I’ve been writing this column for more than 20 years to help you avoid being “ripped off ” by car dealers.
I hope I’ve helped you and many others. It occurred to me that many readers may not know or understand why car dealers are the only large group of retailers whose standard M.O. is to deceive their customers.
Why do most car dealers advertise prices well below what they are willing to sell you the car for, then pack on unwanted, overpriced accessories and junk fees and mark up interest rates and add overpriced warranties when they finance your car?
It may surprise you to know that the auto manufacturers are responsible.
About a hundred years ago auto manufacturers realized that they could sell more cars faster by going through franchised dealers instead of selling directly to consumers themselves.
Henry Ford invented mass, assembly line production which built cars so fast and cheap that almost all Americans could afford to buy one. General Motors, and Chrysler jumped on the bandwagon, and the “Big Three” were viciously competitive. The auto manufacturers contracted with small businessmen (franchised car dealers) to sell their make of cars exclusively in every state and municipality in the USA.
The auto manufacturers’ contracts (dealer franchises) were very one-sided, favoring the auto manufacturer. The length of the contract was one year, and if the car dealer didn’t sell enough cars, the manufacturer would cancel his contract and put in another car dealer. The manufacturers knew that the more car dealers they had in any given market, the more cars they would sell. In fact, these one-sided franchise agreements allowed the manufacturers to add as many dealers in a market as they wanted to.
As a result of this system, too many car dealerships were added in all markets in the United States. This resulted in too much supply to meet the existing demand. It wasn’t unusual to have competing Chevrolet, Ford or
Chrysler-Dodge-Plymouth withing a couple of miles of each other in the same city. Remember that the manufacturers make their full profit on every car they sell their dealers, but the dealers must resort to discounts for you, their customer.
The dilemma of the car dealer was, and is, how to make you (his prospective customer) believe that he will sell you a Ford for less than the other three Ford dealers a few miles away from his dealership. How can a Chevy dealer sell a Silverado truck if he doesn’t advertise a price lower than his Chevrolet dealer competition? Consequently, all the car dealers advertise lower prices than they can profitably sell the car for. This is why you cannot buy a new car today for the advertised price. The dealer, to survive, must add profit after you come in to buy the advertised car.
This is why you discover that the car you thought you could purchase for $45,000 ends up costing several thousand dollars more. Suddenly you discover that the car has “nitrogen” in the tires, pin stripes, road hazard insurance, etc. There also are multiple junk fees disguised as legitimate government fees that are hidden added profit for the dealer. The dealer then finances your car and makes thousands more by marking up bank rates and adding overpriced, warranties and insurance.
The auto manufacturers created this monster, but they can’t “kill” it. In the 21st century, consumers are far more aware and educated than during the formation of the dealer franchise system. Dealers are also far better organized and have insulated themselves against the auto manufacturers’ aggressive tactics utilized when they built their dealer networks. Car dealers have lobbied all 50 state legislatures to protect them from their manufacturers. Manufacturers cannot cancel dealer contracts anymore or add too many car dealers into a given market. The manufacturers would love to eliminate their dealer network but won’t ever admit this. They know that the public is very aware of the deceptive advertising and sales tactics by their dealers and it’s a great embarrassment to them. Covert efforts by manufacturers are in motion to sell their cars directly and eliminate their franchised dealers.
We’re seeing this now with Tesla and the other EV manufacturers. The franchised dealer network will vanish, but very slowly, following the acceptance of EVs and autonomous vehicles.
— This column previously ran in July 2023
