Tesla won't kill car dealerships, but it will force them to change

• Tesla's success selling cars directly to buyers has other carmakers curious about the model.
• That would mean they'd have to eliminate their auto dealers.

Traditional automakers would be in for a fight if they tried to go the way of Tesla and cut dealers out of their sales processes entirely. The car companies aren't likely to win that — but to compromise, their dealerships are going to have to evolve from what they are today.

Tesla showed the auto industry it's possible to be successful without a traditional dealer network and instead sell vehicles directly to consumers. This cuts out the middleman and gives Tesla the power in pricing and customer relationship-building. EV startups like Lucid and Rivian have already copied this strategy.

Other automakers have been taking a look at Tesla's accomplishments and might be wondering if they could model it to some extent. Some of Elon Musk's influence on the industry can already be seen: lean inventory, online configurations, and more transparency — and there's even more on the way.

Though survey data suggests auto executives aren't so confident that Tesla's way will go mainstream, leaders at Ford and BMW, for example, have hinted at offering customers a more direct purchase option, particularly for EVs.

"Tesla is, at this point in time, the one EV automaker that seems to be successful on product, profitability, and distribution," Tim Jackson, former president of the Colorado Automobile Dealers Association, said. Other automakers are looking at "what's Tesla doing, how are they doing it, how can we replicate it?

"I think that will cause some pressure for the other traditional automakers, but I think Tesla is the exception for the direct sellers," Jackson added. "The automakers got where they are today in their volumes, in their distribution models enabled by the franchise dealer. I think that that's the model that will keep them successful into the future."

Still, changes are brewing. Dealerships might not go away, but they're certainly going to look different to car shoppers in the future.

Recent dynamics in the dealership world

A lot has happened to auto retail in recent years.

The digital transition has forced dealers to give buyers more online options.

The pandemic has led dealers to operate more efficiently with less inventory (albeit for more profit).

And now the EV shift is driving a wedge between dealers and their automakers. All of this is to say changes have been happening and remain imminent.

Automakers are all but demanding their dealers make massive infrastructure investments (or get out of the business entirely) to prepare for EVs, even in areas in which adoption is not expected to tick up for some time.

Meanwhile, car companies are saying they might experiment with a different business model altogether — while retailers say they're more important than ever in order to take EVs mainstream.

"That's going to require a healthy dealer body," Scott Kunes, COO of Kunes Auto and RV Group, said of these trends.

The dealer POV

Auto franchise laws are a force to be reckoned with, regardless of any push to offer customers different buying experiences.

"Even if people want this and it was something that was implemented, some of the questions about the rights of dealers will come into play here," Jessica Caldwell, executive director of insights at Edmunds, told Insider earlier this month. Part of the saving grace for dealers has been just how strong of a contingent they are.

Still, "If I was a dealer, I would definitely want some guarantees" about what the future holds with EVs and sales strategies, Caldwell said.

One factor potentially working in the favor of at least smaller dealerships is the fact that big ones are buying them up in droves, according to merger and acquisition data from dealer advisory firm Kerrigan Advisors.

There may be some dealerships that don't see a return on investment from spending over $1 million for EV infrastructure, but not participating in that might risk their business with automakers. If large group retailers snatch up the smaller stores that automakers are hinting could go extinct, those stores remain protected.

Shoppers ultimately need places to see new products, receive education on the nuances of buying electric, and get their questions answered, experts say, especially as the EV buying curve shifts from early adopters to the next wave.

"There's got to be some sort of middle ground there," Kunes said. "I do think the dealer body is going to be a big component in the push to EV adoption — however that looks."