AN AUTONEWS 09-25-06 C 6 AUTONEWS.Qxd

AN AUTONEWS 09-25-06 C 6 AUTONEWS 9/13/2006 10:53 AM Page 1

TheFranchiseSystem 6 • SEPTEMBER 25, 2006

HOW IT BEGAN The first dealers: From humiliation to retail success Leslie J. Allen sold directly to consumers, starting with one-of-a- [email protected] kind models that went to wealthy friends. dward Staebler, a bicycle merchant in To reach more customers, though, carmakers Ann Arbor, Mich., wanted to branch started using third-party retailers. That practice Model T’s await buyers at the Tenvoorde dealership in 1910. The St. Cloud, Minn., store, out. So in 1900, he ordered his first gradually developed into the franchised dealer sys- which opened in 1903, calls itself the world’s oldest Ford dealership. “horseless carriage,” a two-seater tem. called a Trimoto. In his 1928 book, The Automobile Industry: Its Automakers “found they couldn’t make any For this special issue, EPotential buyers weren’t impressed. The Trimoto Economic and Commercial Development, Ralph C. money because they didn’t know what they were Automotive News asked industry had a bum carburetor. Gasoline spilled into its en- Epstein said the franchise system grew out of geo- doing,” says Spinella, who co-wrote a 1978 history leaders for their thoughts on the gine. Worse, the three-wheeled vehicle couldn’t graphic necessity. Automakers were concentrated of dealerships, America’s Auto Dealer. history and future of the dealer run uphill. A dejected Staebler wrote to his Trimoto around Detroit and Cleveland, Epstein noted, but Corporations weren’t willing to make the invest- franchise system and on why the distributor: “We do not care to try any more be- they needed to serve a market spread across the ments in a sales operation that an independent system has remained the cause of the jeers from the onlookers.” country. businessman would, Spinella told Automotive dominant way we sell cars in this Staebler didn’t give up. He had better success in “It was practically impossible for any manufac- News. The branch system gave way to the now-fa- country. Their responses appear later years with other vehicles from brands such as turer to sell his product directly to the consumer,” miliar franchised dealer. throughout this issue. Pontiac. He built his dealership into a family enter- Epstein wrote. prise. Modern system takes root The retail palaces and professional salespeople Failed experiment At its inception, the U.S. vehicle market was wide that American car and truck buyers rely on today Not that automakers didn’t try. After they saw open and potentially lucrative for risk-takers. Au- emerged from such humble, often difficult, begin- how successful many bicycle shop owners and oth- tomakers offered their dealers and distributors ex- nings. er merchants were at moving their metal, some pansive territories in which they would be the only Early on, automakers and sellers found benefits companies opened branch operations in major sellers of a given brand. Potential dealers were will- in working together. The earliest dealers sought the U.S. cities. Those offices, staffed by company em- ing to do whatever it took to secure those territo- In 100 years, opportunity to corner their local markets on the ployees, sold cars and oversaw dealers within their ries. that’s what latest automotive technology. Manufacturers saw territories. In exchange for exclusive rights, automakers im- has been the the dealers as a ready source of cash and sales ex- The system worked well for a while. But as in the posed tough conditions on dealers, wrote author backbone of perience and an easy way to increase their busi- case of Ford Motor Co., it proved inadequate as the Lawrence H. Seltzer in his 1928 book, A Financial the auto nesses with minimal expense. market grew more competitive. History of the American Automobile Industry. business — Like Staebler, many of the other early car dealers “People were employed by Ford Motor Company Dealers had to agree to pay huge cash deposits the franchise sold or fixed bikes for a living. Their main qualifica- and basically drew their salary regardless of how when they ordered vehicles, Seltzer wrote. They system. tions to sell cars: They knew about rubber tires, many cars they sold,” says Robert Casey, curator of had to pay in full on delivery and to accept cars on “ and they had some mechanical aptitude. transportation at the Henry Ford Museum in Dear- a prearranged schedule regardless of market con- Lee Iacocca, To find a car dealer at the turn of the 20th centu- born, Mich. “They weren’t as enterprising as the ditions. former chairman, Chrysler Corp. ry, you also might have looked for the local black- dealers who if they didn’t sell any cars didn’t make Still, requests for dealerships poured in to au- smith or farm equipment salesman. Or the dealer any money.” tomakers’ headquarters. A wannabe dealer wrote may have doubled as proprietor of a wagon shop, Industry analyst Art Spinella, president of CNW to the Winton Motor Carriage Co. in 1900, insisting tire shop, livery stable or hardware store. Marketing Research in Bandon, Ore., faults an ear- that the company could not keep up with the auto Vehicle distribution evolved fairly quickly in the ly form of “Detroit mentality” for the failure of the industry’s first few decades. The earliest inventors branch system. see DEALERS, Page 10

IN THE BEGINNING

1879 1886-87 1895 1896 1897 1898 1901 George Selden Ransom Olds builds Selden patent is Charles Duryea Olds organizes Olds William Metzger Ford wins a road race applies for a “master his first “horseless granted. founds Duryea Motor Motor Vehicle Co.; it opens what is thought against fellow inventor plan” patent covering carriage,” a three- Wagon Co., thought to becomes Olds Motor to be nation’s first Alexander Winton. the basic features of wheel steamer. be first company Works in 1899. auto dealership. the automobile. organized to make A Curved Dash 1902 and sell H.O. Koller opens Oldsmobile becomes Cadillac Automobile automobiles in the what may be first the first mass- Co. is organized by United States. franchised dealership. produced American Henry Leland. He sells Winton cars. car. Henry Ford ▲ invents his first car, the Quadricycle. AN AUTONEWS 09-25-06 C 10 AUTONEWS 9/13/2006 10:54 AM Page 1

