The Economics of Collaboration – the Dealer Network

Amongst the things making news today is the hook-up between Italian carmaker Fiat, and struggling, if not near-dead, American icon, Chrysler. The deal, if approved, would give the Italian auto maker a 35 per cent stake in Chrysler. Given that some believe that Chrysler has a book value near zero, one might question how much that stake is actually worth.

But the actual deal between the two is less about cash then it is about technology exchange and access to their respective dealerships. Fiat, for example, is keen to bring its line of compact cars to the US, and is willing to trade access to its successful small-car platforms and fuel-efficient technologies to do so. Seems like a high price to pay for real estate, non?

Which brings us to the magic of US car dealerships:

  • GM has more than 6,400 dealers in the US.
  • Ford has over 4,300 in the US.
  • Chrysler (with Jeep and Dodge) have over 3,300.
  • And finally, Toyota/Lexus has (just) 1,400 US dealers.
  • This works out to nearly 700,000 direct employees across the US dealer network.
  • And with annual sales of 14-15 million new car sales per year, this works out to about 750 units sold per dealer.

For the most part, these dealerships operate as single-brand sales outlets (proprietary models one might say). Subsequently, the framework for sales across the US leaves the industry with a heavy, and somewhat immoveable burden of dealers that contributes to their inability to restructure.

But does it have to be this way?

There may or may not be precedent for something else.

Example 1 is Ontario’s Brewers Retail – the Beer Store. “Established in 1927, The Beer Store is the primary distribution and sales channel for beer in Ontario. It sells beer to the public under the authority of the Liquor Control Act and is owned by Labatt Brewing Company Ltd., Molson Canada and Sleeman Breweries Ltd.” I.e. It acts as a platform for distribution of various brands. Brewers that wish to sell through The Beer Store can pay a per store listing fee or a single fee for the entire system depending on the number of stores they wish to sell in.

Example 2 is the Credit Card – which for argument’s sake we’ll limit to Visa and Mastercard. Prior to their respective IPOs, both functioned as cooperatives, owned equally by their networks of 21,000 and 25,000 financial institutions respectively, wherein each institution would purchase a license for use of the network.

Both of these examples saw individual organizations choose the efficiencies and lower transaction costs of a distributed and shared network over a proprietary model. And while my colleague Denis makes a good point that in the auto industry the sticker price of a purchase is the equivalent of 1000 or so cases a beer, and thus makes keeping the customer as close as possible more important, I can’t help but think that a shared platform for sales would be more efficient and might just hep build a competitive and user-centred industry.

I’ll admit I’m not an expert on the industry so I’d love to know what everyone else thinks. I’ll also admit that I submitted a similar idea for the financial services industry about 8 years ago when I worked at large Canadian bank and got told thanks but no thanks! So maybe it’s already being done? Maybe it’s not possible?

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One Comment on “The Economics of Collaboration – the Dealer Network”

  1. admin says:

    Jean-Marc Liotier
    Jan 21, 2009 6:12

    Six years ago, the European Commission reformed automobile distribution. In particular they made sure that multi-brand dealerships would be able to set up without interference from the manufacturers. This reforms favors big dealerships – the small ones struggle to meet the quotas that entitle them to the privileges and prices offered by each brand according to the sales volume.


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