Tesla’s strategy of selling its own cars through its own Tesla-branded stores doesn’t sound all that controversial. Gadget makers like Apple (AAPL) have long directly sold their computers, phones, and tablets in shopping malls and downtowns across the country.
However, car dealers and some auto makers oppose Tesla’s sales model and have successfully lobbied a handful of states to block car makers from directly selling cars to customers. In those states, like Texas, Tesla builds showrooms where customers can learn about the cars but can’t buy them in the store.
But why does Tesla (TSLA) go to such lengths to buck the traditional independent dealer system? In recent years, the company has spent heavily building new stores around the world.
On Tuesday, Tesla’s general council, Todd Maron, gave a detailed explanation before the Federal Trade Commission about why Tesla needs to sell its cars itself. The FTC’s opinion is that states shouldn’t block direct car sales.
Maron gave these seven reasons why Tesla wants to sell cars in an entirely new way:
1). Go to the customer: Traditional independent dealerships are usually built on large plots of land in out-of-the-way locations, noted Maron. In contrast, Tesla stores are better off in areas that have a lot of foot traffic, he said. Some are in places like malls and city centers. The stores also benefit from being much smaller and more intimate.
That’s because potential Tesla customers need to learn about both Tesla and electric cars, explained Maron. Electric cars are new technology, and Tesla stores need to be both education centers and conveniently located, he said. When Apple built its stores, Steve Jobs used similar reasoning about wanting to educate customers about his company’s unusual gadgets.
2). No inventory: Traditional car dealers focus on inventory. Once they get a car onto a lot, they move it out as quickly as possible. But Tesla cars are made and sold in a completely different way. Oftentimes, customers customize their cars like picking paint colors and choosing accessories. And because Tesla shipped about 50,000 last year, customers usually have to wait months to get their cars.
3). Education process: Unlike customers at traditional dealers who come in to get the lowest price, potential Tesla customers go into Tesla stores to learn about the technology. Tesla reps often spend hours with customers to teach them where they can charge Tesla cars, the size of government electric car incentives, and how much they can expect to pay in electricity versus gas. Car sales staff at traditional independent dealers would likely be unwilling to spend the time to educate the customer about Tesla cars, said Maron.
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4). Different business model: Tesla makes a profit from selling its electric cars. But traditional dealers make more money from selling services, tuneups and add-ons than they do from selling cars, said Maron. Electric cars have fewer service requirements like oil changes than gas-powered cars do.
5). Advertising: Traditional auto dealers rely on auto makers to fund their advertising, said Maron. But he said that Tesla doesn’t do traditional advertising and wouldn’t let another company do it for them. That’s just another reason why the traditional dealer model isn’t compatible with Tesla, noted Maron.
6). Dealers won’t make money: Perhaps the most compelling reason, said Maron, is that traditional franchise dealers won’t be able to make money from selling Tesla’s cars. Dealers mark up cars they sell to make a profit. But a customer could just go online, or to a neighboring state, and buy a Tesla car without the additional markup.
7). Gas conflict of interest: Tesla is striving to replace gas-powered cars with its electric cars, and promotes its models as superior to those with internal combustion engines. However, the vast majority of cars sold through dealers are gas-powered cars. Tesla’s Maron said that dealers, therefore, wouldn’t be the good advocates for electric cars that Tesla needs.