Direct-To-Consumer Car Sales
In many countries, and especially in the USA, the main way to buy a new car is through a car dealership. This is a well-established procedure, taking its roots decades ago when the car manufacturers needed local relays to promote their products.
Nowadays, with the Internet and increasingly flexible assembly lines, many consumers would like to buy directly from the brand they already want. But this would conflict with actual US regulations and laws forbidding most direct car sales.
It, however, has not stopped new brands of EVs, like Tesla (TSLA -1.93%) and Rivian (RIVN -3.03%) from favoring a direct-to-consumer sales approach, using loopholes in the regulation. We looked into further detail how they did it in “Automotive Direct Sales – Are Dealerships Becoming Irrelevant?“.
However, a new red line for dealerships might have been crossed, with Scout Motors joining the brands in bypassing independent retailers.
Source: Scout Motors
What makes it a big deal is that contrary to new companies & brands like Tesla and Rivian, the Scout branding was inherited by Volkswagen in 2021 when it acquired Navistar International – a truck manufacturer that owned the defunct Scout brand.
So, are dealerships going the way of the dodo amid the EV revolution being embraced by larger groups?
Why Use Dealership In the First Place?
The way franchise car dealership works is that they are owned by independent owners or dealership chains, separate from the automakers, even if it might be named “Ford of Townville”.
They have supply contracts with the automaker, buy the cars from them, and resell them at a profit. Typically such franchise agreements give a dealer exclusive rights to a particular geographic sales territory for a specific manufacturer. And one dealership might have multiple contracts with different automakers.
Besides sales and local market knowledge, dealerships also usually provide repairs and maintenance and act as a relay in providing financing to car buyers.
Freeing Capital
A reason why this model became dominant, and is responsible for the huge majority of car sales in the US, was that it allowed car manufacturers to have local sale relays knowledgeable about the local market’s preferences, and bringing their own capital to expand the automaker sales network.
As automaking was already a very capital-intensive business, not having to cough up more capital for the sales network in thousands of locations throughout the country was welcome for the early automakers.
An additional boost to available capital for automakers was that in the dealer system, automakers book revenue as soon as their vehicles leave the factory. So, fluctuation in demand and inventory could be partially buffered by the dealerships, and more working capital could be freed for the auto factories.
Regulations
Another reason this model became entrenched is that regulators perceived it as increasing competition. If a dealership in a small town sells multiple brands or multiple dealerships are competing, unfair pricing is less likely.
At the same time, dealerships as a group became a rather big business and a major employer. This gave it a strong lobbying power, which led to new laws being voted in many states, outright forbidding automakers to sell directly to customers.
The dealership business became big, with large publicly traded dealership groups, like Lithia Motors and AutoNation, buying up and combining independent dealerships. For the year 2023, AutoNation reported $27B in revenue, and Lithia Motors reported $31B.
Challenging Dealerships
Legacy Automakers
The idea of bypassing dealerships is not new. The Big 3 (General Motors (GM -1.53%), Ford (F -1.38%), and Chrysler (today part of Stellantis (STLA +3.4%))) have periodically explored the option of managing their own dealerships, especially in states that do not outright forbid it.
This would not only allow the automakers to capture the profit margins of the dealerships, but also to get a more direct relationship with their final clients.
Each time this happened, it was met with a massive backlash by their independent dealership network, in and out of the states in question. Threatened by the disruption of their sales across the country, automakers backed down.
New Brands
It was less of an issue for newcomers, as generally, state laws bar automakers with independent dealer networks from selling directly to consumers.
For companies like Tesla, new to the market and without a reseller network, direct-to-consumer was a way to cut costs and customize the purchase experience.
This was especially a good move for Tesla, as a buyer of a Tesla car in the early days already had his mind fixed on the purchase. So, there was no need for a local reseller to convince the buyer about Tesla over the non-existing EV line of other automakers.
“The consumer experience and the consumer journey is too precious to delegate to a third party.”
Peter Rawlinson – Lucid’s CEO
Other new EV brands would imitate Tesla, notably Rivian and Lucid.
Rivian is also warning legislators not to give in to pressure from state dealer associations “looking to entrench dealer protections that block competition and ultimately harm consumers.
Source: AutoNews
A Declining Added Value
There is a good argument to make that the dealership system made a lot of sense when it was established. People were not necessarily familiar with cars and brands and had limited access to reliable information.
The dealership network also provided capital for the automotive industry to expand quickly in the post-war years up to the 1970s. Lastly, it created a dense network of places where customers could get test drives, repairs, and maintenance, supporting the growing adoption of cars into every aspect of the US society.
Today, car dealerships are more known for poor and aggressive sales practices, such as haggling, inflexible offers, predatory loans, and other behaviors that negatively impact customers’ experiences.
The auto industry has ranked among the FTC’s (Federal Trade Commission) top 10 most-complained-about topics over the last five years, including more than 104,000 complaints filed last year.
Source: CNBC
This came to the point where “car salesman” became something of a slur. Or as a 2019 CNBC article resumed it well: “Tesla’s move to online sales gives customers what they want: No car salesman.”
“We’re matching wits with a person who is trained to negotiate to get as much money from us as possible from us, who does it 24 hours and is most likely rewarded for doing so. That simply lends itself to a very uncomfortable experience.”
Jack Gillis – Executive director of the Consumer Federation of America.
A Brewing Legal Battle
While well established, the dealership system is relatively unique to the automotive industry. After all, a person can go to an Apple store or Best Buy to get a new Macbook, but no law regulates it.
