Tesla’s recent flip flop on whether it would close its retail stores got us thinking about the oddball nature of automotive retailing in America. This is a subject near and dear to us; we’ve covered the domestic auto industry since the early 1990s both as a sell-side analyst and on the buy-side. We chatted with the Penske family about taking their stores public in the late 1990s, and were the first analysts to tour a CarMax store when it was still owned by Circuit City.
Even Tesla’s biggest fans will acknowledge that its retailing strategy is totally unique and might act as an impediment to scalable market penetration. The problem: Tesla owns its stores rather than operating through franchised dealers. After World War II, US car dealers pushed for strong franchise protection laws in the US, primarily at the state level. The upshot is that in most American states only a dealer – not the company itself – can sell a car or truck.
David Pogue, the well-known tech blogger, wrote an excellent article about this issue in the wake of buying his own Tesla late last year. Tesla has found its way around the issue in many areas, but there are still 17 US states with no Tesla dealerships. There is a link to the full article at the end of this section.
This is not, however, the only retailing challenge Tesla has; consider the following 3 points:
#1: Americans customarily buy cars/trucks from dealer inventory and the cycle time between “I need a new car” to “look at my new car” is very short. New vehicle dealers typically stock 60-70 days of selling inventory. That’s not because they like carrying so much working capital. It is because Americans are used to immediate gratification (shocker, I know). Moreover, they typically spend very little time – often a week or less – between deciding to buy/lease a car and actually taking delivery. This is why there are so many automotive ads on TV/online – car companies know they have a limited window to get on a customer’s consideration list.
The problem for Tesla: consumers may not want to wait for “their” car to be manufactured to custom specifications. And Tesla keeps very few cars for sale at their stores, with no public plans to change this format.
#2: No/few dealerships means limited service support. The average new vehicle has one defect that a consumer finds in their first year. Dealerships are happy to service that problem – warranty repair margins are very high. And because the US is over-stored when it comes to dealerships, consumers are spoiled for choice.
The problem for Tesla: even well engineered vehicles need some after-sales support. Patchworking an answer is never going to be as convenient for the consumer as running down to a local dealership.
#3: In the end, Tesla is a case study in “how much disruption can one company really manage?” Electric cars have their own engineering and marketing challenges. Layer on:
- upending a 100-year old legally-protected distribution system,
- deep set consumer preferences about the car-buying experience,
- and a different service model…
And that’s a lot of dirt to move while trying to scale a business. Don’t get us wrong: we’re rooting for the Tesla underdog. But we are clear-eyed about the challenges to grow this model, and those go far beyond the usual discussion around this company.
Link to David Pogue’s article: https://finance.yahoo.com/news/cant-buy-tesla-states-161318245.html