Case Study

Tesla

Excellence Test Score 18/26

Becoming a cult company under a cult leader.

End of the Dealership? Why Tesla Will Change the Way We Buy Cars

Whether you’re in the market for a family run-around or a statement sports car, shopping for a new car is one of life’s most exciting purchases.  You probably have a good idea of the make and model you are after even before you start looking.  With so much information at your fingertips online, including specifications, reviews and price comparisons, the days of visiting multiple dealerships for a series of test drives are over.  You know what you want and what you are prepared to pay.

Yet for most of us the car-buying journey still ends with a visit to a dealer.  This is where the pleasure of buying a new car often ends.  Confronted by a pushy sales service, endless form-filling and sales people who try talk you into extras you don’t need (or even a different car altogether), there’s no wonder so many of us are put off by the thought of going to a dealership.

Research conducted by global consulting firm McKinsey found that a decade ago consumers in America would visit five dealers before making a purchase, whereas today they visit just 1.6 on average.  They also discovered that while 85% of customers still visit dealers, 25% are not happy with the dealer experience.  In addition, more than 33% would consider buying a car online.

It’s statistics like these which have led many people to ask:
“Why can’t I just buy the car direct from the manufacturer?”

We live in an age where we’re keen to simplify the shopping process and happy to cut out the middlemen.  When we know which car we want, the simple solution would be to buy directly from the manufacturer.  But visit any manufacturer’s website and rather than a ‘buy now’ button you’re more likely to see a ‘dealer locator’ button.

Why Car Manufacturers Don’t Sell Direct

There are many reasons why manufacturers traditionally don’t sell directly to consumers, some financial, some practical, some driven by necessity and some by legislation.  But is the traditional sales model still relevant today?

Let’s look at some of the main reasons manufacturers use dealers:

  • Different Skills
    Making a car and selling a car are very different disciplines.  Traditionally, those manufacturing cars didn’t have the skills required to close the deal.
  • Cost of Creating a Showroom
    Showrooms require a lot of land.  Add to this the cost of building the showroom and we can see why car manufacturers might have been happy to let someone else shoulder the burden.
  • Guaranteed Cash Flow
    Car manufacturers receive payment for vehicles when they hit the forecourt not when they are bought by the consumer.  So, dealerships represent a guaranteed cash flow for manufacturers even if consumers aren’t buying.  This has been particularly important in times of recession when dealerships have helped keep manufacturers afloat.
  • Local Market Knowledge
    Different parts of the country have different needs and tastes when it comes to buying a car.  Local dealerships are able to respond to local desires by stocking the cars they know will sell well.
  • Local Customer Service
    Dealerships provide a great after-sales service, offering customers regular services and responding to problems if they arise.  Manufacturers would prefer to let dealers handle this aftersales process.

Are these still valid reasons?  Some perhaps.  But as we saw above, many consumers would consider buying a car online and this would negate many of the reasons for selling via a dealer.  One manufacturer proving this is the American manufacturer of electric cars, Tesla.

Introducing Tesla

Founded in 2003, Tesla produced its first electric sports car in 2008.  In 2012 it launched its electric luxury sedan: the Model S.  This became the world’s best-selling plug-in electric car in both 2015 and 2016 and Tesla’s global sales hit 150,000 units in late 2016.

The Model S provides a week’s worth of driving from each charge with a nationwide network of solar-powered charging stations.

In a time when we’re being forced to find eco-friendly alternatives to fossil fuels and consumers are eager to cut the cost of fuel consumption, it’s easy to see why a reliable and aesthetically attractive electric car would be popular.  And unlike many eco-friendly alternatives to traditional products, Tesla’s Model S doesn’t compromise on performance.  It goes from 0-60 in under three seconds and is regarded as the safest car in its class.

An Innovative Approach to Sales

What’s really interesting about Tesla is its innovative sales process.  Rather than using dealerships, Tesla sells direct to the customer.  If you want to own a Tesla you will need to visit the manufacturer’s website where you can order and customise your vehicle.  The car is then delivered to your door and software updates are sent wirelessly.  It’s a process that eradicates the need for a dealer.

Tesla’s dealer-less sales process hasn’t been popular with everyone however.  In the USA, it is illegal in many states for car manufacturers to sell direct to consumers.  It’s a historic set-up from when car manufacturers and dealers first established their franchise models.

So why doesn’t Tesla simply follow the accepted route of using dealerships? There are a number of reasons:

  • Better customer experience
    Tesla knows that many consumers don’t like the process of visiting a dealership.  They want the buying process to be enjoyable.
  • Better product knowledge
    Selling an electric car is different to selling a traditional car.  There is an education process to help overcome the objections consumers might have.  The sales people working in dealerships are perhaps not best suited to promoting the Tesla.
  • Customisation
    One of Tesla’s key selling points is the ability to customise the car.  They therefore don’t have an inventory to sit on dealership forecourts.
  • Technology
    The technology behind Tesla means there are fewer service requirements, so the consumer doesn’t need to rely on a local dealer for services or updates.
  • Control of Advertising
    By selling direct Tesla can keep control over its advertising message.

For these reasons it makes sense for Tesla to sell direct to consumers.  But for consumers who want to see the car up close before committing to the purchase, Tesla has introduced a handful of showrooms or ‘galleries’.  However, these have more in common with a boutique fashion store than a traditional dealership.

Often situated in shopping centres or high-end malls, Tesla’s galleries usually feature just one car.  The purpose of the showroom isn’t to provide a hard-sell or even to persuade shoppers to join a mailing list; they are purely to educate people about the benefits of electric cars and the Tesla brand.

The Future of Car Ownership

It’s certainly a ground-breaking model but everything about Tesla is innovative.  As we look for increasingly creative ways to car ownership, it’s a model that other car manufacturers will one day adopt.

Perhaps soon we’ll be able to visit the Ford Store or the Audi Store in the same way that we currently visit the Apple Store or the Nike Store.

What can manufacturers learn from high-growth industries?

The contents of the Excellence Test have been distilled from extensive study of more than 50 high-growth companies from both within and without the manufacturing industry.  High growth often comes from the tech industry, but you don’t need to be online or work out of swanky offices – many of the core fundamentals born from these industries can be applied to manufacturing and industrial companies: