Do We Really Need Car Dealerships Anymore?
Tesla Motors wants to change the way we power our cars. But first it wants to change the way we buy them.
This year Tesla has faced off against the National Automobile Dealers Association (NADA), a trade group that represents car retailers, over Tesla’s right to sell cars through its websites and manufacturer-owned stores. Tesla calls them showrooms a way, we presume, to circumvent existing laws regarding franchises. NADA is having none of it. It wants to protect the dealership system, and is even fighting in some states to ban Tesla from selling its own cars directly to customers. In scoring a number of court victories, Tesla has codified its right to circumvent state laws and keep a tight control over the retail experience for any potential customers of the Model S.
Visiting a car dealership is a miserable experience that probably ranks somewhere between an IRS audit and a colonoscopy on many people’s activities’ list. So Tesla’s fight got us wondering: Is there any benefit from the current system, which grants dealers an exclusive retail monopoly on what’s likely to be one of your largest purchases? Or is this just a case of the powers that be digging in to protect their interests?
Almost every auto dealer is an independent franchise, because nearly ever state requires it to be that way. It’s a business model that began as a way for automakers to spread their geographic reach quickly and with minimal corporate investment the franchise owner assumes most of the financial risk. Along the way, states enacted laws designed to prevent corporate ownership of dealers, which prevents manufacturers from providing in-house stores with advantages not available to franchisees. Texas, for instance, bans direct-to-consumer sales, while rules can vary widely in other states.
“Most of the dealers have been doing this awhile,” Dan Lacy, of Lacy Ford Lincoln Mercury Subaru, told PopMech, providing a humble spin on the fourth-generation, family-owned business that his great grandfather founded 99 years ago, making Lacy’s store in Catskill, N.Y., the state’s oldest Ford dealership. “We have stories from my mom and dad about how their first washer/dryer came from a car trade,” he says. “There are even stories that my grandfather would take chickens in on trade.”
Lacy’s pitch for the dealership system boils down to this: We’re a local business, and local business is good for the local economy. “Not only do these dealers employ local people, but they also spend money in the community,” he says. “We do a lot of fund-raisers, support little leagues, football, basketball leagues.” Moreover, Lacy employees are locals who live, shop, and spend money in the community. “I think being able to employ 50 people in today’s economy is important,” Lacy says.
Given Tesla’s famously chary behavior when it comes to outsiders, it seems possible that the company would pick transplants who know Telsa up and down, rather than locals, to run new stores. In contrast, Lacy claims that growing up, living, and working in the community means the dealer knows what his customers want and expect. “We’re brought up in the area, we know the area, and know how to sell cars here,” he says.
To make his point, Lacy cited the Ford Retail Network the blue oval brand’s late-20th-century experiment in corporate-owned retail. Ford took over eight local stores not too far away in Rochester, N.Y., only to shutter them just three years later following conflicts with independent dealers, and resulting in a significant settlement with the New York State Attorney General’s office over deceptive advertising practices. “When a big corporation comes in, sometimes what they think is best is not best,” Lacy says. “I’ve seen it happen.”
Diarmuid O’Connell, Tesla’s vice president of business and corporate development, argues that this old-fashioned approach is an impediment in a radical business like selling EVs.
“There is a phase, after the early adopters, where you have to help people to compare and understand the benefits of electric drive versus gasoline power,” O’Connell says. “We believe we’re best suited to doing this because, in a traditional dealer environment, the bread and butter of an auto dealer is selling traditional technology.”
The flip side of Lacy’s local-business-is-good-business argument is the middleman effect: You pay more to buy a car from a local dealer. O’Connell cited “a Department of Justice study that found that 5 to 10 percent is added to the cost of a car because of the dealer system,” and decried the idea that dealers exist “to protect customers.”
O’Connell also says that having dealers sell Teslas alongside gasoline-powered cars would require the salespeople to “talk down their existing technology,” which they would be disinclined to do, thus placing Teslas at a comparative disadvantage (though this logic might not fly with the American Chevy dealers who’ve moved more than 10,000 Volts so far this year from lots crowded with gas-powered cars, or the Nissan dealers who’ve sold a similar number of Leafs).
However, despite Tesla’s current combative nature toward the established dealership system and in what might be a disappointment to those hoping Tesla will disrupt the current car-buying experience O’Connell tells PopMech that the EV-maker is not ruling out the possibility of establishing its own dealer network once the company grows large enough. “Elon and I have both said that there is a time when we will also want to sell our cars through franchise dealers,” O’Connell says. “When we’re selling a high-volume vehicle, hundreds of thousands a year, it’s going to make a lot more sense to place 100 cars at once with a franchise dealer than to sell them one by one as we do right now.”
And, he says, there’s no reason Tesla dealers couldn’t become community institutions just like any other car dealership. Tesla is already diving into some of these traditions: It sponsored a kids’ baseball team in Palo Alto, Calif., and a Fourth of July parade in Florida. Last year Tesla even provided Santa with a whisper-quiet Model S to sled about in a Washington, D.C., holiday parade. “Why wouldn’t we fund Little Leagues and YMCAs, as any business in the community would?” O’Connell says. “When we’re in a community, it makes perfect sense. We’re a business in that community.”
We continue to appreciate Tesla’s attempt to shake up the industry’s accepted and often outmoded wisdom, almost as much as we look forward to seeing what kind of coffee and pastries are served at the brand’s franchise in Peoria, Ill.