In comments at the Automotive Press Association on Wednesday, Jeff Carlson, chairman of the National Automobile Dealers Association, stated that consumers would much prefer to do business at traditional auto dealerships than to do business with Tesla’s retail model. Carlson’s statements were based upon the idea that dealerships often “discount” their prices and allow haggling, and that this somehow results in vehicles being cheaper when bought through middleman dealerships than when bought through a vertically integrated model which removes the middleman entirely. He cited a study which concluded that intra-brand competition from nearby auto dealers can result in decreased prices for new car shoppers.
Of course, there have also been studies showing that Carlson’s belief about consumers’ preferences is quite off-base. Polling data collected by Gallup for over 40 years ranks professions by the public perception of their honesty. The most recent data available, from December 2015, puts car salesmen near the bottom of the list, ahead of only “lobbyists” and tied with “members of Congress” and “telemarketers” with only 8% of the country considering car salesmen as above average in honesty and ethics.
Why would this be? Perhaps the aspect of dealerships which Carlson considers a strength is actually a weakness. Customers want to know they are being treated fairly, that they are getting the best price available on the car they purchase, and they don’t want to have to put in a lot of extra work to make sure this is the case. The growing popularity of “no-haggle” dealerships is an example of this. When the price is the price, then customers know nobody else got a better price than they did. This was the reason for Elon Musk’s recent email to Tesla employees stating Tesla’s take on when discounts are acceptable – only on floor models, demo cars and cars with damage before delivery.
This all fits into the rationale behind Tesla’s direct sales model to begin with. Tesla is a different kind of company and needs to offer a different kind of experience, to free themselves from the baggage of the past. Many observers have noted that the electric car shopping experience at traditional dealerships is generally quite poor, with dealers not prominently displaying electric models, steering customers away from them, not offering test drives and otherwise having little knowledge about and acting dismissively towards electric vehicles. Perhaps this is due to institutional inertia, ignorance of the new technology, or a desire to continue lucrative service contracts for easy, common jobs like oil changes and brake replacements, which is where traditional dealerships make most of their money and which are not required or much less common for electric vehicles. This is the hidden reason behind Carlson’s focus on sales price of vehicles – while dealers make an average of ~2% profit on car sales, they make over five times that margin on service, according to NADA’s own numbers. Tesla, in contrast, believes that “we should never attempt to make servicing a profit center”. And, overall, customers have responded well to this model. Tesla’s customer satisfaction scores are consistently some of the highest ever seen.
So, if it’s Carlson’s belief that Tesla’s dealership model is substandard and that consumers would much prefer the traditional dealer model, why does he continue to fight it? If his sales model is superior, surely it will win out in the end in a fair fight. After all in a recent “secret shopper” survey measuring how well various auto brands conform to the traditional dealership sales model, Tesla ranked dead last, so he shouldn’t have anything to worry about, right?
Consumers, if you agree with Carlson on this one, feel free to leave a comment below about your enthusiastic support for the traditional dealer model.