Tesla Dodges Traditional Dealerships—And Questions Remain

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Tesla Motors [NSDW: TSLA], by nearly all accounts, is an automaker that’s doing things differently. It’s based in Silicon Valley, not Detroit. And it’s transitioning from making a very modest number of Tesla Roadster models to, it plans, tens of thousands of all-electric Model S luxury sedans—with an impressive EPA driving range of up to 265 miles.

And, in what may be surprising to anyone who’s ever bought a new vehicle or been involved with the industry, there’s one other key difference: Tesla plans to do it entirely without traditional dealership franchises.

Instead, it’s building on the success of the ‘store’ strategy fine-tuned and carefully expanded by Apple—fine-tuned actually through the same person who’s now Tesla’s VP of sales and ownership experience, George Blankenship.

But through the years, other such attempts to sell cars from an automaker directly to the consumer have fallen flat. When we caught up with Blankenship last week, just before the opening of the electric automaker’s new Portland store, we asked him why the company is going about retailing its vehicles so differently.

“It’s sort of been that way for a hundred years; that is the model,” said Blankenship. “The model is that they do a bunch of research, hold a bunch of focus groups, and they decide that this is a car we should build; they design that car, they engineer it and manufacture it, and then they sell it to some dealer who then tries to sell it.”

“And it works, it works with thousands of cars sold every single day,” summed Blankenship, who pointed to Tesla’s different development process and revolutionary product. “That’s just not how we’re doing it.”

As we outlined last week, Tesla’s store strategy is clearly working—for informing new people about electric cars, bringing new people into the Tesla fold, and eliciting deposits on the Model S. The automaker has been hitting 11,000 visitors or more in a single week at at least one of its stores, and among its new stores designed around foot traffic it passed a million visitors so far in 2012.

Stores, not dealerships. Does it matter?

But wait. Aren’t dealerships—and our franchise system over them—highly regulated by the states? How can Tesla sell cars this way?

According to Leonard Bellavia, a franchise lawyer and expert in this field, they can’t—even when they avoid following a conventional dealership model. And while the money might not technically change hands at or to the dealership, Bellavia still believes that state and local governments may decide that such ‘factory stores’ can’t operate in their current way.

“Most states prohibit ‘factory stores’ and that is why Tesla is quick to point out that it doesn’t sell cars but rather refers customers to its website,” said Bellavia. “The problems it will encounter stem from the fact that the ‘selling’ of a vehicle does not require the actual signing of a contract and the taking of money.”

Selling, as used in relation to these state statures, generally also includes a long list of associated activities like displaying, test driving, or even demonstrating a vehicle’s features, Bellavia notes. “Tesla admits that it will facilitate the delivery of a vehicle in its locations, which also constitutes ‘selling,’” he adds.

“Every single state, every municipality, that a car company does business in, has a different set of rules and regulations,” said Tesla's Blankenship, who noted that the company’s strategy has of course been vetted by their legal team. “What I know is that we do what we can do in every area, we comply wherever we go and do what we’re allowed to do.”

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Comments (41)
  1. The dealer franchise system seems archaic, I am sure it made sense in the pre- internet world but it is nonsense now. To have it enshrined in legislation is even more ridiculous.

    Cars are increasingly a commodity and a use (rather than own) distribution methodology will become the norm.

    It seems that Tesla are having a disruptive effect beyond the actual car itself, which can only be a good thing.

    I would be worried if I were in the toupee business with all those car dealers "suffering".

  2. Dealerships can also be cheaper to buy from, you can't talk a store into a lower price if they don't have an inventory. And stores don't yet accept trade-ins, they also don't provide warranty or repair services witch means they will need seperate locations just for service in certain areas. Yes Tesla has mobile service but it's only for routine work and they do charge you to come out. Not every one leases, I have always preferred to own rather then constantly throwing my money into rent. I also have a zero maintenence warranty so I pay for nothing for the first four years except for fuel or charging if it was electric.

  3. On the consumer side, this is what perpetuates the concept of "the dealership". Most people think they are better-than-average negotiators and that they have an edge when haggling. Meanwhile, the dealership concept adds precious little value to the consumer and yet siphons off enough wealth to support a million employees.

    It's sort of the Carnival mentality. Everybody thinks they can win the giant stuffed animal. Almost nobody does and the Carnival makes a tidy profit.

  4. Hey a penny saved is a penny earned, if you go in and pay full sticker then they win. And all businesses make tidy profits, nothing is sold at the same price it costs to make it. Even if you buy directly from the manufacturer they're still going to mark it up.

  5. I'd like to trade-in my current car, it saves having to entertain perspective buyers. It also saves time because I don't have to wait for a buyer to come along. But I can't trade my car in for a Tesla because they want to sell their cars like Apple sells computers. I have a plan B and a plan C, I'm going to talk to some friends at local dealerships and either have them help me acquire a Model S for me or just sell my current car to them. And if that fails plan D is the BMW i3. I do have one question/theory is Tesla doing this to keep their base prices intact? Dealers mark cars up from what they actually payed, so is Tesla only doing this to keep the price down, I think they are.

