How is Tesla different from regular car dealerships? - Yogesta

The rapid rise of Tesla is putting many dealership owners on the edge as they witness possibly and likely the beginning of the end of their control in the auto industry. Dealerships control the price of a car, the cost to service that car and the cost of replacement parts. Dealers can also mark up your qualified interest rates when financing, sell you overpriced warranties. Also will use any tricks necessary to make you pay more for a car than you should. Here is how Tesla is different from regular car dealerships.

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How is Tesla different from regular car dealerships?

Elon Musk wasn’t exactly a fan of how this dealer model works which is why Tesla doesn’t have any dealerships. You see in the US all major car manufacturers and consumers are forced to make transactions via a third-party-owned franchise, a middleman, specifically a car dealership. Unlike say McDonald’s where some stores are franchises and other stores are owned and operated by McDonald’s. 100% of car dealerships are owned and operated as third-party franchises.

Costco functioning with dealerships

  • Research a Vehicle
  • Locate a Dealer
  • View the Costco member price sheet and save

It’s the law and trying to change the rules even for the consumer’s benefit is very difficult. Not even a retail giant like Costco had the power to disrupt this sales model. As their version of selling cars relies on getting special pricing through dealership partnerships and not directly through the manufacturer. Ultimately this makes them an additional middleman between you and the manufacturer.

How is Tesla different from regular car dealerships?

How Are They Different Than Dealerships?

As a new car company in the modern age, Tesla was lucky enough to have the opportunity to avoid the traditional dealership model. Today they’re the only major automaker in the US that can sell cars directly to consumers. This is becoming a growing problem for traditional automakers, dealerships as well as a huge industry of companies that support dealers like Cox automotive and Truecar.

How is Tesla different from regular car dealerships?

Tesla’s direct sales model

Unlike 10 years ago Tesla is no longer just a small company selling a few luxury sedans with a niche powertrain. Every automaker willingly or not is shifting towards electric vehicles. Tesla is far ahead of the pack, especially with cost. Not only does Tesla have a cost advantage with manufacturing EVs, but it also has the opportunity to create a big cost advantage through its direct sales model. That avoids a lot of additional dealer costs like storing hundreds of cars at every store on big lots that will often sit for months before selling.

How is Tesla different from regular car dealerships?

The more cars Tesla sells the bigger the problem becomes for dealerships. Just look at the last 12 months Tesla has sold over 700,000 vehicles with sales growing extremely quick. Also with two new factories under construction, this figure is expected to explode soon.

Tesla 12 Month Sales

Q3-2020Q4-2020Q1-2021Q2-2021
Cars sold139,000181,000185,000201,000

Why are manufacturers bound to the dealerships?

When it comes to sales Tesla is slowly becoming a major player in the auto industry. Tesla is the only automaker in the US that’s able to sell cars directly to consumers. This is kind of an unfair advantage that ultimately puts the spotlight on the laws that are forcing other automakers to play by different rules than force them to use dealerships. These are outdated laws that made their appearance long before Tesla was founded and there were some good intentions.

How is Tesla different from regular car dealerships?

Since dealership owners invested millions of dollars of their own money to start a dealership, it made some sense to protect them. Also, manufacturers relied on these dealerships to sell cars in every corner of the country. Today though Tesla on the other hand can sell cars online and deliver them directly to a customer’s home. So the need to have franchises in every corner didn’t exist.

What is the purpose of Tesla Stores?

Technically since Tesla didn’t have any franchised, Tesla dealerships that it could put out of business by operating its own stores. They were never in violation of these laws designed to protect dealerships.

How is Tesla different from regular car dealerships?

This meant Tesla could build its own stores, service centres. Even take orders online from their own website while web pages from other manufacturers must refer you to contact dealerships just to get a price or maybe they’ll redirect you to a local dealership’s website. While a direct sales model is an incredibly expensive and often overwhelming task for Tesla’s sales and service teams this is an advantage that gives Tesla a chance to cut out the cost of having a middleman.

Why are Dealers becoming Scared of Tesla?

