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<ul class="summary-list"><li>Prices for used and new cars have soared to ridiculous heights. </li><li>That's not great for buyers, but it's fantastic for the country's biggest dealership groups. </li></ul>You or I might wince at the notion that the average new car will now run you <a href="https://www.businessinsider.com/used-new-car-prices-surging-chip-shortage-2021-10">more than $45,000</a>. But the country's biggest <keyword id="12419745" type="UNKNOWN" weightage="60" keywordseo="car-dealers" source="Orion">car dealers</keyword>? They're loving it. The same bloated prices that are <a href="https://www.businessinsider.com/when-will-car-prices-go-down-used-vehicles-chip-shortage-2021-9">frustrating buyers</a> are fueling record profits for the largest dealership groups in the US. <keyword id="12419746" type="UNKNOWN" weightage="60" keywordseo="autonation" source="Orion">AutoNation</keyword>, the country's largest dealer of new cars with over 300 locations, <a href="https://investors.autonation.com/news-and-events/press-releases/press-release-details/2021/AutoNation-Reports-Sixth-Consecutive-All-Time-Record-Quarter/default.aspx">posted profits</a> of $361.7 million for the quarter ended September 30, roughly double its net income from the same period of 2020. <keyword id="10909317" type="UNKNOWN" weightage="60" keywordseo="lithia-motors" source="Orion">Lithia Motors</keyword>' <a href="https://www.prnewswire.com/news-releases/lithia--driveway-lad-increases-revenue-70-eps-47-and-adjusted-eps-63-record-third-quarter-performance-301404205.html">profits</a> are up 94% year-over-year, and its third-quarter revenue of $6.2 billion represents a 70% jump over last year. <keyword id="12419747" type="UNKNOWN" weightage="60" keywordseo="penske-automotive-group" source="Orion">Penske Automotive Group</keyword>, which deals in consumer vehicles and other <keyword id="11894924" type="UNKNOWN" weightage="100" keywordseo="transportation" source="Orion">transportation</keyword> services, has <a href="https://www.prnewswire.com/news-releases/penske-automotive-reports-all-time-record-quarterly-results-301409541.html">made</a> $876.1 million in income so far this year, a 155% increase over the same nine months in 2020. While these three mega dealers only represent <a href="https://www.autonews.com/dealers/top-5-dealer-groups-keep-spots-next-5-shuffle">some 500,000</a> of the roughly 14.5 million vehicles sold in the US last year, their financial statements provide a rare look under the hood at dealer economics as the pandemic upends vehicle production and sales. Their profits are surging despite a <a href="https://www.businessinsider.com/why-are-used-cars-so-expensive-now-shortages-pandemic-rentals-2021-7">computer-chip shortage</a> that's dealt a huge blow to vehicle manufacturing worldwide. The supply of new cars has plummeted across the board, but dealers have <a href="https://www.businessinsider.com/used-cars-shortage-prices-dealers-describe-bizarre-world-upended-business-2021-7">made a killing</a> on the vehicles they're able to sell. Big margin increases have offset stagnating sales volumes.The average new vehicle in the US is trading for close to $300 above sticker price, according to Edmunds, helping dealers eke out a larger profit on every vehicle sold. During the third quarter, AutoNation made close to $5,500 on each new car sold, more than triple its profits per vehicle during the same period in 2019. In the third quarter of 2020, Lithia's stores made an average of $2,900 on each new car they moved. This year the figure has almost doubled. Dealers have also gotten a boost as limited availability of new cars fuels booming demand for secondhand vehicles. AutoNation's used-vehicle volumes rose 20% this quarter, while used-vehicle revenue soared 53%. Lithia's same-store used-vehicle revenues are up 40% year-over-year. Amid surging profits and sales, all three of the country's largest car dealers have been on a buying spree, gobbling up smaller groups to expand their footprints. AutoNation in October said it's buying nine luxury dealerships in a deal that's expected to boost annual revenue by $420 million. Lithia has added 56 locations in 2021, including 34 through a single acquisition. Penske recently completed its takeover of a Japanese luxury dealership group. <a href="https://www.businessinsider.com/will-used-car-prices-drop-2023-chip-shortage-2021-10">How long</a> will the tight inventories, inflated prices, and huge appetite for cars last? Industry watchers say the supply of new vehicles won't rebound for at least the next year, and AutoNation's outgoing CEO Mike Jackson agrees. "Consumer demand continues to outpace supply, driven by consumer desire for personal transportation and ongoing manufacturer supply-chain disruption. We expect this to continue well into 2022," Jackson said during a <a href="https://www.businessinsider.com/reviews/out?u=https%3A%2F%2Fwww.fool.com%2Fearnings%2Fcall-transcripts%2F2021%2F10%2F21%2Fautonation-inc-an-q3-2021-earnings-call-transcript%2F">recent call</a> with investors, adding that low inventory levels and pent-up demand "should support sales for the foreseeable future."Customers, meanwhile, are left with no room to haggle, limited selection, and hurting wallets.

