How Car Dealerships Scam America

0:00 For one hypothetical Steamboat Springs, Colorado resident,

0:03 today is a very exciting day.

0:05 After a decade of steady career advancement and saving,

0:08 after years of driving a used car acquired after college,

0:11 and after months of research,

0:13 this Northern Colorado is set to buy their first new car.

0:17 A car that's upscale, capable in the mountains,

0:20 and has the capacity to carry friends to a hiking trail

0:23 head or possibly haul a budding family in the coming years.

0:26 They've settled on an Audi Q3.

0:29 But now comes the hard part, or more specifically,

0:31 the overly complicated, often misleading, always expensive part.

0:36 Actually buying the car from a dealership.

0:38 First, there's the matter of finding an authorized dealership.

0:41 Colorado as a state only has seven Audi dealerships, and the western side,

0:45 dotted with wealthy mountain towns and anchored

0:47 by population center of over 150,000,

0:50 is served by just one, Audi Glennwood Springs.

0:53 It's the closest option,

0:54 and it happens to have a couple of Q3s on the lot, according to its website.

0:58 So, our buyer opts for here.

1:00 They've secured a ride down to the dealership more than 2 hours away.

1:03 They've read up on how to navigate

1:04 their interactions with the sales team and financing manager,

1:06 and they've drawn up the number they're willing to pay.

1:09 But there's also what they haven't considered.

1:11 There's the fact that not only are

1:13 they opting to likely buy from this dealership,

1:15 but that they're also entering into a de

1:17 facto long-term customer relationship with them.

1:20 That they're likely to get their car serviced here for the next 10 years.

1:24 that the salesperson is likely to send them a holiday card

1:26 and ask about future upgrades or more purchases for the family.

1:30 The buyer's car business for the life of the car

1:32 is likely going to be tethered to this dealership.

1:35 And our buyer doesn't actually even know who owns the dealership.

1:39 Audi Glennwood Springs, for its part, really looks like it'd be owned by Audi,

1:43 as its interior, exterior,

1:45 even its website all communicate the same upscale minimalism of the car company.

1:50 But this dealership isn't owned by Audi because

1:52 in Colorado and in the other 49 US states, that much is illegal.

1:57 Rather, this dealership is owned and operated by Sonic Automotive,

2:01 the same company that owns the Land Rover and Volkswagen dealerships in town.

2:05 Sonic isn't local, though.

2:06 It's a growing car dealership operator headquartered in North Carolina that has

2:10 become a Fortune 500 company without

2:13 ever actually manufacturing a single vehicle.

2:16 This much would be news to our buyer.

2:18 Because of some antiquated laws, nearly every new car purchase in the US

2:22 is made through a franchised middleman like Sonic Automotive.

2:25 In a country where car ownership is so universal,

2:28 this puts every car buyer in a seriously

2:30 compromised position without them really knowing it.

2:33 Globally, this is fairly unique.

2:35 While car sales in North America

2:37 go almost exclusively through dealerships, in China,

2:40 if a buyer wants to buy a BYD, they just go to BYD's website.

2:44 In Japan, while dealerships do exist,

2:46 car companies are allowed to sell directly to consumers.

2:49 In the UK, in Germany, in much of the EU,

2:52 you can work with car manufacturers to get the exact color,

2:55 trim, and specifications you're looking for rather than having your choice

2:58 limited to what's left on the lot of a franchise seller.

3:01 In the rest of the world,

3:02 you have the choice of going through a dealership or the manufacturer.

3:05 In the US, you don't.

3:08 Now, at one point, from the perspective of car buyers and small business owners,

3:12 there was some good logic for dealerships to be protected under state law.

3:16 At the beginning of the automotive age,

3:18 figuring out how to mass-produce automotives while at the same

3:21 time selling the public on their necessity was a major hurdle.

3:25 Factory production, no matter how efficient,

3:27 doesn't matter if people wouldn't buy the cars.

3:30 Ford Motors turned to the franchise dealership model to keep sales humming.

3:34 This allowed the company to stay focused on its core competency, manufacturing,

3:38 while allowing entrepreneurial local business people who knew the wants

3:41 and needs of their towns best to keep the product turning over.

3:44 Through the early 1900s, this model worked.

3:47 Americans adopted the automobile as a necessity.

3:50 Small local dealerships nationwide thrived,

3:52 and Detroit's big three became the center of the automotive manufacturing world.

