Why automakers don’t want to be their own dealers

The drive by Tesla Motors to sell its cars by bypassing traditional auto dealers has opened a legal and public relations war in several states. In every case, the arguments follow the same script: Tesla says it needs the freedom from tradition to successfully sell electric vehicles, and dealers say the system protects customers from abuse by far-off corporations.

What's been ignored so far is a more basic question of whether having dealers or the factory sell cars makes better business sense, something that can't be tested in the United States, where franchised dealers control the market for new cars. But it can in Germany, where factory-owned dealers exist side-by-side with independent stores — and the results may give Tesla pause.

As Reuters reported, Mercedes-Benz' parent Daimler is considering shedding some of its company-owned dealerships in Germany to better compete with its main rivals, Audi and BMW. Daimler's corporate dealers account for more than half of Mercedes sales in its homeland, while Audi's stores handle only a quarter of its volume and BMW's take an even smaller fraction.

The reason for Daimler's strategy? Running dealerships costs too much; Daimler's dealership profits are slim to non-existent, in large part because the workers earn more than at competing franchised dealers and often sell fewer cars per worker. (German laws make it far harder to cut jobs without paying out massive severance checks). Reuters notes that BMW has mulled similar changes even though it has far fewer corporate shops and better sales.

Those lessons jibe with the experience of U.S. dealers. Those gleaming vehicle palaces of stone and steel that carpet many American suburbs aren't paid for by selling new cars, which has devolved into a break-even business at best for many stores. Dealers rely on their other businesses — used cars, parts, service and especially the finance/insurance office — to make most of their profits, with some help from automaker bonuses for meeting monthly sales goals.

And the few times automakers in the United States have experimented with factory stores, the results have ben similar: It turns out that having workers whose pay depends on sales, who know customers personally, who can anticipate demand and who aren't shuffled around or overruled by a remote marketing manager sells more cars.

The Apple store model works when a company like Apple has a near-monopoly on a market, with items that have few options. Automakers not only compete against each other but their own business pressures; profits come from pushing as many cars as possible out of their factories. Tesla's move to follow Apple makes sense as long as its the only provider of electric luxury sedans. The bigger challenge will come when it has to fight several thousand dealers offering competing models from established players, all unwilling to take no for an answer.

Photo: Reuters