Legality of Tesla's Store Model Being Challenged
Tesla Motors has not just wanted to reinvent the automobile, its business model of placing trendy and customer focused zero-pressure stores in highly trafficked retail venues flies in the face of traditional automotive franchising, and now dealers and officials in a few states are pushing back.
To date, the California electric car maker has 17 stores in the U.S., six pending, and is having to work with complaints in four states while more complaints may come in time.
Objections are based on varying laws either restricting or forbidding factory owned automobile stores in 48 states, and Tesla is reportedly working with objectors as well as it can on a case-by-case basis.
Complaints have included observations that Tesla sets a dangerous precedent overturning the specialized function that dealerships have long held as purveyors of a manufacturer’s vehicle products.
As factory owned stores, Tesla’s stores are also being said to represent unfair competition, threatening the franchise system, and – given they are like Apple stores in shopping areas – they are inconvenient for repairs and service although Tesla has a mobile service intended to get around that objection.
Since Tesla has been a niche company with all but zero actual deliveries for much of the first half of this year while in limbo between the discontinued Roadster and June-launched Model S, it has flown under the radar in some cases. Even so, automobile dealer associations and others have been looking askance or in cases have attempted action.
This year attempts to protest Tesla’s store model have come from the Illinois Secretary of State, the Greater New York Automobile Dealers Association, and state dealer associations in Massachusetts, and Oregon.
In other situations, such as in California, there is no legal conflict as long as a factory store is placed at least 10 miles away from a competing franchise. Since Tesla is a newcomer, that was an easy law to comply with.
In short it is a patchwork quilt of laws Tesla must contend with, and it has been scrutinized by the National Automobile Dealers Association (NADA) and some legal authorities which would at best like to see the upstart go to a traditional dealer model if it wants to continue to do business.
Tesla narrowly missed being illegal in Colorado, but its one store opened in 2009 is grandfathered in although the state has since updated its franchise law to prevent factory further stores being opened in that state.
In 2010 a law suit that was later thrown out in New York against Tesla and the New York Department of Motor Vehicles said Tesla’s Manhattan store was illegal. It was only disallowed because the suit was filed after the expiration of a statute of limitations.
In June it was reported that a NADA legal representative thought Tesla’s store idea was “somewhat laughable.” Since Tesla sells a niche product, its actual threat was not perceived as great as say, if Toyota was to open a factory direct store down the street from an existing Toyota franchise.
But an attorney who specializes in working with auto dealers, Leonard Bellavia, was quoted by CNN Money saying dealers should take action for the precedent Tesla is setting. He also predicted Tesla will eventually be forced to conform, abandon its retail franchise stores, and adapt the traditional franchise model.
“The business model that works best is having the manufacturers focus on building quality products and the dealers focused on selling and serving the vehicles,” said the NADA in a statement.
It too predicted Tesla will in time reconsider its ways – aided to this decision no doubt by exerted pressure.
“Tesla may not yet recognize the value of the independent, franchised dealer system, but as its sales increase, NADA is confident it will re-examine its business model,” Montana dealer and NADA Chairman Bill Underriner said in a statement. “Other companies such as Daewoo did. All companies should be complying with existing laws in the same way dealers are required to.”
But Tesla says it is determined to continue adding Tesla stores to select spots on the map, having announced six news stores this fall, and is thus far working with specific complaints in various localities as they come.
Tesla has been dedicated to the maverick model for a while now, and announced its hiring of veteran Apple marketer George Blankenship, early in July 2010. He was at the time touted as enabling Tesla to carry forward successful principles that work for marketing computers.
“Tesla is revolutionizing the auto purchasing experience. Unlike traditional car dealerships, said Tesla in a statement, “Tesla stores are designed to be stylish and inviting.”
In response to objections, Automotive News quoted Blankenship as saying Tesla’s mindset is it will do what it takes to make its stores legally complaint and its high hopes fly.
“We do what we’re capable of doing, and we do whatever they let us do,” said Blankenship. “It’s unique for each location. If we can’t be a dealer in a mall, we won’t do reservations on-site. We tell people where to go on our Web site to make a reservation.”
Perhaps making a subtle distinction to its printed statements, Blankenship says the “last thing on our agenda” is to change the automotive retailing industry.
Tesla has said its locating stores in high-traffic retails areas is an attempt to put the Tesla concept in front of people who may not even be shopping at the moment for a car.
Blankenship said it is not motivated to overturn laws, or change how other brands sell their cars. It is mainly concerned with how it sells its own cars, and says its store model is how it wants to do so.
But the issues have been brewing for a while, and Tesla is now delivering cars, with big plans for the future, so we shall see where this goes.