It's a terrible time to buy a car, but a great time to sell them

<ul class="summary-list"><li>Bernie Moreno, the GOP nominee for Senate in Ohio, is an opponent of affirmative action.</li><li>But he's said he got his first dealership at a lower price in part because of his racial background.</li></ul>Bernie Moreno, the <a target="_blank" href="https://www.businessinsider.com/bernie-moreno-wins-ohio-senate-primary-trump-democrats-2024-3">GOP nominee for US Senate in Ohio</a>, has long staked his political identity on the car dealership empire he once oversaw.Moreno, an immigrant from Colombia, has frequently touted his success in the auto industry as a shining example of the American dream — and his ability to do it all on his own — in the course of both his aborted 2022 bid and his <a target="_blank" href="https://www.businessinsider.com/ohio-gop-senate-primary-bernie-moreno-rally-trump-matt-dolan-2024-3">bitterly fought 2024 campaign</a>."I did what you're supposed to do when you come to the United States. Learned the language. Worked hard. Didn't take handouts," Moreno wrote in a <a target="_blank" href="https://www.toledoblade.com/opinion/letters-to-the-editor/2021/08/02/to-the-editor-unite-around-America-First/stories/20210725049">2021 op-ed</a>. "It worked. I risked everything to build businesses. I employed thousands of Ohioans. I'm proof positive that the American Dream is alive."Yet when Moreno bought his first car dealership in 2005, he got some extra help as the result of the kind of diversity initiatives that Republicans now decry, according to his public comments in 2016 and court testimony in 2014.After 12 years working for an auto dealership group in Boston, Moreno decided to buy a struggling dealership in North Olmsted, Ohio that was owned by Roger Penske, the founder of the Penske Corporation and a former professional race car driver.As Moreno has publicly recounted himself, Mercedes-Benz pushed Penske to sell the dealership in exchange for essentially handing him another dealership in Arizona — and the luxury car dealership specifically wanted a "minority" to take over."The stipulation was that Mercedes got to choose the dealer, and the dealer had to be a minority," Moreno said during a "<a target="_blank" href="https://www.youtube.com/watch?v=v7xGRCavVW0&amp;t=730s">Forum on Race</a>" organized by YWCA Greater Cleveland in February 2016. "That was the rules. So they had a few different candidates, they ended up choosing me."But Moreno benefited from Mercedes-Benz's push for diversity in more ways than one.In 2014, he testified during an unrelated lawsuit in Florida that Mercedes-Benz managed to get him a discount because auto companies like them faced "pressure to have more diversity among their dealership ranks.""They wanted a minority operator there," Moreno said during the 2014 hearing, according to a <a target="_blank" href="https://s3.documentcloud.org/documents/24503535/morenodeposition.pdf">transcript</a> obtained by Business Insider. "So what they did is they went to Roger Penske and asked him to sell that dealership for a dramatically reduced price in exchange for Mercedes giving Penske an open point in Chandler, Arizona."It is unclear how steep of a discount Moreno received. Reagan McCarthy, a spokeswoman for Moreno's campaign, said the GOP candidate was "offered this opportunity because he is a talented businessman, and he was able to turn this location into a successful dealership," but did not provide further information on the sale.Mercedes-Benz declined to comment on the specifics of the 2005 sale, but said in a statement that the company "is committed to diversity, equity and inclusion efforts across the business, which includes initiatives to diversify ownership within the dealer network." The Penske Automotive Group did not respond to a request for comment.By the end of 2019, Moreno had sold his empire of dealerships, which by then had spanned four states. Moreno and his wife are now worth somewhere between $43 million and $186 million, according to a mandatory personal financial disclosure filed with the US Senate in August 2023.Despite Moreno acknowledging that he benefited from Mercedes-Benz considering diversity when deciding who could buy the