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October 13, 2015
Driving profits: The competitive landscape in today's car business

Photo: Brian Tietz

In southwest Florida, both Honda of Fort Myers and Germain Honda in Naples decided to use the franchise laws to block the Hanania-Richardson group from building its dealership on U.S. 41.

Florida's Biggest Companies

Driving profits: The competitive landscape in today's car business

FLORIDA TREND'S list of the state's 350 biggest businesses includes at least 10 auto dealership groups with revenue of at least $500 million each. A look at the competitive landscape of today's car business.

Lilly Rockwell | 6/27/2014

In early August of last year, Honda of Fort Myers received a letter from the state. The letter informed the dealership that Honda planned to allow a Jacksonville company called Hanania-Richardson to open a Honda new-car dealership 13 miles away on the same road, U.S. 41.

The letter wasn't just a courteous gesture: It was required by section 320.642 of Florida's motor vehicle license laws: New-car dealers must notify the state of any plans to open or relocate new-car dealerships. The state then informs existing dealerships that sell the same brand of vehicle about the new competitor; the law lets the existing dealership contest the new dealership's plans.

All 50 states have franchise laws that regulate the relationship between car manufacturers and dealers. The laws originated as part of efforts to create competition that benefits consumers — and protect individual car dealers from manufacturers. "Historically speaking, if you go back and look at the legislative history of these statutes, in this state and nationwide, they always cite a history of the bigger business taking advantage of the smaller business," says Craig Spickard, an attorney who specializes in vehicle franchise law.

The franchise laws prohibit direct sales from auto manufacturers to consumers, for example, envisioning the dealership as an intermediary to provide consumers with an independent source of information during the purchase — and service afterward.

The laws also typically prevent manufacturers from closing dealerships without proving the dealer is doing a bad job. Without the laws, say dealership owners, car manufacturers could close dealerships on a whim, for example, or withhold inventory from some dealers while favoring others.

"This is a business where dealers and factories are part-owners, but they don't always get along," says Ted Smith, president of the Florida Automobile Dealers Association.

New-car dealers welcome the franchise laws, even if they involve jumping through a few bureaucratic hoops like Florida's notification requirement for opening or moving new-car dealerships. While the state's Department of Highway Safety and Motor Vehicles, which determines whether to allow a new dealership, almost never rejects new dealerships' plans, the laws effectively create safe territories for the dealers. New dealerships are discouraged from being closer than 12.5 miles to an existing dealership carrying the same brand, for example.

Franchise laws haven't received a lot of scrutiny over the years because they regulate the competing interests of dealers and manufacturers and seem to be disconnected from the consumer.

The emergence of big dealership groups — there are 10 groups among FLORIDA TREND'S top 350 companies with revenue of more than $500 million each — and the online retailing revolution, however, are posing challenges to the franchise laws and the protections they create for dealers.

Tesla Motors is in the vanguard in challenging the status quo. Beginning in 2008, Tesla started marketing an all-electric sports car. The company does most of its sales over the internet and wants to be able to sell directly to consumers, bypassing state vehicle franchise laws that require local dealerships. In Florida, Tesla operates six stores in which customers can look at Tesla models. If they want to buy, however, the local Tesla employee's involvement ceases — the customer goes online and places an order directly to the company's California headquarters.

In some states, dealer associations have sued to prevent Tesla from bypassing franchise laws. The car maker had success in early-stage court rulings in New York and Massachusetts, according to a review by franchise attorney Roger Quinland, a partner with Gordon & Rees, a national law firm. But Tesla has had less success in tweaking or challenging laws in other states, including Texas, Virginia and North Carolina, Quinland writes, saying he expects the company will either create local dealerships or try to carve out "narrow exemptions" to state laws. "The likelihood that Tesla will successfully convince federal courts to invalidate the various state auto dealer franchise laws in their entirety is remote," he writes.

Car dealers say they couldn't afford to be in business without franchise laws. Smith says it costs at least $5 million to $7 million to open a dealership — much more in urban environments where land is more expensive.

"Car dealerships cost an enormous amount of money," says Larry Morgan, who owns 12 dealerships in Florida. "The land and buildings — it's not at all uncommon to have $20 million to $25 million invested in just land and buildings on one single franchise."