Naturally, manufacturers that can’t enjoy such benefits and dealerships that can’t capitalize on the sales of Teslas are strongly against this. They have pushed regulators to limit or outright ban Tesla from selling its own cars. Unfortunately to an extent, they’ve been successful. To this day there are still many states that banned Tesla. Which for not using a middleman saying that they want to create an equal playing field for automakers rather than giving Tesla a leg up on everyone else and they’re completely right.

Advantages of Direct sales model

We know that having a direct sales model can be advantageous especially if you know what you’re doing. Just ask Apple, it allows for better efficiency and gives the automaker complete control over its operation. Such as their own personal standards for salespeople, trainers and managers rather than relying on the standards of a small mom-and-pop dealership. But that’s not the problem though.

How is Tesla different from regular car dealerships?

The transition to electric vehicles has created a whole new generation of automakers like Rivian, Lucid air and Polestar. All promising companies have no intention of using the dealer model. Although many people don’t like dealerships the problem again isn’t that they exist. Most consumer goods out there are sold through third-party dealers like best buy. There are many benefits to franchises for both consumers and brands.

How is Tesla different from regular car dealerships?

In Hawaii for example Tesla’s operation is limited to two small stores. One service centre is all on Oahu the bulk of the state’s population. Ford on the other hand has seven dealers on all four major islands. While it may not make financial sense for a manufacturer to open a store on a small island with 70,000 residents. It might be for a local who’s willing to make that investment and take that risk. This also means that when someone has a problem with their car they can usually find a nearby dealership to help them as quickly as possible.

Downside of Direct sales model

Believe it or not, dealers can also help with quality control. Which is something that Tesla is known to suffer from. It’s not that Tesla can’t produce quality cars, it’s just that there’s not really much of an incentive for them to do so. Even after years of producing cars out of Fremont we still see examples of customers driving home new cars with paint issues or bigger than normal panel gaps. Since dealerships buy their inventory from manufacturers to resell they carefully inspect their cars and make sure that the manufacturer pays for any flaws before being sold.

How is Tesla different from regular car dealerships?

This means that manufacturers have a quality that they need to uphold or else dealerships are going to penalize them. These are excellent benefits for consumers but unfortunately, that’s kind of the end of the smooth road.

What are dealerships doing differently for profits?

When a market is run exclusively by independent middlemen manufacturers lose control over their sales process. Automakers can’t even control the price of their own cars. All they can do is set a manufacturer’s suggested retail price that nobody pays even though the FTC states that manufacturers can create pricing agreements with dealers or cut them off if they break the rules.

This is how Sony is able to control the price of their highly sought after and limited supply PS5 at retail stores even when they’re being resold for double or triple on third-party markets. However when it comes to cars and when an exciting new car is in short supply like a Civic Type R dealers can be charging an extra 10,000 dollars or more than 25% above MSRP. There’s not much a manufacturer can do about that when a dealership is its only sales channel. Especially when dealerships have joined together to become one powerful force.

Dealership association

The national automobile dealer association represents the interest of virtually all dealers in the US. Mess with one of them and you’re messing with all of them. However, it is our prediction that dealership owners will soon realize that all good things must come to an end. Consumers are getting tired of the way cars are being sold and the only thing that makes haggling a car tolerable in the first place is because it’s the industry standard.

How is Tesla different from regular car dealerships?

However, with Tesla and new automakers like Rivian, Polstar, Lucid and many others come haggling for a car won’t be normal and more often than not it’ll be a negative customer experience. Traditional automakers are already considering the way their cars are being sold. Take this Lincoln store for example which is a store in a shopping mall much like Tesla stores. But instead of being run by a dealer, it’s run by Ford. They still don’t get to sell their own cars because that would be illegal but the experience is probably more in line with what Ford wants.

How do GM and other manufacturers have a chance to fight dealerships?

General Motors is investing tens of billions of dollars in electric vehicles. They don’t want dealerships getting in their way for their Cadillac brand they gave dealerships an ultimatum. Dealers would need to invest about 200,000 dollars adjusting their stores for electric vehicles or take a buyout offer. Roughly 20% of them took the buyout offer. Maybe since the dealerships are choosing to be bought out rather than being forced to face competition from the manufacturer this could be an opportunity for GM to bend the strict dealer laws a little bit and create their own stores, sell their own cars and have a website that can actually be used to buy a car.

