TSLA Stock: Tesla Must Face Dealer Model Dilemma

Tesla Motors (TSLA) is making headlines again, but not because it won another auto industry award. This time, the Tesla news is all about the company’s fight with several state governments over its direct-sales model, a model which cuts out the traditional auto dealer middleman.

tesla-tsla-stockThe whole situation came to a head recently with the battle lines drawn in New Jersey. Much to the dismay of freedom lovers like me, Governor Chris Christie basically took steps to block the direct sale of TSLA vehicles by supporting the state’s Motor Vehicle Commission, which unanimously passed new rules that limit Tesla’s direct sales business model.

The reason given for the ruling was that Tesla’s direct model hurts consumers. Now, I pointed out the absurdity of this idea in a previous article, facetiously writing that the ability to choose to buy directly from the manufacturer and without a middleman is something that every customer knows is going to hurt them.

Yet all humor aside, TSLA stock does face a problem here going forward, both from a state government perspective and also from a growth perspective.

TSLA Puts Up a Fight

So far, several states have either banned or restricted direct sales from automakers to customers, including the aforementioned New Jersey, as well as Texas, Colorado, Ohio, Maryland, Minnesota and Virginia. Arizona also had restrictions on the direct model, but that state recently took steps to open its doors to Tesla via a bill approved by the Senate committee of Arizona to allow TSLA to directly sell its vehicles in the state without any dealer network.

The win for Tesla in Arizona is encouraging for freedom advocates and TSLA stock owners like me. What’s also encouraging is the fighting spirit of the company’s genius founder and CEO Elon Musk. That pugilistic approach was on full display in a blog post written by Musk assailing the New Jersey decision and the thinking behind it.

In the post, Musk wrote:

“The rationale given for the regulation change that requires auto companies to sell through dealers is that it ensures ‘consumer protection’. If you believe this, Gov. Christie has a bridge closure he wants to sell you! Unless they are referring to the mafia version of ‘protection,’ this is obviously untrue. As anyone who has been through the conventional auto dealer purchase process knows, consumer protection is pretty much the furthest thing from the typical car dealer’s mind.”

Now, I am a big admirer of Musk, both for his business acumen and his gumption; however, the TSLA direct sales model is something that deserves scrutiny, and not just because of the dust up it HAs caused at the state government level.

The Problem With Direct Sales

Certainly, Musk is committed to only selling Tesla vehicles via the direct route, and not the dealer route, and the main reason is because he doesn’t think companies should milk profits from owners through the dealership model. Unlike behemoth automakers like General Motors (GM), Toyota (TM) and Ford (F), who view dealerships as profit centers that gather up big maintenance and repair fees, Musk and Tesla think this model is outdated and wrong.

Yet if TSLA wants to continue to grow in the years to come, I suspect that it will have to iron out its differences with every state, and perhaps develop some type of dealership-oriented sales model.

As the company grows, and as it releases new models such as the proposed, more affordable, Model E Sedan, I suspect it would benefit mightily from a destination where you could physically check out the various models sitting on the lot, kick the tires, test drive a few different vehicles and then sign on the dotted line and drive her home. The current Tesla sales model, with its Apple (AAPL) store-like showroom, doesn’t really allow you to do that.

As anyone who has ever ridden in a Model S can attest to, the vehicle is smoother, more luxurious and more technologically savvy then anything on the road today. I think the more people that can experience this first hand, the more TSLA will continue to grow — and one way to do that is via the traditional showroom/dealership model.

As of this writing, Jim Woods was long TSLA.

Article printed from InvestorPlace Media, https://investorplace.com/2014/03/tsla-stock-tesla/.

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