and Rachel "Mommy" Krouse launching the Krouse Motor Car Company in Philadelphia, becoming the first woman car dealer in the U.S.
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Key Facts
- First Dealership: Opened by Fred Koller in 1889 in Reading, Pennsylvania.
- Peak Volume: The number of U.S. dealerships peaked in 1927 at 53,125.
- Profit Centers: Most dealership profits are derived from servicing and used cars, rather than new car sales.
- Legal Framework: Franchise laws in most states prohibit manufacturers from selling new cars directly to consumers.
- EV Adoption: A 2023 Sierra Club survey found two-thirds of U.S. dealerships lacked electric or hybrid vehicles for sale.
The Evolution of the Dealership Model
Over the decades, the number of dealerships has steadily declined from its 1927 peak. By 1960, there were 33,658 locations; by 1980, 23,379; and by 2001, 22,007. Modern dealerships typically operate as franchises, requiring significant physical space for showrooms, mechanical service bays, body repair facilities, and vehicle storage. While some remain single proprietorships, like the traditional Collier Motors in North Carolina, many are now part of large corporate chains.
Manufacturers have recently shifted their focus toward branding and technology. This includes standardized facility designs and the use of product experts. For example, Audi has implemented high-tech showrooms featuring 1:1 scale digital screens for vehicle configuration, while Mercedes-Benz has opened city center brand stores where permitted.
The Tesla Exception
Tesla, Inc. famously rejected the traditional franchise model, arguing that third-party dealers could not adequately explain the advantages of electric vehicles over internal combustion engines. Because many state laws prohibit direct manufacturer sales, Tesla operates city center galleries—inspired by Apple Stores—where customers can view cars but must complete their purchases online.
Economic Theory of Automotive Franchising
In economic terms, the relationship between a manufacturer (the franchisor) and a dealer (the franchisee) is designed to be mutually beneficial. The franchisee gains access to a desirable product, while the franchisor avoids downstream costs and leverages the dealer's local market relationships.
However, this relationship can lead to opportunistic behavior. A franchisor might impose burdens on a franchisee after they have incurred sunk costs (investments in physical assets and reputation), such as forcing low sale prices or minimal service compensation. Conversely, a franchisee might use a local monopoly to provide poor service or overcharge customers, passing those costs back to the franchisor.
Regulations and Legal Protections
Car dealerships have successfully lobbied for extensive legal protections to ensure their profitability and survival. These regulations often create high barriers to entry for new competitors.
| Regulation Area | Impact/Requirement |
|---|---|
| Direct Sales | Prohibited in all states by 2010; manufacturers cannot bypass dealers. |
| Market Entry | Most states restrict the creation of new dealerships to protect incumbents. |
| Franchise Termination | Severe limits on a manufacturer's ability to end a relationship. |
| Inventory Control | "Quantity forcing" (requiring dealers to buy unordered cars) is largely prevented. |
| Termination Costs | Manufacturers may be required to buy back inventory and equipment. |
Some jurisdictions impose geographical restrictions on licenses, meaning if a dealership already exists in an area, no other competitor can open. This has led to "hereditary" dealerships, where families run businesses for generations without needing to prove consumer benefit, as licenses can typically only be withdrawn for illegal activity.
Criticisms and the Shift to Electric Vehicles
Economists often describe these protective laws as rent-seeking—a practice that extracts value from manufacturers and increases costs for consumers to raise dealer profits. Critics argue that these regulations limit manufacturer profitability and create legal hurdles for new market entrants like Tesla.
The transition to electric vehicles (EVs) has introduced new challenges. According to a 2023 Sierra Club survey, two-thirds of U.S. dealerships did not offer electric or hybrid vehicles. This gap is attributed to supply chain issues and the need for significant investments in infrastructure and employee training to maintain and service EV technology.
Frequently Asked Questions
Why can't I buy a car directly from most manufacturers in the US?
Most states have franchise laws that require new cars to be sold only by licensed, bonded, and independently owned dealerships, prohibiting manufacturers from selling directly to consumers.
How do car dealerships make most of their money?
While they sell new cars, the primary sources of profit for U.S. dealerships are typically vehicle servicing and the sale of used cars.
What is "quantity forcing" in the auto industry?
Quantity forcing occurs when a manufacturer requires a dealer to purchase vehicles that the dealer did not actually order. Most states have laws to prevent this practice.
Why do some dealerships stay in the same family for generations?
Geographical restrictions on new licenses often prevent competitors from opening in the same area. Since licenses can usually only be revoked for illegal activity, these businesses often become hereditary.
Why are some dealerships slow to adopt electric vehicles?
Adopting EVs requires substantial investment in new infrastructure and specialized employee training, and many dealers have also faced supply chain difficulties.