The Ethics of Franchises

With all of the auto dealerships being closed down lately, we’ve been hearing a lot of commentary on the news about how one or the other of the Big Three automakers has pulled someone’s franchise after sixty years; about the three generations of the family that have given their lives to this business; about all of the things that the owners, their families, their communities, even their states have done for the company, and how it isn’t right that they’re being let go without warning – and apparently without rhyme or reason, in some cases. I’m not going to comment on the closures themselves, or the strategy which is driving them, since without a detailed examination of the companies’ financial and sales records, I really don’t know if these are good moves or foolish ones. But the elimination of dealerships by cancelling (or failing to renew) franchise agreements raises some interesting ethical questions, and I thought we should take a closer look…

First of all, it’s important to note that most auto dealers are, in fact, franchised businesses, operating under a contractual agreement with one or more divisions of a major automaker. As such, they pay a franchise fee to the parent corporation each year, and are required to both purchase product from the franchisor and also operate according to the standards of that company. It’s an arrangement that usually works well for both parties; the franchisee gets to sell (and service and lease and so on) automobiles without the impossible challenge of starting their own car company, and the automakers get to sell their product through a huge network of retail locations without actually having to hire, employ or train any of the people involved, purchase or maintain any of the facilities, operate any of the service departments, and so on. Both parties are, in effect, using the other’s assets and capital to base their operations, and specializing their own business operations to only a part of the total operation. Just as happens with pizzas, hamburgers, and convenience stores…

Of course, since this is a contractual relationship, it is in the interests of both parties to deal fairly with the other. If the automaker feels a franchise is not making enough money (e.g. not contributing enough money to their total operations) they are perfectly within their legal rights to cancel – or at least not renew – the franchise contract. By the same token, if the dealer feels that they are not being treated well by the company, they are entirely within their rights to opt out of (or not renew) their contract, and find another brand of cars to sell. The real question is, do these partners have any ethical responsibilities, to each other or to the large communities in which they operate, to act in the other company’s best interests?

It has been argued, for example, that the automakers have a responsibility to the dealers who have remained loyal to their parent companies throughout the years, despite incursions by foreign car makers and gasoline crises, and still do their best to sell the franchisor’s cars. Some dealers have gone so far as to claim that the automakers have a responsibility to the communities where the dealership provides jobs, puts money into the local economies, supports local charities, and so on. But does that mean the dealers have a responsibility to the parent corporations, as well? If their performance is costing the parent company money, and increasing the chance that their franchisor will go under, taking tens of thousands of jobs and tens of billions of dollars worth of the national economy with it, don’t they have an obligation to surrender their franchises and go do something else?

Normally we expect the larger company to make sacrifices on behalf of their franchisees and the local economies those franchise holders represent. But if the time has actually come when the franchisors have to back out of the relationship in order to stay afloat, do the dealerships have any obligation to cooperate with these moves? Or should they only be responsible to their own communities, employees, and owners?

It’s worth thinking about…