Car Dealership vs. Direct-to-Consumer: Here's the Difference
The landscape of new-car sales, long dominated by dealerships, is shifting.
Even if a dealership's name is BMW of Cityville, it's not owned and operated by the car manufacturer mentioned — it's a franchise. Over the past century, the franchise dealership model of selling cars has gained a significant grip on U.S. car sales. Franchise dealers in 2022 were responsible for 13.7 million light-duty vehicle sales — a figure that accounted for the majority of such transactions.
With various workarounds, however, some electric-vehicle manufacturers have figured out how to bypass the dealer and sell directly to consumers.
What is the dealership franchise model?
Car dealerships are generally either stand-alone businesses or part of dealership chains with multiple locations, although automakers can set corporate brand standards. Vehicle manufacturers sell cars to dealerships, which can adjust the final sales price. This pricing dynamic is the origin of the "suggested" part of the manufacturer's suggested retail price.
The franchise dealership model dates to 1889. The National Automobile Dealers Association says the setup gives consumers extra protection in the marketplace, in part because it allows local businesses to compete for the best prices. Historically, state laws have prohibited automakers from directly selling their vehicles to consumers, requiring instead that the companies go through franchised dealerships. That has started to change, however, with some states altering the language of their laws to address the evolving vehicle marketplace.
What is the direct-to-consumer model?
Over the past few years, companies such as Tesla have utilized a direct-to-consumer (DTC) approach to selling vehicles, which gives them the option of avoiding expensive in-person sales infrastructure.
Tesla and some other electric vehicle manufacturers sell their vehicles directly through corporate sites and put corporate-owned showrooms in strategic locations, often in large urban centers. For more than a decade, Tesla has been a visible advocate of the DTC model and a prominent challenger to the traditional dealership model in the U.S.
Tesla has gotten around state laws regarding DTC sales in various ways, such as agreeing to limit the number of stores per state and setting up showrooms on land owned by Indigenous groups. The company also helps customers with the steps needed to purchase a car in one state and register that car in another state.
One benefit to the DTC model for consumers is an established and nonnegotiable price, which removes the need for comparison shopping because everyone gets the same deal. Of course, a small subset of consumers (perhaps those who love to negotiate) may see this benefit as a downside.
What could the future look like for car sales?
The crystal ball is cloudy. Some states specifically ban direct-to-consumer sales of electric vehicles, while other states do not allow for any new DTC locations in the future. The direct-to-consumer model continues to be championed by Tesla; other startup EV manufacturers, such as Lucid and Rivian, are following Tesla into DTC sales. And last summer, major automotive maker Ford announced plans to sell its EVs through a "digital retailing experience."
Other established car brands, such as Cadillac, Genesis, and Land Rover, have started introducing customer lounges and pop-up shops. The goal is to establish a direct connection with the consumer without violating local laws. In these stores, representatives can speak to consumers about vehicle attributes even if they can't technically sell them a vehicle.