If you want to go shopping for a car, you might notice that your town has a bunch of dealerships within eyeshot of one another. Why are these car dealerships so close to each other? This isn’t just a quirk in your area — across the nation, rival dealerships are so close to each other that you can walk from one to the other without breaking a sweat.
There are several different reasons. In some cases, zoning restrictions will force dealerships to construct near each other. Other times, a single owner purchases a large lot of land and opens a number of different dealerships for different car manufacturers. When dealerships intentionally open near their competitor, it’s to save money on marketing, target the car-shopping demographic, and directly steal business from their competitor.
In this quick guide, I’ll be talking more about this concept. I came up with 8 reasons to explain why this happens, and I’ll review them in detail.
Is It Bad to Have Dealerships Next to Each Other?
From a consumer’s perspective, is it bad to have so many dealerships near each other? Actually, it’s one of the best things that could happen. When you’re looking to buy or lease a car, it’s all about test-driving and negotiating.
Unless you know exactly what car you want from a previous round of test drives, you’ll need to check out different options across the market. If you have a number of different dealerships close to each other, you can save a lot of time.
In the past, I’ve done all of my test drives in a single day. I would go to dealership A, do a test drive, then go to B, and continue down the line.
This is helpful because the test drives are all fresh in your mind and you can easily compare the cars. If you wait days or weeks between test drives, you might forget all about the first car as you test the second one.
With dealerships near each other, you’re saving time driving and speeding up the whole process.
You might also notice that the prices are more competitive, and the negotiation process is more favorable. The salespeople need to close the deal before you walk away and go to their competitors across the street. This means you have more power during the buying process and can get an even better deal on a car you love.
Reasons Why Dealerships are Always Close to Each Other
Believe it or not, there are a number of reasons why dealerships will often open up next to one another. To better explain this phenomenon, I put together this list of 8 reasons why dealerships are always so close to each other.
Car Buying Isn’t a One-Car Option
If you want a hot hatchback under $35k, you have a ton of different options. Even though your buying criteria may be relatively specific (car style and price cap), there are just so many vehicle options on the market.
The simple truth is that car buying isn’t a one-car option. Most car manufacturers only offer one vehicle within each buying category. They might have one entry-level sedan, one luxury sedan, and one workhorse pickup truck. If they have more than one car in a single category, they’re competing against themselves.
To expand this idea, you’ll realize that you need to consider a number of different car manufacturers if you know the specific car type and budget you’re aiming for. Dealerships know this, so they’ll open their salesroom right next to their competitor’s so they can offer you yet another option to consider.
Spend Less on Marketing
The goal of every business is to minimize money spent and maximize money made. Finding the right marketing budget usually involves balancing these two — after all, marketing costs money but hopefully yields more customers, which increases sales.
The best-case scenario for any business is to spend no money on marketing and still attract a constant stream of customers.
By opening up a dealership next to a competitor’s, companies can get close to that. They can reduce how many billboards, commercials, and printed ads they need to run. Doing this will dramatically reduce how much money they need to spend on marketing.
Why? The other guys are helping with marketing. If Ford attracts a customer to their dealership which is right next to a Honda dealership, suddenly Honda just got free marketing. The potential Ford customer will drive by the Honda dealership, and they might consider stopping in after checking out Ford.
In a sense, all of the dealerships can spend less advertising their specific facility, since they’re all within eyeshot of each other.
Dealerships Go Where There’s Land
Sometimes the reasoning is less business-savvy. Dealerships take up a lot of “real estate” — they need space for a showroom, plenty of office space, a large car lot, and potentially even a service building. If you look at a map of your area, there are only so many spots that have huge lots for sale.
If one car dealership buys a massive lot of land for their dealership, that’s a good hint that there are other large lots for sale nearby.
They Prefer High-Traffic Areas
Other times, the location drives the desire to open a dealership in that area. You’ll find that a lot of dealerships are near a highway, and they’re often in high-traffic areas.
These areas have a lot of people driving by in cars, which is any dealership’s target demographic. People with cars will eventually buy a new car.
If you drive by a strip of dealerships every day, there’s a good chance that you’ll stop in that strip when it’s time for a new car.
It’s the same reason why you’ll find so many fishers in a single area: they fish where the fish are.
There’s no point in convincing people to drive out of their way to visit you when you can just open shop along their commute route.
Sometimes There are Zoning Restrictions
From a real estate perspective, zoning restrictions might limit where dealerships can open up. Towns and counties only have certain areas where dealerships or commercial buildings can operate. To operate legally, dealerships need to stick to these regions.
As such, you’ll find dealerships popping up near each other, since that’s the spot where the town decided dealerships can operate.
The zoning restrictions are a lot more convoluted than this simple explanation, but who wants to be bored by those details? The simple fact is that the town decides what area can have dealerships, then the dealerships pop up there.
The Concept of Hotelling’s Law
If you want to look at it from an economics and psychology standpoint, you’ll land on Hotelling’s Law. To break it down simply, it says that you might be better off opening a shop right next door to your competitor’s location. This will effectively split the customers coming through your door.
To open a store far from your competitor, you’ll also have to deal with location, distance from the buyer, and how easily accessible your location is. Hotelling’s Law says that you’re better off ruling out all of the variables and just letting your business compete directly with your competitors.
This is the same law that explains why you’ll often see a McDonald’s near a Burger King or a Lowe’s near a Home Depot. The customers are already coming for a specific product (in this case, a car), so why not offer them every possible option and let brand loyalty or curb appeal take over?
They Target the On-The-Fence Shopper
Here’s a quick scenario that should help you understand what’s going on here: Let’s imagine a street has a Dodge, Ford, Chevy, and Nissan dealership within walking distance. 10 miles away, there’s a Honda dealership all on its own.
If you’re on the fence about which car you want to get, you’ll go to the area that has a lot of options for you. If you’re dead-set on a Honda, then you’ll drive the distance and go to the remote dealership. However, how many people know exactly what make, model, and year they want?
A vast majority of shoppers need to test drive a lot of different cars before they know the right one for them — in fact, test driving different options is one of my keys to buying a car.
Sometimes They’re Owned by the Same Person
In the town where I grew up, a strip of 5 dealerships were all owned by a single person. You could shop at Jones Honda, Jones Ford, Jones Toyota — and the list went on. Regardless of where you bought your car from, Mr. Jones was seeing the money.
When this is the case, the explanation is a lot easier. At one point, there was a massive plot of land for sale. Mr. Jones bought all the land, then divided it into five subplots. From there, he opened five dealerships and got to work.
When all of the dealerships are owned by a single person, it makes sense to put them all next to each other. This allows the owner to share staff and management between the dealerships without requiring huge changes in commutes. It also allows cars to be delivered to a specific area, regardless of where the shipment is coming from.
It makes things simpler for the owner.
Now you know a little more about dealerships and why you might see so many in a small area. It’s not just your mind playing tricks on you, it’s a common occurrence across the country. If you have more car questions, you might find the answer on my blog. I also have a list of car products that can help you a lot, so check that out as well.