Thoughts on why Tesla can't (and won't) sell through franchise dealerships

[ToddRLockwood]

Here's a blog post I wrote to help explain how Tesla's sales model got to where it is. There is a sense among dealers that Tesla is trying to get away with something, that they're keeping the dealer's profit for themselves. I don't believe that's the case, and here's why...

Digital Toaster: Why Tesla Motors can't (and won't) sell its cars through franchise dealerships

 

[Curt Renz]

Here's a blog post I wrote to help explain how Tesla's sales model got to where it is. There is a sense among dealers that Tesla is trying to get away with something, that Tesla is keeping the dealer's profit for themselves. I don't believe that's the case, and here's why...

Digital Toaster: Why Tesla Motors can't (and won't) sell its cars through franchise dealerships

Todd, you stated the case correctly, eloquently and succinctly. I hope it gets wide distribution.

 

[ggies07]

Nice article. Thanks for the read and I shared it on FB.

 

[dsm363]

Fantastic article. One of the best I've seen so far.

 

[Larry]

Very well written and really provides a specific reasoning for the general public to understand and get behind what's going on with Tesla and free market realities.
Thanks Todd

 

[hcsharp]

Well written but dealers don't generally add much to the price of a new car. I'm somebody who doesn't believe the "cutting out the middle man saves buyers a lot of money" theory when it comes to auto dealers. The reason Tesla doesn't use dealers is primarily because of the inherent conflict of interest when the dealer is also selling gassers. It takes more time to sell an EV because there's a lot of education involved. Salespeople will just sell gas cars because it's quicker and easier. Not to mention all the education required for the sales staff. Most dealers make most of their profits from parts, service, and aftermarket products (insurance and finance). Why lose money pushing EVs when you won't get it back on parts and service?

 

[dsm363]

Well written but dealers don't generally add much to the price of a new car. I'm somebody who doesn't believe the "cutting out the middle man saves buyers a lot of money" theory when it comes to auto dealers. The reason Tesla doesn't use dealers is primarily because of the inherent conflict of interest when the dealer is also selling gassers. It takes more time to sell an EV because there's a lot of education involved. Salespeople will just sell gas cars because it's quicker and easier. Not to mention all the education required for the sales staff. Most dealers make most of their profits from parts, service, and aftermarket products (insurance and finance). Why lose money pushing EVs when you won't get it back on parts and service?

I thought one of the articles said the dealership process adds about $1,800 per car costing consumers $2 billion or so a year? Even if it is only $1,000 per car on average that is still a lot of money. I agree with you though what you brought up is a bigger issue than just profit on sales.

 

[hcsharp]

I thought one of the articles said the dealership process adds about $1,800 per car costing consumers $2 billion or so a year? Even if it is only $1,000 per car on average that is still a lot of money. I agree with you though what you brought up is a bigger issue than just profit on sales.

It's closer to $1,800 for cars in Tesla's price range, but those cars cost the dealer more to hold and sell. Most dealers lose money selling a car. They make it back on service, parts, and finance/insurance products. They usually make a lot more selling you an extended warranty than on the car.

Normally it would make no sense for a startup like Tesla to build their own stores and sell direct when a network of retailers (dealers) already exists. Obviously Elon was brilliant to see the importance of it and the huge conflict of interest that existed with franchise dealers of gas cars.

 

[ToddRLockwood]

I appreciate the comments and feedback.

Some of my numbers were extrapolations that might have overstated the dealer markups. But on the other hand, we don't really know how it would have worked with independent dealers. Clearly, they would have insisted on larger than average markups, since the service revenue stream would be insufficient to support the sales effort.

 

[DaveT]

Decent article breaking down dealership profit sources.
Where Does the Car Dealer Make Money? - Edmunds.com

 

[hcsharp]

I appreciate the comments and feedback.

Some of my numbers were extrapolations that might have overstated the dealer markups. But on the other hand, we don't really know how it would have worked with independent dealers. Clearly, they would have insisted on larger than average markups, since the service revenue stream would be insufficient to support the sales effort.

What about the EVs from major automakers being sold through dealers? What is the markup on a Nissan Leaf or Ford Focus Electric for example? From what I can tell they're not making much, if any more selling those cars than their gassers. At least not yet! I agree dealers will have to find a way to make EV sales profitable. If nothing else, it will have to be a higher markup.

- - - Updated - - -

Now that I think about it, many Nissan dealers were very slow to start selling the Leaf and would only sell them at MSRP for a while. It was worse with Ford and the Focus Electric. Here in the Northeast most of their dealers flat out refused to sell the car unless Ford forced them to. Some of them would order one for you but only if you paid MSRP. So maybe Todd's speculation is correct that the markup would have been higher than for their gas cars.

Regardless of markup, we know that if Tesla had used dealers, they would have sold far fewer cars.

 

[dsm363]

I don't see how franchised dealerships can refuse to sell a product.

 

[jerry33]

I don't see his franchised dealerships can refuse to sell a product.

They don't actually refuse, but they often make it as difficult as possible and try their best to sell something else while pointing out any disadvantage real or imagined. There was a lot of this, plus adding a $5,000 market adjustment in the early years of the 2G Prius (Toyota never imported enough 1Gs to really make a dent in anything).

 

[brucet999]

It takes more time to sell an EV because there's a lot of education involved. Salespeople will just sell gas cars because it's quicker and easier. Not to mention all the education required for the sales staff.

Very good points.

I saw the truth in your last sentence first hand when I test drove an eGolf at a large Volkswagen dealer in Santa Ana. The salesman I dealt with had gone to an intensive training class and he knew the car very well and was enthusiastic about it, but he was the only salesman from that store to have gone to the training. On the service side, the service advisors I talked to knew little about the eGolf and could not tell me what scheduled maintenance it would require.