3:57 But as the big three crystallized

3:59 an effective oligopoly over domestic car manufacturing,

4:02 they began to leverage their large s against the local mom and pop dealerships.

4:07 If you were to walk into a Ford dealership in the 1920s,

4:09 for example, you'd find a copy of Henry Ford's anti-semitic propaganda,

4:13 the Dearborn Independent, somewhere in the lobby,

4:16 not because the dealership's owner was an anti-semite,

4:18 but because Ford mandated it.

4:21 In times of financial difficulty,

4:22 Ford would keep factory production high and flood

4:25 dealerships with cars they couldn't hope to sell.

4:27 And should a dealership get sideways with the manufacturer,

4:30 the car company would either freeze them out, open up a direct competitor,

4:33 or license a rival to begin selling their vehicles across town.

4:37 Manufacturers, with little in the way of competition, bullied the dealerships.

4:41 But by midcentury, dealerships and their friends and elected

4:44 positions had conceived of a way to get back.

4:47 laws that mandated and protected their existence.

4:51 Even today, car dealerships tend to be heavily ingrained in their communities.

4:55 In Glenwood Springs, for example,

4:57 the Ford dealership sponsors high school golf tournaments

5:00 and the Toyota dealership sponsors the football games.

5:02 At midcentury, this influence and visibility

5:05 of the local dealership was at an absolute peak.

5:08 The interstate system, the drive-through and drive-in,

5:11 the postwar consumer boom,

5:12 all made for record auto production and sales in the 1950s.

5:16 And at the center of it was the town's local car dealerships.

5:20 Dealerships were pillars of the community.

5:22 Their owners were local celebrities and the sales tax

5:25 they brought in was critical for state and local governments.

5:28 They had sway and as the big three manufacturers toyed with them,

5:32 they responded by using their local importance to lobby for some protections.

5:36 Soon all 50 states had some form of legal bans on manufacturers

5:40 selling their own cars in states with already established franchise dealerships.

5:44 Now, Ford couldn't simply open up their own showroom down the block

5:47 to put a company that sold Fords for decades out of business.

5:50 In each state, the exact rules vary.

5:52 Certain states have added further protections.

5:54 In Colorado, for years, this law was pretty cut and dry.

5:57 No manufacturer shall own, operate,

5:59 or control any motor vehicle dealer or used motor vehicle dealer in Colorado.

6:04 And while these mid-century laws remain,

6:06 the car landscape has flipped on its head.

6:09 The arrival of foreign made cars has undercut the big

6:12 3's igopoly while consolidation is eating up the dealerships.

6:16 Along with Sonic, all these car dealerships are Fortune 500 companies, too.

6:20 Meaning there are more massive car

6:22 dealership companies than car manufacturing companies.

6:25 Aided by legal protections from a bygone era,

6:28 and dealing with less and less competition

6:30 just means more leverage for the middleman dealership.

6:32 And they use it.

6:34 While our buyer is prepared once they've

6:36 stepped on the lot of Audi Glenwood Springs,

6:38 they're now navigating a pretty hostile environment

6:41 from the perspective of the customer's wallet.

6:43 First, it's confusing.

6:45 Cars are inherently complicated, so our buyer is at a knowledge disadvantage.

6:49 Next, our buyer has to navigate a host of separate motives.

6:52 Because while the manufacturer just wants the sale near MSRP,

6:55 the dealership's in the business of a resale.

6:58 And for that to be profitable,

6:59 they need to do some upselling, upgrading, or favorable financing.

7:03 But even before these conversations begin with the salesperson,

7:06 our buyer is already losing just on baseline MSRP.

7:10 They've decided going in that they want to get this Q3 at sticker price.

7:14 Well, at $48,170, that's already more than

7:18 $4,400 more than the reported invoice cost,

7:22 or what the manufacturer sold it to the dealership for.

7:25 This number includes a destination fee

7:27 that the seller isn't likely to haggle over.

7:29 So, while you can't custom order this car from the manufacturer

7:32 to ensure you have the exact color or trim you want,

7:35 you are still paying for the shipping and handling

7:37 of a car you didn't really get to choose.

7:39 Our buyer is happy with white though and willing to stomach MSRP.

7:43 Now, there's the dealer handling fees for another $500,

7:46 which in the business is usually just understood as payment for all

7:49 the paperwork that the customer is expected to just accept as part of purchase.

