Here’s an intriguing supply chain question: When should a firm sell directly to customers and when should it go through an independent retailer? Obviously, this isn’t a clean either/or question. Nike, for example, has its own stores as well as selling through a variety of different retailers. Of course, Nike stores are as much about marketing — showing all things that can be bought with a swoosh on it — as dramatically increasing the firm’s sales. Apple Stores, on the other hand, are very much above moving merchandise and, I suspect, have really punished many small dealers that have long specialized in Apple products. It is not fair to describe the Apple Store as being the only place to buy a Mac, but it is likely the first place that most people think of.
What go me thinking about this is a recent story about Tesla Motors, the Elon Musk’s electric car company (Car Dealers Sue Tesla, Citing State Franchise Laws, NPR, Nov 9). Tesla’s cars are unconventional and it turns out their distribution strategy is as well. As opposed to signing up franchisees across the nation to be dealers, Tesla has opted to open its own stores in malls. That is leading to complaints that they are violating state franchise laws.
Robert O’Koniewski, the executive vice president of the Massachusetts State Automobile Dealers Association, is suing Tesla for opening a store in a local mall.
In Massachusetts, franchise law 93B prohibits a manufacturer from owning a dealership, O’Koniewski says. An auto dealer association in New York is also suing Tesla.
Typically, car manufacturers build the cars, then ship them out to local car dealers, which have to meet the various manufacturers’ standards. …
Each brand represents another manufacturer that can require expensive equipment and training. Not having to meet those various needs, O’Koniewski says, gives Tesla an unfair advantage.
“Those dealers are investing millions of dollars in their franchises to make sure they comply with their franchise agreements with the manufacturers,” he says. “Tesla is choosing to ignore the law and then is choosing to play outside that system.”
Tesla insists it isn’t breaking the law, in Massachusetts, New York or anywhere else. But it is clearly trying to play outside the franchise system.
Jeremy Anwyl, vice chairman of Edmunds.com, thinks that’s the real issue.
“Let’s say consumers really liked buying from a factory store. That would put dealers in a tough spot because they’ve been saying for years that the franchise system is actually good for customers,” he says.
So would consumers be better off buying directly from car manufacturers? The answer is not immediately clear. It would seem that cutting out the middle man should result in lower prices because it would eliminate the middle man’s profit as well. That would be true if demand were really elastic and the market was competitive. However, if the firm’s products are unique and customers (or at least a large segment of them) aren’t very price sensitive, then prices may not come down much at all. To spell that out for you, Apple Stores have obscene sales per square foot numbers.
There is also the question of cost. O’Koniewski is right that dealers have to meet at time onerous standards, but it is not clear that a company-owned store would be exempt from these. If the market demands a certain amount of amenities or technician training, a company-owned store would also have to supply them. Arguably an independent dealer, who can build scale across several brands, may be better able to provide these than a store dedicated to one brand. That is, the dealer might need to have a separate showroom for each brand, but it can pool back-office functions, have more alternatives for using trade ins, consolidate local media buys and so on.
That said, it is not obvious that state franchise laws are misplaced. Given that car manufacturers once found it advantageous to franchise, an existing franchisee could be at a serious disadvantage if it had to compete with a factory-owned store. The carmaker would have an incentive to favor its own store when it came to allocating cars. Further, the factory-owned store could likely get better financing. Hence, it would almost certainly be able to offer a better selection of vehicles.
Politics also comes into play. The typical state legislator likely has several car dealerships but very few car plants in his or her district. That makes for a relatively straightforward case for why dealerships deserving protection from big car companies.
Note that saying existing franchisees face risk from carmakers acting opportunistically is not the same as saying that a new entrant should be precluded from opening its own stores. As long as the only way to buy a Tesla is from Tesla the concerns of competing on a less than level playing field are irrelevant. Further, I am not sure that many conventional dealers would want to sign up with Musk and Company right now. Electric cars are a niche product for now and Tesla has a pretty sizable waiting list. I would guess that each new store Tesla opens is expected to lose money for a while. They may be taking orders, but it’s going to be while before they are delivering cars and cashing big checks. An independent franchisee may not have the stomach for that.