How Tesla Is Disrupting the Traditional Car Dealership System

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Joe Raedle/Getty ImagesA Telsa gallery in a Florida mall.
Buying one of Tesla Motors' (TSLA) sleek electric cars can usually only be done online. That's because in most American states, auto manufacturers are severely limited or banned outright from selling their goods directly. This is why we've traditionally been forced into buying cars from a middleman -- an independently owned, licensed and franchised dealer.

But Tesla has been fighting hard for the right to sell its vehicles the direct way, against a determined, well-funded and connected group of dealerships. The fight that will last for years, but in these early days the upstart is already racking up body blows. And although it's still a relatively small enterprise, Tesla is enough of an adversary to worry the incumbents.

Expensive Franchising

Car dealerships hold a privileged position in the American economy, with legislative protections not enjoyed by other businesses. Among other advantages (depending on the state), they are guaranteed a certain radius of exclusivity for their chosen make, are often recompensed by the manufacturer -- at a profit -- for parts and services for their customers and can be compensated for unsold inventory.

The dealership model came about in the 1920s, when manufacturers realized that setting up and maintaining nationwide sales/service operations was prohibitively expensive and resource-heavy. Franchising these parts of their business helped Fiat Chrysler (FCAU), Ford (F), and General Motors (GM) become the powerhouses they are today.

%VIRTUAL-pullquote-New-car and -truck dealers boasted collective sales of $676 billion in 2012 -- 15 percent of U.S. retail activity that year.%But there was a price to be paid. Gradually, the independent dealerships grew in size, power and influence. Entrenching the status they enjoy today is their economic strength -- according to the National Automobile Dealers Association, the roughly 17,600 new-car and -truck dealers boasted collective sales of $676 billion in 2012 -- a whopping 15 percent of U.S. retail activity that year.

They tend to spend some profits on keeping favor with lawmakers; data from the National Institute on Money in State Politics found that dealers and their employees have donated nearly $87 million on state-level political campaigns from 2003 through 2013, and $57 million on federal elections. That's significantly larger than the $500,000 Tesla has shelled out for the same activity.

That wealth comes at the expense of consumers. Buying at a dealership is a difficult, stressful and costly process. According to a study by investment bank Goldman Sachs (GS) in 2000, buying a built-to-order car directly from a manufacturer would theoretically save just under 9 percent of the total cost. At an average sticker price of $26,000, that shakes out to $2,225.

Walk Into a Mall, Buy a Car

Tesla doesn't have an independent dealer network. At the moment, there's no compelling reason that the company should. Its state-of-the-art electric cars are still luxury items, and compared to the giant manufacturers, its volume sales are tiny.

Rather, it sells directly to consumers in the few states it's allowed to. Where it's not, the company operates what it calls "galleries" in locations such as shopping malls. These are small storefronts that usually feature just a single car model for test drives, with employees who only provide information on the vehicles; potential customers are directed to Tesla's website if they inquire about purchasing.

The purchase and delivery process is essentially a more elaborate version of the typical ordering of goods online. Via the Tesla website, the customer chooses vehicle specifications, selects the method of financing, pays a deposit for it and arranges delivery. If the process is done correctly, the car arrives within a few weeks.

Dealerships Fight in Court, Legislatures

All of this is scary for the dealerships, and they're reacting accordingly. In many states where Tesla has attempted its direct approach, incumbents have banded together to fight Tesla in court and in legislatures.

A recent defeat in Massachusetts notwithstanding, the dealerships have had some success. In a move that didn't come as a great surprise, car manufacturing center Michigan enacted a bill that strengthened its ban on direct auto sales, notching an important win for the dealerships.

But they're fighting an enemy that has plenty of allies. Tesla's models enjoy very high approval ratings and good reviews in the automobile press.

Meanwhile, more drivers are plugging in and turning on to the cars; yes, those volume sales are relatively low, but in its most recent quarter the company's deliveries of its signature Model S sedan notched a new record at 7,785 vehicles, a robust 42 percent higher than in the same quarter one year ago. Although the company cut its full-year delivery estimate to 33,000 cars (from the previous 35,000), the former number is still well above the 22,477 the company delivered in 2013.

Dealerships or Dinosaurs?

So even those most onerous, dealership-friendly legal restrictions can't do much to prevent Tesla from selling its wares to interested clientele.

Not that the determined electric-car maker is going topple the old system anytime soon. Big carmakers used dealerships to move more than 13.7 light vehicles so far this year -- a 5.5 percent increase over the same time period of 2013. Matched against those figures, Tesla's potential 33,000 deliveries for this full year look downright puny.

Tesla is a niche player at best in the auto industry; however, in terms of disruptive power, it punches well above its weight class. The dealerships are sure to return to their corner with at least a few more bruises over the coming rounds.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, Goldman Sachs, and Tesla Motors, and owns shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. Find out the easy way for investors to ride the new mega-trend in the automotive industry in our free report.
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