Study Reveals High Costs of Car Dealership Model for Customers
The traditional car dealership model, which has long been accepted in the industry, is now under scrutiny. A recent study highlights the expensive implications this model has on car buyers. Customers could be facing additional costs ranging from $3,934 to $4,992 when purchasing new vehicles due to franchise dealership requirements.
Study Insights on Car Dealership Costs
The nonprofit International Center for Law & Economics (ICLE) conducted the study, referring to these added expenses as a “middleman tax.” This tax arises from inefficiencies inherent in the franchised dealership system, which has been mandated by state laws.
- Average additional cost of buying through a dealership: $3,934 to $4,992
- Average price of new cars: $50,000
Breakdown of Costs
The study reveals several components contributing to the inflated prices:
- Carrying costs: $1,045 to $1,105 are incurred due to the need to maintain inventory.
- Floorplan interest: Interest rates between 6% and 9% further increase expenses.
- Inventory movement: An additional $1,600 is associated with managing an inventory not always aligned with customer demand.
- Overhead costs: Facilities and staffing expenses add approximately $1,200 to $1,900.
Historical Context and Future Considerations
Franchise laws have roots in the early automotive industry, primarily designed to shield independent dealers from unfair competition. However, the study suggests these laws have become outdated. The authors argue for a reassessment of how dealerships operate, advocating for more competition among manufacturers.
The study asserts that modernizing the laws would allow car manufacturers to explore alternative sales models that cater better to consumer needs. Notably, companies like Tesla have successfully challenged these regulations, adopting direct-sales methods that bypass the franchise system. This has paved the way for other electric vehicle startups to enter the market without reliance on traditional dealerships.
As the automotive landscape evolves, brands like Volkswagen’s Scout are pushing boundaries by attempting direct sales, although they face legal challenges from franchise dealers. The findings from this recent study underscore the financial burden imposed on consumers by the current dealership model, prompting significant questions about the future of car sales.
