Based on an article from the July 26th edition of Automotive News, it seems that start-up automaker Tesla plans is to sell cars the same way that Apple sells iPods. Tesla won’t have dealer showrooms – they’ll have manufacturer-owned “galleries.” Tesla won’t have service departments – they have field technicians called “Tesla Rangers.” Tesla’s stores won’t have a lot full of new cars to choose from – they’ll have a couple of floor models to sit in, a demo unit for test drives, and a website to visit when it’s time to buy.
Unfortunately, all of this means that Tesla won’t have much success with sales, especially once big automakers bring out their own electric cars. Until they recognize the limitations of their strategy, they will be nothing more than a small, niche manufacturer that will probably be swallowed up by a larger automaker down the road. Here’s why:
1. Instant gratification can’t be ignored, and no inventory means no urgency. Ask any auto dealer and they’ll tell you that people don’t like to wait for their car. Because Tesla dealerships won’t have any cars in-stock, there is a real risk that some consumers will opt to buy a competing vehicle rather than wait for their Tesla to arrive.
There’s also the fact that a lack of inventory means there’s no urgency – if a consumer is told “this is the last red one on the lot,” they feel some pressure to consummate a transaction right away. If they’re told “sign here and your car will arrive in 6 months,” they’re much more likely to investigate alternatives. The bottom line is that dealers need inventory to maximize sales, and without ready-to-buy inventory Tesla dealers will be at a disadvantage compared to the local Ford, Toyota, Honda, and Nissan dealers with in-stock inventory.
2. Larger dealers are more effective. Tesla’s plan centers around small little dealers in select markets. However, larger dealers are more capable of selling and marketing vehicles. Specifically, larger dealers can:
- Justify larger marketing and advertising budgets, including brand-level ads
- Afford to invest in long-term marketing strategies
- Expend the resources to be active and visible in the local community (things like baseball team uniforms and sponsoring local events)
- Offer consumers more on trade-in (more on that below)
3. Apple doesn’t sell used iPods, but Tesla will sell used cars. Trade-ins are an especially important aspect of the retail automotive business, and represent a significant flaw in Tesla’s strategy. Since many consumers aren’t able to buy a new car without getting rid of their old one, the average Tesla dealer is going to have to take trade-ins. These dealers can either try to market these trades to the limited number of visitors they get, or they can auction these trades off to other dealers. Auctioning off trades (which will mostly be gas powered) seems like the most likely option for Tesla dealers specializing in electric cars.
Of course, if Tesla dealers are going to the auction, they’ll be forced to offer customers auction value. Large dealers, with thousands of visitors and a wide variety of cars, rarely auction off trade-ins because they can usually sell anything they get. As a result, large dealers can afford to offer a consumer more than auction value for their trade to facilitate a transaction…and that gives them a financial, transactional advantage over Tesla’s small dealers. What if Tesla dealers, as a result of this fundamental disadvantage, gain a national reputation for under-valuing trade-ins? That’s not going to do much for the brand.
4. Manufacturers probably can’t sell cars. In the late 1990’s Ford conducted a dealership experiment. Beginning in 1997, Ford bought back all of their franchises in five markets – San Diego, Tulsa, Oklahoma City, Rochester, NY, and Salt Lake City. These franchises were formed into “auto collections,” and once these dealers were all under Ford’s control, they began to “fix” all the problems that consumers had with dealers.
A little less than three years later, Ford’s auto collection experiment was deemed a failure. According to an Automotive News article from 2002, one of the stores that Ford “fixed” saw a sales decline somewhere between 75-90% over the three years that Ford ran the show, forcing Ford to give up or lose their presence in these vital markets.
While it could be argued that Ford’s factory-owned dealership failures were a result of poor management or a poor market, consider this: The only remaining independent Ford dealer in Salt Lake – Butterfield Ford – saw tremendous sales increases every month while Ford’s Salt Lake Auto Collection suffered. Ford’s corporate stores sank while a local independent in the exact same market thrived. Is a large corporation like Tesla really going to be better at selling cars than a local franchise with ties to the community and very little overhead?
According to Tesla, one of their advantages over bigger automakers is their small size. If Tesla really does understand the value that a small company with low overhead can bring to the table, why do they reject a franchise strategy?
The other irony here is that Tesla has promised to “revolutionize” the auto industry before. Tesla claimed that they could shorten the development cycle of the automobile and bring technology to the consumer faster than their bigger rivals. When they launched the Tesla Roadster in 2006, it was supposed to be the beginning of a new era. Four years later, Tesla has squandered much of their technological advantage, failed to produce more than about 1,000 vehicles, and lost buckets of money. Yet despite this humbling experience, Tesla remains arrogant, assuming that they can re-invent the auto industry in every respect. Good luck.
Jason Lancaster is a nine-year veteran of the car business and the president of , a firm.