  6. Any Carmax dealer will buy your car, giving you a written offer that is good for 5 to 7 days. And in my experience it beats a normal dealers trade-in offer.

  7. That's true,I had forgot all about them. Thanks.

  8. CD Speed, Blankenship was clear in our interview that Tesla has a set margin with every Model S and it will keep to that -- so I'd expect this to prevent gouging as well -- although raising the retail price itself is Tesla's alternative if demand is hot.

  9. CDSpeed, Tesla has indicated in communications with early customers that "Tesla Motors has partnered with AutoNation Direct to facilitate trade in vehicles". However there is no official announcement, so I don't know how reliable (or subject to change) this information is.

  10. Norbert, Thanks for the info I'll contact my sales person at Tesla and see if he can find out if arrangements can be mad through Tesla after all.

  11. Typo, can be made through Tesla after all. Sorry

  12. This praising the virtues of car dealerships as a provider of jobs sounds a lot like the people that once went on strike against automatic looms.

    Jobs just for the sake of jobs is not good for the economy. You have to show that these jobs provide added value. If they do, they'll survive on their own merit. If they don't, they deserve to perish.

    Furthermore, that part of the story ignores that the Tesla stores employ people too.

  13. Good point, I think populist arguments like this are signs of an imminent battle, both legal and in the media between the innovators and those invested in the old regime. Obviously the last thing an car dealer franchise lawyer needs is a new company that wants to do away with dealer franchises and this Leonard Bellavia is in fact already urging dealers to take action. Things will heat up pretty soon!

  14. Hi Anne. Tesla does indeed directly employ a number of people at each of its stores. Rather close to publication time, we asked Tesla for information on wages for those product specialists. So far, our query has gone unanswered (adding to the piece for clarification).

  15. @ Bengt Halvorson: I don't thing you fully understood Anne's point: The point of car dealerships is primarily to sell and maintain cars, employment opportunities are just a (positive) side effect of that. It's not something Tesla needs to offer clarification for. Except maybe if their retail system turns out to be as costly as the traditional ICE vehicle retail system is adding unnecessary cost for the consumer and cutting into their profits, but Tesla's hole point was to avoid that.

  16. one of the many things i like about coda was that they were bypassing the traditional dealership sales.

    the old way entrenched with the big companies - i know what that is about.

    time for a new way of doing things, and i think better for the consumer.

  17. I think it's great Tesla is taking the rational path toward every step of this process and throwing into question all the strange "norms" we've allowed these dinosaurs to build. As far as I'm concerned, every dealership I've stepped into was full of lying con men - it's normally a terrible experience. We went to several Toyota dealers who told us flat we wouldn't see a plug-in-prius for over a year (so buy this older model); we got one in a couple of days from our credit union's car buying service. Mix it up Tesla!

  18. State laws prohibiting manufacturers from selling cars were initially intended to protect franchise dealerships from the parent manufacturing company. See Automobile Dealers’ Day in Court Act, ch. 1038, 70 Stat. 1125 (1956) (codified as amended at 15 U.S.C. §§ 1221-25 (2000)).

    In Florida, the statutory language reflects this intention. See §320.645 (1), Fla. Stat. (2011).

    Therefore, because Tesla does not have any franchise dealerships whatsoever, a statutory bar, such as the one in Florida, does not prohibit Tesla from selling cars.

    I believe most states have language similar to the Florida Statute.

    The only exception that I am aware of is Texas statute § 2301.476.
    That statute prohibits manufacturers from selling cars entirely.

  19. protect them in what way ? as far as i am concerned, just another step that the govt should not have been allowed to make.

    that is a business agreement between 2 parties, and should remain so.

  20. Quoting from S. REP. NO. 84-2073, at 2 (1956).

    This vast disparity in economic power and bargaining strength has enabled the factory to determine arbitrarily the rules by which the two parties conduct their business affairs. These rules are incorporated in the sales agreement or franchise which the manufacturer has prepared for the dealer’s signature. Dealers are with few exceptions completely dependent on the manufacturer for their supply of cars. When the dealer has invested to the extent required to secure a franchise, he becomes in a real sense the economic captive of his manufacturer.

    For further reading see 29 Fla. St. U.L. Rev. 1057 at 1061


  21. @Alex: Great info, thanks for taking the time to post it.

  22. the govt should not be involved in business agreements. that should be handled between the 2 parties.

  23. The government is ALWAYS involved in business agreements. It's called "contract law".

  24. I guess if the vested interests really had a strong legal case their lawyers would already have been all over Tesla. Maybe that's why they only seem to be warming up the public for a case against Tesla at this point with these hypocritical arguments like contribution to local economy and safety (somehow?).

  25. Tesla is the 100% US company, the new kid on the block with an innovative, cutting edge product and refreshing new ideas, a shimmer of hope in an otherwise rusty and underperforming industry. I can easily see legal action turning into a PR nightmare: Goliath unable to compete with David and desperately trying to protect it's business by whatever means necessary.

  26. As far as the public safety argument, the only legal action I see that may be brought against Tesla is selling cars without a license. However, as noted above, nothing prevents Tesla from acquiring a license to sell cars.

