Dealerships Are 'Terrified' Direct Sales Might Be The Future

Direct sales are gaining traction in more U.S. states. Dealerships aren't ready to accept defeat just yet.

Photo by: Scout Motors

Rob Stumpf

By: Rob Stumpf

Apr 28, at 11:00am ET

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Dealerships are "terrified" of direct-to-consumer sales opening to any manufacturer.
28 states still restrict or outright ban direct sales.
New EV companies have taken advantage of the lack of franchise models, and that same workaround could eventually also apply to Chinese car companies.

For decades, buying a new car in America followed the same recipe: go to a dealership, take a car for a test drive, and then watch some finance manager draw the four quadrants out on a piece of paper while negotiating the final price. This method is so deeply ingrained with car buying in the States that it feels pretty much natural.

That's changing, though, especially as newer automakers without established dealer networks set up virtual shops so their customers can buy a new car without ever experiencing the sales pressure that comes with going to a physical lot. Dealers aren't happy about it, and are continuing to fight against it, as Automotive News reported.

Photo by: Scout Motors

The shift to direct-to-consumer sales isn't new. Tesla kicked that into gear years ago as it muddled through state-level regulatory hurdles to gain the right to sell its cars directly to consumers, without dealers. But the battle is entering a new phase, as Rivian managed to muscle out win in Washington last month.

Then there's Scout, which has more lawsuits filed against it than it has cars on the road. That fight is a bit different than the one Tesla and Rivian continues to fight since Scout—despite being an independent brand with no established dealerships—is backed by the Volkswagen Group.

An ongoing fear in the industry is that if Scout succeeds in branching away from its parent company and is able to get around dealer-franchise laws, it could set a precedent for other established automakers to follow suit with their own offshoot brands. That is the scary part for dealerships that rely on legacy brands being locked into franchise laws.

From a recent report by Automotive News on the topic:

[D]ealer associations have become concerned in recent years that those carve-outs might grow into something broader, in which traditional automakers might try to circumvent their franchised dealers, particularly to sell EVs.

Automakers generally have maintained that they support their franchised retailers. In the Washington state case, automakers and the dealer association ultimately took opposite sides.

Legacy automakers opposed the bill, arguing it would give EV competitors an edge by allowing direct sales. Honda, Ford, General Motors, Toyota and the Alliance for Automotive Innovation testified against it.

The bill “signals a slow erosion of the franchise system,” said Craig Orlan, Honda’s director of state government affairs, in committee testimony in March.

A whopping 28 states have outright bans or restrictions on direct-to-consumer sales today. Some states also have exceptions only for Tesla. And in the states that outright ban sales, automakers like Tesla circumvent it by processing the sale as an out-of-state transaction, which has proven to be a cumbersome, but effective, workaround.

This same workaround could theoretically be used by Chinese automakers if—or when—it becomes viable to begin selling vehicles in the U.S. Given that the vast majority of these brands have no direct or affiliate relationship already in the States, it could allow for easier consumer access to the vehicles.

University of Michigan law professor, Daniel Crane, described dealers as "most terrified" of direct sales being opened more broadly during an interview with Automotive News.

“Every poll shows that voters—from liberal Democrats to conservative Republicans—overwhelmingly say, ‘Why shouldn’t I have a choice as to how I buy my car?'"

Dealerships aware of the direct-to-consumer threat see it for what it is: a crack in the system that could result in the dealership model being forever reformed. Granted, it's unlikely that any sort of major change will end dealerships as we know them today, but with 4% of the market being captured by Tesla, Rivian, and Lucid today, that impact has room to grow.

What do you think?

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Consumers have shown a large amount of support for the ability to choose how (and from who) they buy a new car. Restrictions in place clearly have workaround today, and if those are succeeding in bypassing the existing model, maybe reform isn't such a bad idea after all.

Correction May 5: An earlier version of this article said that a ruling last month deemed that Scout's direct-to-consumer sales plan violated California law. That is incorrect. The lawsuit filed by the California New Car Dealers Association has not been decided either way.