Dealerships also play vital roles in the community, Smith and other advocates argue. Car dealerships are typically owned by local entrepreneurs who engage in the community by sponsoring Little League teams and advertising in local newspapers and television stations, for example. A manufacturer- owned dealership would be much less likely to have the same kind of participation, Smith says.

Dealers also argue that the intermediate layer between customer and manufacturer keeps costs down for car owners, who can choose among several dealers in deciding where to have a car serviced or repaired rather than having to rely on service from the manufacturer.

Some economists say, however, that the franchise system raises the price of cars. Two university professors, Francine Lafontaine of the University of Michigan and Fiona Scott Morton of Yale University, studied franchise laws four years ago and found the laws "almost guarantee profitability" for dealers. The study suggests that the laws create higher distribution costs and therefore higher retail prices, especially for dealers selling cars made by the big three — General Motors, Ford and Chrysler.

The laws also create inefficiencies in the auto retail industry because they make it difficult to close or move dealerships when population or market share shifts. This, say the professors, is why Toyota and Hyundai tend to have fewer but larger and well-placed dealerships — they started locating franchises after the franchise system was put into place. Older companies, like Ford, tend to have smaller dealerships in less populated areas.

State-based franchise laws have staying power in part because of the lobbying prowess of the car dealership industry and in part because of the sheer financial heft of the industry. Car sales contribute significantly to Florida's bottom line. Sales tax revenue from automobiles was $3.2 billion last fiscal year, about 15% of the $20.7 billion in sales tax collected overall. The Florida Automobile Dealers Association, as well as other locally based auto dealer associations, have spent more than $800,000 on contributions to state campaigns in the last 10 years. By contrast, car manufacturers mostly stay away from state campaign donations and are outspent by dealers even at the federal level.

Back in southwest Florida, the franchise law produced a kind of polite conflict that resolved itself behind the scenes. Both the Honda of Fort Myers dealership and Germain Honda in Naples decided to contest the plans of the Hanania- Richardson group to build a new Honda store on U.S. 41. Both filed official protests with the state, claiming the new dealership would negatively impact their sales and asking for an administrative law judge to decide the matter.

Notices of the protests went out to the new dealer's owners, Honda and its attorneys. But by January, both dealerships had dropped their protests. They likely reached a settlement, though settlement amounts or agreement aren't typically disclosed.

None of the Honda dealerships involved returned a call seeking comment. Spickard, who represented Germain Honda in this case, declined to discuss a specific settlement. Settlements can be reached in any number of ways: Sometimes one dealer may pay another to drop a protest or the new dealer may agree not to protest an upcoming relocation by its opponent if the opponent drops his protest.

It's rare for a protest to go all the way to a final hearing. The net effect of the law largely is to prevent a manufacturer like Honda from doing something egregious — like opening a dealership right across the street from another Honda store to try to put an existing dealer out of business.

Smith is adamant that consumers are not hurt by the protections the law creates for dealers against manufacturers.

"At the end of the day, price competition doesn't come from the (manufacturer); it comes from the fact that you've got dealers in two places or three places in every town and Ford guys competing against Toyotas and Chevys," Smith says. He points to the language in the franchise law: "To protect the public health, safety and welfare ... maintaining competition, providing consumer protection and fair trade."

Dealership Finances

Average New Car / Truck Dealer (2013) 

Total sales: $41.3 million 

Total gross: $5.5 million — as percent of total sales, 13.4% 

Total expenses: $4.6 million — as percent of total sales, 11.2% 

Net profit before tax: $923,248 — as percent of total sales, 2.2% 

New vehicle department sales: $23.6 million — as percent of total sales, 57.1%

Used vehicle department sales: $12.9 million — as percent of total sales, 31.3% 

Service and parts department sales: $4.8 million — as percent of total sales, 11.6%

Advertising expenses: $429,744 — as percent of total sales, 1.0% 

Rent and equivalent: $413,273 — as percent of total sales, 1.0%

Interest dealer pays on the line of credit taken out to pay for the inventory: ($62,456) — as percent of total sales, -0.2% 

Average price that a new vehicle sells for: $31,762 
Retail gross profit: $1,200 
Gross as percent of selling price: 3.8% 

Average used vehicle selling price: $18,111 
Retail gross profit: $2,361 
Gross as percent of selling price: 13.0%

Tags: Retail & Sales, Florida's Biggest Companies, Car Dealerships

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