Dealers seen challenging Tesla shift to online sales

Tesla Inc. is dropping one controversial retail model in favor of another.

The disruptive California electric vehicle maker said last week that it will close most of its 120 factory-owned stores — a distribution concept that has challenged the traditional U.S. retail system for years. And in their place, Tesla will move to online sales only.

The new plan is already raising questions. Unclear is how state motor vehicle rules will respond to an automaker selling vehicles online, direct to consumers, without local stores or service centers.

Jim Appleton, president of the New Jersey Coalition of Automotive Retailers, labeled Tesla's online plan "not a well- considered business strategy."

"The motor vehicle licensing and franchise laws in New Jersey seek to promote investment in an extensive network of independent, neighborhood new-car dealers," Appleton wrote in an email to Automotive News.

"Regulators want to know who is doing business, extending credit, taking personal information and conducting highly sensitive financial transactions in their state," he said.

Don Hall, CEO of the Virginia Automobile Dealers Association, said he has a problem with Tesla's online selling plan. Virginia's franchise law requires a company to have a physical presence in the state to sell online, he said.

Tesla CEO Elon Musk "is going to have problems in a lot of states from a licensing standpoint," Hall said in an interview Friday, March 1.

Tesla was clear in its announcement last week that its chief motivation is to reduce costs. The strategic play came as the automaker revealed that its eagerly anticipated $35,000 Model 3 will go on sale as early as this month. The base Model 3 arrives as Tesla faces growing competition, including Audi and BMW.

"Shifting all sales online, combined with other ongoing cost efficiencies, will enable us to lower all vehicle prices by about 6% on average, allowing us to achieve the $35,000 Model 3 price point earlier than we expected," Tesla said in a statement.

"Over the next few months, we will be winding down many of our stores, with a small number of stores in high-traffic locations remaining as galleries, showcases and Tesla information centers," the company said. "You can now buy a Tesla in North America via your phone in about one minute, and that capability will soon be extended worldwide."

The move could trigger pushback from dealer groups but also stir industry interest in more digital retailing. A transition to online sales is in motion, with automakers and some retailers working to establish a nationwide digital retailing purchase process. Some dealers see the model as a means to faster, easier car buying.

But Tesla should expect challenges, Morningstar analyst David Whiston said.

"I like the idea of making car buying easier, though laws are not written for today's tech, so it's not quite as simple in some states as buying the car on your phone in one minute as Tesla said," Whiston said.

Tesla has butted heads with states and franchised dealers for years over its model of factory-owned stores — a concept that many state laws have long prohibited.

"Our understanding of [Tesla's] announcement is that nothing has changed with regard to direct sales," National Automobile Dealers Association spokesman Jared Allen told Automotive News.

Franchised dealers across the country offer online sales and financing via their websites, Allen said.

"But the reality is that the vast majority of consumers want to do some combination of both online and traditional shopping for new vehicles," he said.

The competition will "have to decide whether to try to unwind Tesla's advantage, or quickly finalize their digital retailing selling process," said Karl Brauer, executive publisher of Autotrader and Kelley Blue Book. "They'll likely do both."

Many of Tesla's roughly 120 U.S. stores are in malls and shopping centers. Unlike traditional auto dealerships, Tesla stores have small real estate footprints and lack a service center and finance and insurance department.

To allay consumers' concerns about buying a vehicle unseen without test-driving it, Tesla is offering a seven-day, 1,000-mile return policy.

A generous return policy might not be enough to persuade some buyers.

"You are still asking someone to take an upfront obligation of $35,000 to about $150,000 without first doing a free test drive," Whiston said. "That's very different from buying clothes on Amazon."

Melissa Burden contributed to this report.