    As far as the local economy argument, it is not founded in law. Therefore, no matter how vigorously anyone may argue it, it will never succeed in court.

    Long Live Tesla :)

  27. Traditional dealers are there to service piston cars.

    Electric cars need little service, a tire store will do every several years for most. An new windshield wiper here and there.

    Pistons go away, dealer goes away. Jobs change. We all breathe easier. It will work out in the long run.

    Car dealers are about as popular as Congress. Much of the time, both groups are trying to get away with something.

  28. These laws are to protect dealer franchises. A negative side effect is that auto manufacturers cannot disipline a bad dealer, they cannot remove the franchise. If a bad dealer chooses to charge for frivolous unneeded repair work or gouge prices, the manufacturer suffers bad image.

    Auto manufacturers such as GM would love to see these archaric laws overturned and I am sure they are privately rooting for Tesla. Dealers will of course try to protect their turf, they will not receive any help from their manufacturers.

    Tesla's plan is to cut out the middleman to reduce cost to you, the consumer, and maintain control for the betterment of their reputation. This is a win-win for the consumer.

  29. There are lots of ways to do everything. Real question: can Tesla do all the things owners want and be profitable. Tesla's store method will be very expensive and have limited results. They are not selling $100 to $500 iPads. The news media gives Tesla a lot of free PR which is really helping them build their brand but think of no. people TV ads reach.
    What must be done to get and keep a customer happy? Need to go to store and talk to someone about the vehicle, options, financing options, service, parts, trade-ins, test drive. Now you buy it...so how easy is service or to just talk to someone about setting your car up differently. People want to buy where they will be taken care of. First problems or recall will be major test for all.

  30. Since there are no dealers/franchisees at all, nobody has legal standing to file suit against the way Tesla sells their cars. Only after there is precedent of a single franchisee would others would have grounds to file suit if their application to open a dealership were rebuffed by Tesla in favor of factory-direct sales.
    The states certainly aren't going to do anything as long as they get their appropriate share of sales taxes and fees.

  31. "For now, no states or municipalities have decided to pick that fight with Tesla, and as a niche player Tesla doesn’t pose a major threat to the franchise system."
    Well, it seems that the Massachusetts State Automobile Dealers Association has started to challenge Tesla's first planned store in Natick, MA. Apparently, state law requires car dealers to maintain a service facility "near" the sales location. Tesla's planned service facility is 15 miles away in another town, which has led to the problems with their license to operate the Natick location.

  32. See these related stories:



  33. If anyone reads this, it sounds likes some of you don't like dealerships and I was just wondering, why? And I'm being serious I've heard people say that they'd like to see change in how cars are purchased but I've never heard an explanation.

  34. i dont want the govt sticking its nose in.

    my guess is that it will be cheaper for the consumer to buy directly from the manufacturer.

    that choice should not be taken away by the govt.

    dealers are usually ridiculously priced, regarding service. next thing you know, the govt will force consumers to use dealers for service.

    give em an inch, and they take a mile.

  35. Dealerships tend to be unpleasant to work with. You always feel like you're getting worked over, and clearly the dealer and sales people have the upper hand in sales techniques and experience. I don't want to have to depend on my limited negotiating experience to not get ripped off.

  36. You can only get worked over if you let them. But I will admit I can't stand the sales people that represent non luxury brands. When I went in to test drive the Leaf the guy wouldn't shut up I started to get the feeling that he was trying to slip me a pen. The best advice I can give is be aggressive and if they're not budging start to leave but do it slowly, I've had a lot of sale managers cave in when they think they are about to loose a sale. And going in at the end of the month helps and going in at the end of a year, all dealerships want to show good sales numbers and they are more willing to deal at the end of the month because they want to bring their numbers up.

  37. CDspeed, I think you've illustrated perfectly why people don't like car dealers? I buy a car once every 10-15 years, I don't want to have to have my guard up and study up on tricks, defenses, tactics, etc. for one of the largest purchases I'll make. I want it to be a pleasant experience with no BS, and no trickery.

  38. Well the one major thing that can make the dealership experiance an unpleasant one is the sales person. If you get one who is overly eager they tend to push to hard for a sale. But no the things I learned I'm just passing on to keep in the back of your mind when it comes time to look at the numbers. I go in all the time and test drive, pick up free brochures and just enjoy looking at the latest models. You complained before about feeling worked over, I don't worry about that because I know the sales person's salary is commission based and a few of them are naturally going to be aggressive. I like to look for a sales person with a laid back approach to sales, they're easier to talk to, helpful, and only try to sell you a car when your ready.

  39. Are you sure, Bengt? "The automaker has been hitting 11,000 visitors or more in a single day at at least one of its stores..." How can they possibly handle this much traffic in one location in one day?

  40. Thanks, Brandy, and corrected.
    That reference should have been 'in a single *week*' -- to correspond with the other mention and this piece:

  41. In 35 years of driving I'm not sure I can point to a single instance where a car dealer sales department has added any true value to my vehicle ownership experience. Plenty of negative experiences though.

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