 

[yesla]

I was under the impression that Tesla only plans to sell direct in the initial stages of growth to control the distribution channel when the volume is small - and then transition to a mixed direct/dealer model with larger volumes.

Eventually, I imagine less headache for Tesla if they don't have to manage 100's of thousands or millions of individual deliveries world wide.

Plus, I think the dealer will still be able to make money.
1) EVs are a unique breed. there is no 3rd party mechanic you can bring in to inspect/maintain.
2) because the maintenances are smaller and hopefully less expensive, people should have less issues bringing them into the ACTUAL dealership for maintenance - less $/customer but more regular services make up for it.
3) make the numbers make sense. volume discounts, specialty services like retrofitting hardware, CPO cars can be revenue sources, and sales/advertising expense can be negated, as the Tesla dealer would just be a place where customers come in to pick up their cars that was ordered online.

Of course, I am sure I am missing the bigger picture here. As EV's become more of a consumer electronic and refresh cycles of 2-3 years with significant advancements, CPO can be a big deal. or with fully autonomous cars; dealers can be spun off with Uber-like services to provide on demand transportation to people with "timeshares" of a car. or whatever... I just like to day dream....

 

[bh1783]

Of course, I am sure I am missing the bigger picture here. As EV's become more of a consumer electronic and refresh cycles of 2-3 years with significant advancements, CPO can be a big deal. or with fully autonomous cars; dealers can be spun off with Uber-like services to provide on demand transportation to people with "timeshares" of a car. or whatever... I just like to day dream....

Tesla won't sell through franchise dealerships because the company is trying to vertically integrate.

dealers (Tesla owned stores and galleries)
gas stations (Tesla Superchargers)
repair shops (Tesla service centers)
insurance (Autonomous Driving)
software (Tesla's in-house software)
gigafactory (battery and energy)
taxi/truck drivers (autonomous driving)
stereo aftermarket (17 inch screen)
aftermarket body parts (can't really happen with all the sensors in the bumper and body panels)

Tesla is different from other American car manufacturers because they are outsourcing as little of the entire vehicle as possible.
What makes Asian car manufacturers like Hyundai competitive is the fact that they are completely vertically integrated. For example:
When you buy a Hyundai(in Korea), Hyundai controls every aspect of the car:

hyundai steel (produces the steel for the car's body)
hyundai motors (automotive production)
hyundai mobis (parts supplier)
hyundai globis (car shipping and logistics)
hyundai ships (container ships)
hyundai containers (containers and shipping)
hyundai oilbank (gas stations)
hyundai insurance
hyundai apartments
hyundai dept stores
hyundai oil refineries

When you buy a hyundai in Korea, you get gas from a hyundai gas station, the car is built from hyundai steel, you park in a hyundai apartment and drive your hyundai to the hyundai department store. While Tesla may not become this vertically integrated(US anti-trust laws), allowing outside dealerships doesn't fit their goals.

Tesla is trying to vertically integrate the entire energy and transportation industry(from solar panels, to stationary storage to vehicles). Thus, they will probably not just give away dealerships when it appears like they are trying to control all aspects of the energy/transportation industry.

 

[ItsNotAboutTheMoney]

Exactly: everywhere along the chain there is profit and cost. Vertical integration provides the opportunity for Tesla to control costs and retain (or eliminate) profits. This is not necessarily cost optimal, because specialization tends to be the lowest cost approach. But even when outsourcing parts of the chain it's important to retain control, and _that's_ the real problem with dealerships. Under current law manufacturers do not have sufficient control of sales and service, and it results in customers hating the process, and being stuck with an outmoded model of large lots with heavy marketing per customer, with predatory pricing and service, which together adds cost, which is Tesla's greatest challenge. Tesla doesn't really care about the limits states have placed on numbers of stores, because it doesn't need many. It's the service centers that really matter, but most states don't have restictions on service.

 

[bhzmark]

Dealers simply don't add value anymore. If they ever did. Perhaps once upon a time it was worth protecting the dealers with special legislation against the bad monopolistic manufacturers, but not anymore. Same thing as many unions. Both dealers and unions are now just a shelter for incompetence and dead weight loss rather than serving any productive function. Without special legislative protections the market would kill both dealers and unions.

 

[AUSinator]

Something nobody has mentioned is that dealerships & there sales consultants often compete with each other own brand more than other brands. This causes extra pressure for the sales person to sell the car to you straight away as can buy the same car at 10 or 20 dealerships in the same large city and there is always somebody willing to sell the car cheaper than you. This may affect negatively the service experience when buying from a dealership. Then there is price fixing and supply and demand issue for Tesla. As we all know Tesla can't produce enought cars. So if they sold them at dealerships there would be nothing stopping them selling the cars $1000s above retail. The matter a fact that you can buy Tesla direct from factory and you don't need to neg on price gives a lot of joy and saves a lot of time/hassle and I hope Tesla never do a franchise dealership model in the future. I'm sorry to say this however if your stat doesn't let you buy direct bad luck and your stat government is going against there job description and capitalism. Again we all know capitalism is what made America today. So they are un-American! and are acting like communists! I don't think they are communists but there integrity must be questioned. How a US Stat can ban a tiny US auto manufacture business that is green,inventive and an American pride is beyond me - only in America.

 

[yesla]

Hate to break it to u guys but EM already said he would be looking into some sort of franchise model for model 3.

It seems you guys have your mind stuck on what a dealer is just as much as the dealers are stuck in their ways.

There could be an alternative way...