Tesla, Franchising and the Bottom Line

Tesla’s direct-sales model deprives consumers of the thrill of driving the car home from the dealership – as well as the great discounts, experiences and incentives derived from competitiveness between franchisees.

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Chris Scali, Halbert Rasmussenand 1 more

July 24, 2020

4 Min Read
Tesla store San Jose CA (Getty)
Tesla store in San Jose, CA, mall.Getty Images

Wall Street was bullishly anticipating Tesla’s second-quarter earnings report released Wednesday. The electric-vehicle maker posted an unexpected profit but imagine how much better that report would have looked if Tesla stopped resisting the franchise-sales model.

Instead, Tesla CEO Elon Musk insists on swimming upstream, clashing with governments and dealer associations around the country via a direct-sales model that deprives consumers of the thrill of driving the car home from the dealership – as Industry-Voices-bug.jpg

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well as the great discounts, experiences and incentives derived from competitiveness between franchisees.

While it’s a fool’s game to predict how the stock market might react to anything, it’s hard not to imagine how much rosier Wednesday’s report would be if Tesla stopped publicly showcasing its gorgeous cars like department-store mannequins and actually allowed consumers to test-drive a car and drive it home – and how that change would lead to the following:

  • Consumers would spend less money if Teslas were sold at franchise dealerships (more on this in a minute);

  • Tesla might make more money on each car, on average;

  • Consumers would have a better shopping and overall experience if the company shifted to a franchise model – which would also, after a time, drive up Tesla’s profitability. Better shopping and ownership experience = more cars sold = more profit;

  • Tesla could grab more market share if it adopted a franchise model.

  • By focusing on innovation and outsourcing, and less on swimming upstream with its direct-sales model, Tesla ultimately will produce cars that are even better and more affordable.

While Tesla’s approach of window shopping-style showrooms helps demonstrate to consumers that Teslas are different from other cars, different isn’t always better and it’s never enough. Imagine how much of a buzzkill your first new-car-buying experience might have been if you never got to do more than sit in the front seat of a kind-of similar model at a dealership at the mall. At least the Gap lets you try on the jeans!

America’s franchise automotive retail system has been criticized by the likes of Musk and other new automotive brands as inefficient, costly and resistant to innovation. But Tesla has failed to create an experience that customers are happier with; in fact, a recent J.D. Power quality study on new-car satisfaction ranked Tesla dead last.

Tesla’s opposition is rooted in the thinking that franchised dealers cannot properly sell electric vehicles. This inspired Tesla to spend billions creating its own retail locations, service centers and call centers, and on hiring personnel to populate them.

This left Tesla with higher selling, general and administrative expenses than any of its established competitors (on a per-unit basis) – expenses that have not substantially reversed as sales have increased.

Whether he likes every aspect of it or not, Musk should see the advantages of using an infrastructure that’s existed in the U.S. since cars first hit the road, rather than actively going to war with it.

Owning every step of the process from the moment manufacturing begins to the day the customer gets the keys, Tesla sets its own prices without downward pressure from retailers selling its product.

Manufacturers’ ability to fulfill consumer expectations of accessible sales and service facilities is one of the frequently cited public-welfare benefits franchise law is intended to provide, but is completely absent from the Tesla model.

Several states have only a single Tesla service center, while others have none at all. This has resulted in one of the more persistent complaints regarding Tesla ownership: long waits for vehicle service.

Setting up its own shops and shipping cars countrywide is expensive, and the protracted legal battles with states banning direct automotive sales have been similarly costly. If Tesla were to reverse course, they’d be able to pass along enormous savings to consumers and investors.

While Tesla’s model has merits for a startup in a niche market, its approach does not provide the community and consumer benefits every state has recognized that franchised dealers provide. Teslas are great because of the innovation behind the product – which has been anything but on par with the innovation Tesla has attempted on the distribution side.

Scali Rasmussen’s attorneys are thought leaders in the automotive industry. Chris Scali, founding and managing partner, has a diverse practice with a focus on automotive and advertising law. Halbert Rasmussen is a partner specializing in automotive and business law. Monica Baumann is a partner specializing in automotive and consumer environmental litigation.

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