Direct Sales vs. Dealerships: How They Impact Consumers
When it comes to buying a car, consumers today have more options than ever before. But, your buying experience can vary greatly depending on which brand you’re purchasing. Traditional dealerships have long been the go-to for car purchases, but the rise of direct sales models, popularized by companies like Tesla and Rivian, is reshaping the automotive landscape.
Each sales model comes with its own set of advantages and challenges for consumers. Understanding these differences is key to making an informed decision when deciding which brand you will buy, and which route to pursue. We’ll get into the pros and cons of both.
Something that makes the U.S. unique is that until recently you could only buy directly from dealerships. Globally, car purchasers generally have had the option to buy from either dealerships or directly from manufacturers in many other countries.
History of the U.S. Car Dealership
The origins of U.S. franchise laws are closely tied to manufacturers leveraging their pricing power and other competitive practices, which threatened to push out independent dealers. In the early 20th century, as the automotive industry grew, manufacturers often used aggressive tactics to dominate local markets. They would undercut prices, open company-owned dealerships in competition with independent dealers, or suddenly terminate dealer agreements, leaving these businesses at a severe disadvantage.
Independent dealerships, which invested significant resources in facilities, inventory, and marketing, found themselves vulnerable to the whims of manufacturers. State governments intervened to protect these businesses, which were important contributors to local economies and job creation. Franchise laws were introduced to ensure fair treatment and limit manufacturers' ability to engage in predatory practices. These laws required automakers to work through independently-owned dealerships and established regulations for dealership agreements, including termination and competition restrictions.
Interestingly, in many other countries, automotive manufacturers have the flexibility to sell vehicles directly to consumers, either through company-owned stores or online platforms. This direct-to-consumer (DTC) model allows manufacturers to control the sales process and pricing more tightly.
In the U.S., however, state franchise laws have historically restricted such practices. The rise of electric vehicle manufacturers like Tesla, which employs a DTC model, has challenged these traditional frameworks, leading to legal disputes and gradual shifts in some state policies. Nonetheless, the entrenched franchise system continues to differentiate the U.S. automotive market from its global counterparts. Even when old brands, such as the revitalized Scout, return with an all-EV lineup.
Key elements of these laws included:
- Prohibition of Manufacturer-Owned Dealerships: Laws often banned automakers from operating their own retail outlets, ensuring competition came solely from independently owned businesses.
- Good Cause Termination: Manufacturers couldn't arbitrarily cancel franchise agreements; they had to demonstrate "good cause," protecting dealers from sudden disruptions.
- Territorial Exclusivity: Dealers were often given exclusive territories to protect them from competition, both from other dealers and directly from manufacturers.
The system aimed to balance the interests of manufacturers, dealers, and consumers, creating a regulated framework that allowed local businesses to thrive. While this model has its advantages, critics argue that it limits competition, drives up prices, and stifles innovation..
Evolution of the Direct Sales Model
The direct sales model eliminates dealerships, allowing consumers to purchase vehicles directly from the manufacturer. This approach has gained traction, particularly among electric vehicle (EV) makers and new automotive entrants looking to disrupt the status quo.
Tesla was the first to take this on in modern time and has since been followed by other startups like Rivian, Lucid and others. Many of them have also taken on not just sales, but the ongoing service, of these vehicles as well. Which is part of the reason the startups have been so focused on Over-The-Air (OTA) updates and other advances that help minimize needing to bring the vehicle somewhere for service.
However, one of the recent EV startups, Fisker, had planned to do direct sales, then pivoted to partner with dealer networks for sales and service, before unfortunately going bankrupt.
Direct Sales Model Pros and Cons
Buying direct from the vehicle’s manufacturer gives buyers several advantages:
- Transparent Pricing: One of the most attractive features of direct sales is transparent, fixed pricing. This eliminates the need for haggling. Which many consumers find stressful and confusing. You pay the same price as everyone else for the same model. There are occasionally seasonal specials or discounts, but it’s an experience more similar to buying an iPhone or a mac at an Apple store, the price is the same for everyone.
- Uniform, but Personalized Experience: Since the manufacturer controls every aspect of the transaction, from sales to service, the customer experience tends to be more uniform and brand-focused. With direct sales, the purchasing process is handled by the manufacturer, allowing for a more customized and consistent experience. Buyers can configure their vehicles online, choosing everything from the color to advanced features.
- Simplified Process: The streamlined nature of direct sales is another major benefit. Online ordering and direct delivery options save time and effort, making the car-buying process more convenient. When I bought a car recently, I was in and out to pick up my car in under 5 minutes. Most of the documents were already completed online in advance. I just had to sign three documents in person and then hopped in my new car and drove off.
There are still some disadvantages of the direct sales model, which can become acute, depending on where you live:
- Limited Physical Presence: Direct-sales companies often have fewer service centers and showrooms, which can be inconvenient for consumers who prefer in-person interactions or need quick repairs.
- Lack of Local Advocacy: Dealerships often act as intermediaries who advocate for customers during warranty claims or disputes. With direct sales, consumers deal directly with corporate customer service, which may not always prioritize individual needs.
- Potential Delivery Delays: Ordering directly from the manufacturer can lead to long wait times, especially during periods of high demand or supply chain disruptions.
Pros and Cons of Buying from a Dealership
Dealerships have been the only option for car sales domestically for decades, offering a more localized and immediate purchasing experience. While they’re adapting to the challenges posed by direct sales, dealerships are still the dominant model in the automotive market. They offer:
- Immediate and Widespread availability: Dealerships are locally distributed, making it easy to view, test-drive, and purchase vehicles in person. The hands-on experience is also great for buyers who want to compare models. Dealerships often have vehicles in stock, allowing for same-day purchases compared to direct sales which more often are built to order.
- After-Sales Support: Dealerships provide a robust network for repairs, maintenance, and warranty claims. This local support is often more accessible and timely compared to direct-sales companies.
- Price Negotiation: For those skilled at negotiation, dealerships can offer opportunities to get a better price or secure additional perks, such as free maintenance plans or extended warranties.
However, those advantages also bring with them some negatives:
- Price Negotiation and Opaque Pricing Practices: The negotiation process can create disparities in pricing between buyers, and additional fees or markups can lead to confusion about the final cost.
- Potential Upselling: Dealerships may push optional features, services, or financing options that increase the overall cost of the vehicle. I’ve personally had the misfortune of trying to be upsold repeatedly even when I shared I was not interested in certain things when buying a car.
- Inconsistent Customer Experience: Service quality varies significantly between dealerships, which can result in mixed experiences for consumers. Finding a dealership close to you that has both a great sales and service experience might be a challenge.
Conclusion: What Is The Future of Car Buying?
The growing competition between direct sales models and traditional dealerships is ultimately a win for consumers. Automakers and dealers alike are being forced to innovate, improve customer experiences, and offer better pricing transparency.
While direct sales have disrupted the status quo, traditional dealerships’ adaptability and extensive networks ensure they remain relevant. As both models evolve, consumers can expect greater convenience, more competitive pricing, and broader access to cutting-edge automotive technology.
Whether you prefer the tech-savvy simplicity of direct sales or the hands-on service of a local dealership, understanding the pros and cons of each will help you make the best decision for your next vehicle purchase.