7:54 But at least according to Mountain Sales Toyota,

7:56 a dealership also owned by Sonic, but one that proudly waves all dealer fees,

8:00 these are nothing more than additional profit generators for the dealership.

8:04 After a positive test drive,

8:05 our buyer has agreed with the salesperson that they're willing

8:07 to pay sticker price so long as the dealership fee is waved.

8:10 They feel pretty good about themselves, but so too does the dealership.

8:14 To this point of the transaction,

8:16 the dealership has come out positive on what they call the frontend gross,

8:20 turning a profit over what they paid for the car from the manufacturer.

8:23 When sales are good,

8:24 a dealership hopes to turn 3 to 10% profit on front-end gross.

8:28 But in bad times, they're okay with selling in the red here.

8:31 And that's because of the backend earnings.

8:34 Now, our buyer is pretty content with themsel as they move from the desk

8:38 of the salesperson to the desk of the finance and insurance manager.

8:41 This person, given their title, seems like a paperwork person,

8:44 and that much is intentional, but they are absolutely another salesperson.

8:49 Here's a job listing for an FNI

8:51 manager for Sonic Automotive at Audi Central Houston.

8:54 It requires a lot of experience.

8:56 It provides good benefits,

8:57 and it's a job that comes with training and even program schools.

9:01 It's a job that nets from $100 to $500,000.

9:05 And it's the core of the dealership's

9:07 business because it's a major profit source.

9:10 As the listing describes, the job is to sell, to upsell,

9:14 to add on, to squeeze every last dollar out of a deal that's on the finish line.

9:19 They'll do this through financing,

9:21 working the buyer to as high of an interest rate as they can stomach.

9:24 They'll push the add-ons like extended warranties,

9:26 gap insurance, winterization, paint, wheel, and glass insurance.

9:30 All are services that could be helpful,

9:32 but all are also massively overpriced within this office.

9:36 with the buyer disarmed with their most experienced,

9:38 highest compensated salesperson on the job.

9:41 It's through back-end gross where car dealerships make their real money.

9:45 In 2025, Sonic Automotive announced that their FNI earnings hit record numbers,

9:49 netting gross profits of over $2500 per unit sold.

9:54 That's an incredible amount of profit generated

9:57 by a part of the car buying interaction

9:59 that's supposed to feel like just tying up

10:01 loose ends and getting you out the door.

10:03 Our buyer is now finally out of the door,

10:06 but with a car that costs $44,000 from Audi to the dealership,

10:10 but closer to $56,000 before taxes for our buyer, a 25% markup.

10:16 And should they choose to service the vehicle

10:18 through the dealership for the next 10 years,

10:20 they'll come to expect a similar strategy on upselling

10:23 services every single time they bring in the vehicle.

10:26 Now, it'd be wrong to identify dealerships as strictly a shady,

10:30 parasitic institution.

10:32 They provide a real and valuable

10:33 service to manufacturers in pushing their vehicles.

10:36 They provide a service to buyers through location convenience and actually

10:39 getting people in these cars and educating them on the vehicle.

10:42 Their lack of competition and strong legal protections

10:44 have given them far too much leeway, though.

10:47 It's hard to attack this imbalance of power headon,

10:49 as the National Automotive Dealers Association

10:52 is a wellestablished lobby with deep pockets,

10:54 and states themselves benefit from the jobs

10:56 and sales taxes that come with dealerships.

10:59 Consumers are unmotivated to rally opposition to this system

11:02 because it's not one they deal with on the day-to-day.

11:05 So, it's largely up to the manufacturers to try to check this power.

11:08 In 2021, a frustrated Ford CEO, Jim Farley,

11:12 threatened to cut vehicle allocation to certain dealerships because

11:15 the company had grown so frustrated over dealership markups.

11:19 But then there's what Tesla did.

11:21 Today, Tesla has more than 320 showrooms,

11:24 service centers, and mall pop-ups spread across the US,

11:28 all of which staffed by Tesla employees and owned by Tesla.

11:32 This makes the company far and away the largest automotive manufacturer

11:36 in the states to run a direct to consumer sales model.

11:39 But they've had to fight tooth and nail to establish this network.

11:42 And still, in many US states,

11:44 it's illegal to buy a Tesla from Tesla within state borders.

11:48 Perhaps as bold as the concept of fully automated driving was

11:51 Tesla's push to sell its cars directly to consumers in the 2010s.

