2012 Tesla Model S Signature Front Quarter

Car dealers and their lawyers around the country are up in arms about Tesla Motors. “Illegal!” they shout. Mass panic is ensuing with dealers, some of which are contacting their state representatives to shut down Tesla’s newfangled business model where it opens stores in malls and has the transaction done digitally.

What do they have to fear from an automaker that has barely put a few hundred cars on the road since going on sale in late June?

The franchise model was created nearly a century ago so automakers could expand their sales territories without having to maintain standalone stores in the middle of nowhere. It worked for them, too, and continues to work with thousands of dealerships across the U.S. Tesla has 17 stores in 10 states and runs them more like Apple Stores than what we’ve come to know as a traditional dealership. Much ado has been given to franchise laws, as automakers in most states aren’t allowed to run their own dealerships that compete with franchises. A disadvantage to franchised dealers is that they oftentimes jack up overhead on the car you buy. A dealer can–and often does–command premiums for rare and hot-selling cars, called “market adjustments.”

By contrast, you can now go into a Tesla Store, order your car, and the price you see is often the price you end up paying. The store is there for casual talk to learn more about the car and schedule a low-pressure test drive. That’s a remarkable contrast.

Perhaps the franchise model should be scared.

Tesla Logo Red 300x47 imageIn Illinois, New York, Massachusetts, and Oregon, dealer associations have filed petitions. Illinois said Tesla can’t have company founder and CEO Elon Musk on documents listing him as the Chicago store’s owner. New York threw out the petition it received because Tesla opened its first store there in 2009, and the New York Dealers Association was long past its statute of limitations. The Massachusetts association filed its challenge to Tesla’s store model last month. Tesla said it wouldn’t be selling any cars in its stores directly, disputing the associations assertions that Tesla was skirting a proper business model. And Tesla looks to be safe in Oregon, despite the Oregon Automobile Dealers Association persistence in debating the state’s laws.

“Tesla may not yet recognize the value of the independent, franchised dealer system, but as its sales increase, NADA is confident it will re-examine its business model,” says the chairman of the National Automobile Dealers Association, Bill Underriner.

“All companies should be complying with existing laws in the same way dealers are required to,” he added.

But therein lies the issue: Tesla has never had its cars sold at franchises. You can’t go down the street from your local franchised Tesla dealer to see the factory outlet store selling it for wholesale prices. If you want a Tesla, you’re going to get a Tesla. If you don’t, there are plenty of other dealers out there willing to sell you a car, dealers whose companies they represent have been selling cars under franchise agreements since their inceptions. Dealers who are willing to undercut one another–sometimes selling at a loss–for the same product, because service contracts for repair are much more lucrative for making money than selling the car itself in most cases.

But Tesla is handling all of that, from test drives to servicing the car. It doesn’t want to train outside personnel to sell and service its cars. It doesn’t want sleezy salesmen peddling its cars with whatever made-up information they can spew from to move cars out of the showroom. Tesla’s model calls for a lot more control and accountability, a way to get people to buy cars in a place no one has thought about selling them since Sears sold Allstate cars in the 1950s. And, it may end up being more expensive to do in the long run.

But if you’re going to sell your new car as something wholly revolutionary, you might as well have the sales and service experience to back that up. And no franchise is going to be able to provide that quite like Tesla itself.

Source: Automotive News (Subscription required)

By Jacob Brown