Don’t Fear the Dealer: Embracing Tesla’s Sales Model

In the highly unlikely scenario where all states allowed vehicle manufacturers to sell their own products, the current dealership model would not disappear.

American dealers have created an amazing network of sales and service outlets covering the entire country. With nearly 18,000 stores in the U.S., it would cost a fortune for manufacturers to absorb these retailers.

And no local or national government is ready to allow manufacturers to open their own stores to compete with existing shops – not that the big manufacturers are looking to add sales and service to their portfolio.

Even with all of these barriers to entry, dealers are nervous they might need to compete with the factory when it comes to sales. Every legal method is being used to prevent changes in laws that would allow this to happen.

With electric-car maker Tesla as the lightning rod, storm clouds have appeared in many states wherever the startup tries to open a store. Despite widespread voter attitudes against more government regulations, a few states, such as Texas and North Carolina, have passed laws preventing automobile sales through any method other than franchised dealers. Other states such as Pennsylvania and New Jersey have placed limits on the number of stores a manufacturer (read: Tesla) can have within their borders.

The National Automobile Dealers Assn. and the Alliance of Automobile Manufacturers have tried to prevent Tesla from selling its vehicles outside of the traditional methods.

The AAM took a stand against the recent Pennsylvania law which allowed Tesla to open stores, pointing out that there were no limits on stores.

NADA commissioned a report from industry analyst Maryann Keller on the Consumer Benefits of the Dealer Franchise System to further its cause. Her findings include “past experiments by factories…to sell directly have proven unsuccessful.”

Both groups have constituents who would rather see Tesla use traditional dealers or go away altogether.

According to the Tesla website, the automaker currently has 57 retail stores in the U.S., four in Canada, 35 in Europe and six in Asia. These “galleries” supported retail sales of about 18,000 units of the Model S in 2013. That’s about one sale per store per day. It’s also more daily car sales per store than Ford and Chevrolet and most other brands in the U.S.

The arguments against Tesla’s sales model are being pushed by national groups with much to gain from defeating this plan. Sadly, most lack merit. Let’s look at a few of these arguments:

Argument 1: Local dealers fiercely compete for business and drive prices down

Manufacturers and dealerships have been working on reducing the amount of pricing negotiations needed to sell a car. “No-haggle” pricing attempts to remove the pricing differential between buyers and, in effect, raise transaction prices and dealer profits. This has been the goal with the existing system, not increased competition but higher prices.

With the costs of running dealerships rising and competition between brands increasing, fewer dealerships are around today. According to NADA, there were 17,665 new-car dealers in the U.S. in 2013, down 27% from 24,200 in 1991, while light-vehicle sales have increased by 26.7% in that time frame. This decreased competition in the face of increased sales has resulted in dealers inheriting wider sales territories that make comparison shopping much more difficult.

Having factory-owned stores instead of dealers would not limit the competition between stores any more than dealership attrition and consolidation have. Cross-shopping between brands would keep prices in check. Should a buyer not find another local Ford dealer, it is likely there is a Chevrolet or Chrysler or Toyota or Honda dealer nearby. That competition keeps prices reasonable.

Argument 2: Dealers would take the side of the consumer in warranty and safety recalls

The recent troubles at General Motors have shown just how important dealing with customers can be to automakers. Dealers typically do an outstanding job of processing warranty and recall issues, but manufacturers need to make owners happy as well. Like Toyota before it, General Motors quickly learned perception is reality.

Customers already are protected by federal and state laws ensuring coverage of warranty and safety problems, and yet dealers fail to take the consumer’s side automatically. Dealers need to keep the manufacturer happy in order to get paid.

Even now, it is the responsibility of the manufacturer to contact owners about recalls. While dealers are authorized to do necessary recall work, any mechanic can accomplish the same task.

According to the Federal Trade Commission, “the Magnuson-Moss Warranty Act…makes it illegal for manufacturers or dealers to claim that your warrant is void…simply because someone other than the dealer did the work.” This allows even the owner to do his own warranty work, and who would take the owner’s side better than the owner?

Argument 3: Locally-owned dealers create good-paying local jobs and significant tax revenue for communities

Until automobile manufacturers find a way to properly demonstrate a vehicle online, local salespeople always will be needed. Comparing one brand with another or even two of the same model built at different times reveals great differences. Cars aren’t apples and shouldn’t be treated as commodities, even though they usually are.

With these local salespeople demonstrating product, the local tax base and unemployment rate will be positively affected. Local ownership of dealers may add a layer of business owners, but the salespeople and mechanics remain with or without the traditional dealership network.

Argument 4: Simplify an otherwise complex car-buying experience

Dealers are constantly working to simplify the car-buying experience. Today, dealers are attempting to lessen the time it takes to purchase an automobile.

After more than a century of existence and two decades of online sales, the process still requires a couple of hours at best. Once the vehicle has been selected, any salesperson should concentrate on completing the sale in the shortest time in order to move onto the next potential sale.

Whether the dealership is owned by a single business person, a publicly owned conglomerate or an international manufacturer, simplifying the process increases the potential for more sales, which should be the goal of any store.

Vehicle manufacturers should not be allowed to compete against privately owned stores of the same brand. When a new manufacturer enters the fray, such as a Tesla or anyone else, there is no reason they shouldn’t be allowed to open their own stores.

However, manufacturers and dealers will continue to look for ways to convince the buying public that new and different is worse, right or wrong.

Sam Fiorani, an industry economist and analyst for nearly two decades, is vice president-global vehicle forecasting for AutoForecast Solutions, a WardsAuto data partner.