The age of online shopping, app stores, and EVs is upending the auto industry, but not only that.
“All products will ultimately move online, and now it’s autos’ turn. It’s a natural progression given how much of the car shopping and buying experience already happens online, from research to price comparison to financing and paperwork.”
Paul Hennessy, CEO of Vroom, a used-car sales website
It is worth noticing that this status quo has been increasingly challenged before Tesla became the EV juggernaut it is today. For example, back in 2009, the Antitrust Division of the US Department of Justice was concluding in a dedicated report:
“This paper advocates eliminating state bans on direct manufacturer sales in order to provide automakers with an opportunity to reduce inventories and distribution costs by better matching production with consumer preferences.”
Nevertheless, the dealership associations, usually a powerful lobby, are fighting back.
Dealer associations are now proposing legislation to address issues of direct sales and warranty repair compensation, among others. Several states are also proposing laws to make selling EVs more complex for newcomers like Tesla and Rivian.
Source: Jalopnik
The legal fights can get even nastier, for example, Tesla suing Louisiana, challenging its ban on direct vehicle sales to consumers.
Volkswagen Joining The Fray
That growing EV companies like Tesla actively bypassed dealerships, and even challenged dealership law is one thing. But seeing the second-largest automaker company in the world, Volkswagen, do it is another.
Of course, technically, Scout Motors is its own brand without established dealerships, as Volkswagen recently revived it. But obviously, dealerships will have none of that from Volkswagen.
The National Automobile Dealers Association said it and state associations “will challenge this and all attempts to sell directly in courthouses and statehouses across the country.”
This comes in a period of turmoil for Volkswagen, with the need to switch to EVs, and 3 factories closing in Germany, the first time this has ever happened. So more control over which model to push, and becoming more profitable might be a matter of survival for the Volkswagen Group.
“I think it’s critical moving into the future in unstable environments to control your customer, control your margin, control your operational excellence.
We expect Scout will have around three dozen U.S. retail centers when sales begin in 2027, eventually rising to 100.”
Scott Keogh said – Scout Motors CEO
Conclusion
The car dealership model is likely to last a while, as it is so firmly entrenched in law and the sales model of the world’s largest automakers. However, relying exclusively on lobbyism and political pressure can only last so long.
So, it is most likely either a dying model or one that needs to be reinvented. At the very least, car buyers would need to perceive it as a positive experience instead of one where they feel cheated or bullied. And maybe rebuild the relations with automakers so they, too, perceive that the relationship with dealerships is not just a costly relic of the past.
Investing In The Automotive Industry
The automobile industry is seeing more change in the last decade than it did in the past 5 decades before. The arrival of EVs, as well as many new brands, has completely changed what makes a new car model successful or not.
Now, with the global arrival of Chinese cars, a new challenge has arrived for legacy Western manufacturers. So maybe seeing dealerships disappear or change is not so surprising either.
You can invest in automakers through many brokers, and you can find here, on securities.io, our recommendations for the best brokers in the USA, Canada, Australia, the UK, as well as many other countries.
If you are not interested in picking an automaker stock, you can also look into automotive industry ETFs like the Fidelity Electric Vehicles and Future Transportation ETF (FDRV), the Simplify Volt RoboCar Disruption and Tech ETF (VCAR), or the First Trust NASDAQ Global Auto Index Fund (CARZ) which will provide a more diversified exposure to capitalize on the quickly changing automotive industry.
Direct Sales Automotive
Tesla, Inc. (TSLA -1.93%)
The leading EV company barely needs to be presented at this point. Tesla has been at the forefront of making EVs “sexy” and high-performance, whereas previous efforts had focused on low-cost, low-performance “golf carts”.
In Q3 2024, Tesla sold 462,890 vehicles. It is still regularly on top of the most sold EV model globally and in the US, including the Cybertruck despite (or thanks to?) its unique design and look.
The company also sold a massive 6.9 GWh in energy storage products (batteries).
Innovation
It has also been very much in the news recently, with a series of big announcements at the “We, Robot” event we described in a dedicated article: “Tesla (TSLA) Spotlight: Autonomous Taxis, Humanoid Robots, and the Long-Awaited Semis”. In short:
- Art deco self-driving robotaxis, coming in both 2-seaters and 20-seaters (robovan).
- If approved by the regulator, this could become very quickly the largest part of Tesla’s business, as well as boost the sales of regular Tesla, getting back to the situation a few years ago where the company would sell as many cars as it could produce.
- Optimus humanoid robot is likely to first be an extra “free” labor force for Tesla factories.
- Successful testing by DHL of the Tesla Semi, the long-awaited heavy-duty truck.
Source: Shop4Tesla
Politics
Meanwhile, Tesla is still very much synonymous with its eccentric and controversial owner, Elon Musk. As Musk has fully endorsed Donald Trump in the run-up to the US election, it is yet to be seen if this will be a positive or a negative for Musk’s companies.
What is for sure, is that the Musk brand is still going strong for technical achievements, after the latest remarkable success of SpaceX, catching mid-air a rocket as large as a 20-story building.
Source: Tesla Hype
Tesla’s Future
If Tesla indeed wins the race to self-driving technology, it will likely also be a step ahead in other AI applications, like humanoid robots, turning it into an autonomy-focused company. Battery storage and solar energy are other fields in which the company could keep expanding.
So, in the long run, Tesla’s future will depend on its capacity to become more of a tech company and less of a car manufacturing company. This is especially true as the entire industry, including high-quality Chinese automakers, is progressively embracing EVs, making what made Tesla unique less special in the long term.