11:55 Because the product was so unique in the automotive space,

11:58 because the company is tasked with more education about their product,

12:01 and because EVs just don't fit the standard

12:03 car dealership model very cleanly given how

12:05 different they are from any other product

12:06 and how dissimilar their maintenance requirements can be,

12:09 Tesla has always viewed dealerships as a hurdle to their success.

12:12 So, they challenged franchise dealership laws at the state level.

12:16 In many states, Tesla could argue that it

12:18 was not actually competing against any franchise

12:20 locations because Tesla had never actually established

12:23 Tesla franchises at any point to begin with.

12:26 In the 2010s, Tesla faced little opposition as it spread across California.

12:30 But in other states, the battle took longer.

12:33 In Colorado, for instance,

12:34 the law broadly banned manufacturers from selling cars.

12:37 But if the manufacturer had no franchises already running,

12:40 then it could run direct consumer sales so long as it only ran one location.

12:45 That meant this single spot held down all the state's Tesla sales for a decade.

12:50 In Texas, Tesla could open showrooms

12:52 but not actually make sales within the state.

12:55 So, someone could come into the showroom,

12:57 learn all about the EV, then figure out an outofstate purchase option.

13:01 In Connecticut, Tesla could lease but not sell.

13:04 In New Mexico, Tesla couldn't sell.

13:06 But in both states, Tesla found

13:08 loopholes by working with Native American reservations.

13:10 After nearly two decades of fighting

13:12 in court and lobbying battles going both directions, the map looked like this.

13:17 Tesla can sell direct to consumer in all these states, but not in these.

13:22 But the growing popularity of EVs and the arrival of companies like Rivian

13:25 and soon Scout are pushing the boundaries of these franchise laws even further.

13:30 Colorado now has six separate Tesla dealerships because under increasing

13:34 pressure from the anticipated arrival of Rivian, the state revised,

13:37 adding this clause that so long as the company

13:40 is producing EVs and not competing with any

13:42 of its own franchise dealerships is clear to sell

13:45 direct to consumer from as many locations as it pleases.

13:49 But dealerships aren't going quietly into the night.

13:53 Even in Colorado, where franchise laws are seemingly

13:55 getting undercut one way or another every few years,

13:58 Sonic Automotive in 2026 sued the state after its issuance

14:02 of a dealership license over to Scout Motors in 2025.

14:06 Sonic is arguing that Scout doesn't plan to produce strictly EVs,

14:09 but also plug-in hybrids as their vehicles have the option

14:12 for a small gas-powered generator to extend range in a pinch.

14:16 The company also argues that Scout's backing by Volkswagen means the company

14:20 is in fact competing with an already

14:22 established dealership network within the state.

14:24 While it remains to be seen where this court case goes,

14:27 it makes it abundantly clear that franchise dealers aim to continue to fight.

14:32 Inertia is perhaps the industry's best line of defense, though.

14:36 While these laws were designed to protect small business and create competition,

14:39 the competition from the perspective of the consumer is the worst

14:43 sort of competition where the choices paired down to a gut

14:46 feel on which option is going to rip you off

14:48 the least or which you have the most bargaining leverage over.

14:51 It's bad for both the consumer and the manufacturer when poll

14:54 data shows that more than 70% of respondents don't trust dealers

14:58 to be honest about pricing and more than 80% suspect hidden

15:01 fees and don't trust the transparency of dealerships across the board.

15:05 Protectionism has created an environment that promotes maximally squeezing

15:09 the consumer and presents as the least bad option.

15:12 This is so backwards to the economic ideals

15:15 of the US and its freedom of choice, pro competition,

15:18 pro-consumer stances that the Federal Trade Commission

15:21 has gone so far as to state

15:22 its stance on the matter and side with the adoption of direct to consumer sales.

15:28 For now, the third party dealership is the status quo.

15:31 It's something that a consumer begrudgingly accepts as something

15:33 they hope to deal with once every few years.

15:36 But as EVs continue to grow in popularity,

15:38 and as awareness of their alternative model of sales and servicing spread,

15:42 a reckoning over outdated state protections

15:45 of thirdparty dealerships becomes more and more

15:47 probable as the legacy manufacturers begin to lose out to a cheaper,

15:51 more transparent, and more approachable alternative.

15:56 Of course, it's easy to forget this much

15:58 in a car brand culture like that of the US,

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