TheFranchiseSystem 10 • SEPTEMBER 25, 2006

DEALERS Car dealer Edward Staebler in a Toledo Investments kept early Steam Wagon, circa automakers in business 1901. Staebler overcame early obstacles to build continued from Page 6 a successful dealership in Ann Arbor, Mich. boom without a representative in Saginaw, Mich. “So I hereby present myself as just such a one that would do you good and also bring credit upon your firm,” he wrote. Car companies needed dealers as much as dealers needed them. Although many banks were skep- tical about the horseless carriage, automakers had to find operating capital. They got it — in cash — from their dealers. “Dealer investments … kept the early automakers afloat,” Spinella and co-authors Beverly Ed- wards, Mo Mehlsak and Larry Tuck wrote in Ameri- ca’s Auto Dealer. “Men like Henry Ford, who wanted to become motor vehicle manufacturers, could rarely receive bank credit; automaking was a highly speculative enterprise, and people who made cars were considered crackpots at best.” For a dealer, the initial investment to open an “agency” — as dealerships were first called — was negligible. Charles Mason Hewitt wrote in his 1956 book, Automobile Franchise Agreements, that the largest initial expense a dealer faced was buying a demonstrator car. “He sold for cash on delivery, customarily requir- ing a sizable deposit in advance,” Hewitt wrote. “There were no price discounts to customers or BENTLEY HISTORICAL LIBRARY used-car allowances to threaten his solvency. His commissions were large, and his ‘exclusive’ territo- Dealer investments … kept the early automakers afloat. ry was enormous.” Another factor that drove automakers to develop Automaking was a highly speculative enterprise, dealer networks was the need to give consumers a “ chance to inspect cars they may have only read and people who made cars were considered crackpots at best. about. “The unreliable nature of the early product and the general lack of confidence of the consumer AMERICA’S AUTO DEALER made it imperative that the manufacturers make ” the cars conveniently available to the consumer for demonstration and testing in advance of pur- made dealers “exclusive agents” of automakers for by having them absorb part of the financing, stor- chase,” Hewitt wrote. no more than a year at a time, Hewitt wrote. They age and control burden, the manufacturers could Outside dealers also helped automakers resolve required dealers to maintain a “suitable” show- obtain more widespread representation,” Hewitt the problem of getting vehicles repaired, he wrote. room and repair shop at an appropriate location wrote. In addition, dealers provided “some means of cop- and to keep a reasonable inventory on hand. ing with the off-season storage problem. Produc- Dealers had to agree to sell cars only within a pre- Struggle and success tion on a continuous basis was essential if lower scribed territory. They paid 10 percent of the list The long-suffering Edward Staebler failed to manufacturing costs were to be achieved. The price up front with each vehicle order. achieve immediate rewards. After repeated, unsuc- manufacturers had no facilities and little capital They were expected to devote their “best ener- cessful attempts to get his Trimoto to work, he fi- with which to solve this problem.” gies” to sales, Hewitt wrote. Automakers typically nally traded it in for a Toledo Steam Wagon. The reserved the right to pull a franchise with 30 days’ new car proved an even bigger headache for the The trailblazers notice if the dealer failed to meet factory expecta- fledgling dealer. In 1898, Detroit bicycle merchant William Met- tions. Staebler wrote in a memoir that he endured two zger opened what is thought to have been the na- Dealers also had to agree to take a certain num- years of shipping cars and components back to tion’s first dealership designed specifically for ve- ber of cars in advance of each selling season and to the factory for repairs. He still hadn’t sold a single hicle sales. He sold his first car, a Waverly electric, keep a minimum number of demonstrator vehicles vehicle. He finally unloaded the Toledo around to furrier Newton Annis in 1899. Soon afterward, on hand. Dealers who failed to comply could lose 1906. he sold a curved-dash Oldsmobile to a druggist. their deposits. But automakers rewarded the top Things improved in later years. The Staebler and Also in 1898, H.O. Koller opened the earliest performers with rebates. Son dealership sold Reo, Dort, Franklin, Oakland known franchised dealership, in Reading, Pa. By 1910, franchise agreements generally required and Pontiac cars. But the store closed in 1952, as its Koller sold vehicles for Winton Motor. dealers to appoint “subdealers” in their territories. principals shifted from auto retailing to real estate Typical franchise agreements in the early 1900s “By designating strong dealers as distributors and sales. c

IN THE BEGINNING

1903 1904 1908 1909 1911 1912 1917 David Dunbar Buick founds Buick Motor Co. William Durant takes General Motors is GM buys Cadillac. The U.S. Supreme Walter Chrysler ▼ Leland forms Lincoln control of Buick. organized under Court overturns the becomes a manager Motor Car Co. Ford Motor Co. is incorporated by Henry Ford Durant’s leadership. Selden decision, finds at Buick. He would and 11 investors. William Hughson buys $5,000 Buick and Oldsmobile for Ford. later worth of Ford automobiles to distribute on the join. become West Coast, becoming the first Ford dealer. president Ford introduces the and Model T. general Association of Licensed Vehicle Manufacturers, manager a group of automakers that recognized the of Buick Selden patent, forms and agrees to pay Selden Judge confirms the and a vice royalties. Henry Ford declines or is refused legitimacy of the president membership. The association sues Ford for Selden patent. of GM. patent infringement.