Maybe this will give GM and other manufacturers a chance to fight dealerships and tell them that if they’re not going to honour their prices they’re going to restrict them from ordering new cars to sell. Who knows what will happen and how long it will take but ultimately and thanks to Tesla’s rise we could be seeing the beginning of the end of the unwanted car dealership only sales model. One day hopefully soon traditional automakers and regulators will work together to improve the way that we buy a car. But most importantly though and hopefully consumers will be given the option to choose between a dealership or a manufacturer store just like how we can choose between buying an iPhone from Apple or Costco.

5 reasons why Tesla sells its cars directly to its customers rather than through a dealership.

The Model 3 is an amazing car but another factor driving its success is a direct-to-consumer sales process. Unlike other carmakers, Tesla doesn’t use franchise dealerships and instead owns and operates all of its stores. Here are five reasons why?

1.Electric cars don’t benefit dealers

There’s a fundamental problem with dealerships for Tesla. Dealers wouldn’t benefit from selling them but Tesla being low volume in the beginning a dealer would have to start by selling Tesla’s alongside other brands before opening a dedicated store. This creates a small problem.

If a prospect walked into a dealership that had ten models but only one was electric, it would be like having a vegan option in a steakhouse. When selling the advantages of an electric car you must undersell everything else. Unless a customer only wanted a Tesla, it would make no sense for a salesperson to explain the benefits if it had to undermine its nine other models inventory.

2. Full control of customer experience

A second problem is that dealers make most of the profits from service. Electric cars require a lot less maintenance Plus Tesla enables its cars to be updated over the air. When Model 3 launched there was a problem with its ABS system affecting braking performance but is simple over-the-air update fixed it. If that were any other car the manufacturer would have to recall all the vehicles and pay the dealer to fix them. Also, human labour is not cheap.

Since dealers are owned and operated by a third party the manufacturer has little control over who’s in charge and ultimately the entire experience. Wach store has a different owner with different processes on how things like customers are greeted, how test drives are conducted or how negotiations are handled. Each dealer even has its own unique website. By owning all of its stores Tesla has complete control it does the hiring, the firing and ultimately every store of all is the same procedures and there’s only one website.

3. Dealers are a costly middleman

Dealerships got their dealership nickname for a reason. It’s a middleman that takes us bigger profit as it possibly can. They’re very profitable and the staff are well paid. The car salesperson averages 48,000 dollars a year in the US the sales manager averages over 100k dollars a year. The general manager trumps all of that and of course, there’s an owner who gets the biggest cut of all.

At Tesla, the salespeople get about 30-40 thousand dollars in a year. The store manager only about 70K. Since Tesla owns its stores there’s no middleman taking profit thus giving it an extra cost advantage over the competition.

Dealership (salary/annum)Tesla Store(salary/annum)
Average car salesperson – $48,151Specialist – $30-40k
Sales Manager – $103,833
General manager – Up to $250k Store manager average – $70,000
Owner – $$$$…

4. One price for all

Tesla believes that everyone who buys their car should pay the same price. Even if you’re an employee there’s known let me ask my manager price or only for today price. It’s one price when you go to the website what you see is what you get.

For other cars getting a final price isn’t very easy. You have to negotiate or call multiple dealerships and get multiple quotes. In fact, it’s so difficult that a company called Truecar was formed which is basically just another middleman to help people get the final price of a car. It’s kind of silly.

5. Tesla stores don’t need to compete with each other

The last reason is that Tesla stores don’t really compete with each other. Ask a Honda dealer who its number-one competitor is and it will tell you that it’s the next closest Honda dealership, not the Toyota or Ford dealership across the street. Shoppers these days know what they want. So dealers have to compete in order to earn their business in the end. The salesperson aim is to how to make deals today rather than on product explanation.

At a Tesla store priority, one is educating customers. Since each store is owned by Tesla and since salespeople are paid hourly. It doesn’t really matter what store the customer buys the car. At this alleviates a lot of the pressure experienced at dealerships and a lot of customers appreciate this. It’s why it’s so much easier to visit a Tesla store versus a dealer. That’s five reasons why Tesla doesn’t use dealerships.

By Yashwanth

Hi, I'm Yashwanth Mallepudi working as an Automobile Journalist also an aspiring blogger.This blog is dedicated to help people learn about Automobiles.

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