dealership, he maintains that he is opposed to affirmative action programs.When the Supreme Court <a target="_blank" href="https://www.businessinsider.com/supreme-court-ends-affirmative-action-colleges-decision-2023-6">ended affirmative action</a> in college admission in June 2023, Moreno <a target="_blank" href="https://twitter.com/berniemoreno/status/1674500032379101185">celebrated</a> the restoration of "race blind merit" in the educational system, arguing that the status quo had created a "culture of low expectations for minorities."Since that decision, Republicans have taken aim at diversity, equity, and inclusion (DEI) efforts elsewhere. In July 2023, <a target="_blank" href="https://www.tn.gov/content/dam/tn/attorneygeneral/documents/pr/2023/pr23-27-letter.pdf">13 GOP state Attorneys General</a> sent a letter to Fortune 100 CEOs threatening legal action over their DEI initiatives, arguing that they could amount to "racial discrimination." House Republicans have also <a target="_blank" href="https://oversight.house.gov/wp-content/uploads/2024/02/EEOC-Title-VII-Oversight-Request-03012024-1.pdf">launched a probe</a> into the federal government's oversight of those initiatives."As he has said time and time again, Bernie is opposed to misguided Affirmative Action policies championed by the far-left, that prioritize race over merit and success," said McCarthy. "Bernie believes that merit should always be the singular factor in these decisions — period. His dealerships performed to the highest standard, and he believes that success should be the only factor for hiring practices, promotions, and business dealings."Moreno is set to face incumbent Democratic Sen. Sherrod Brown of Ohio in a race that could determine <a target="_blank" href="https://www.businessinsider.com/us-senate-races-2024-election-landscape-democrats-republicans-2023-1">which party controls the Senate</a>.Brown managed to win reelection in 2012 and 2018 even as the state has drifted rightward, but this year could be different with former President Donald Trump appearing on the ballot at the same time.During his Senate campaign, Moreno has faced criticism from both Democrats and his GOP primary opponents for issues stemming from his time as a car dealership owner, including being sanctioned by a Massachusetts court for <a target="_blank" href="https://www.businessinsider.com/bernie-moreno-ohio-shredded-documents-employee-massachusetts-lawsuit-2024-1">shredding documents amid a wage theft lawsuit.</a>

Ohio GOP Senate nominee Bernie Moreno benefited from the kind of diversity initiative that Republicans hate

<div class="KonaFilter image-container display-table"><div><div class="image on-image">AP/David J. PhillipFlooded cars near the Addicks Reservoir are shown as floodwaters from Tropical Storm Harvey rise Tuesday, Aug. 29, 2017, in Houston.</div></div></div>The hurricanes that struck Texas and Florida were tragic and costly disasters. But they wrecked so many cars that they gave a boost to auto sales and both automaker and auto-dealer stocks.The US industry had been waiting for something to move the sales needle, after months of year-over-year declines. September came in strong, and with October sales data coming in early November, many car companies expect the sales pace to head toward 17 million for 2017.Morgan Stanley isn't so optimistic. In a sales note published on Monday ahead of the US carmakers reporting third-quarter earnings at the end of October, analysts Adam Jonas argues that shares of auto dealers could be in for a retreat. (His coverage ground includes names such as <a href="http://markets.businessinsider.com/stock/AN-Quote">AutoNation</a> and <a href="http://markets.businessinsider.com/stock/PAG-Quote">Penske Automotive Group</a>, some of the country's mega-dealers.)"At the height of the 'storm trade,' the dealer stocks were +22% v. August 25, 2017 (Hurricane Harvey)," he wrote. "The stocks have given back some of the gains (-7% from recent highs), but [sales pace] was strong in September, and investors may still be expecting positive revisions."The impact of the hurricanes will still probably have a positive impact on the 2017 sales scorecard. Jonas reports that as many as 500,000 vehicles will need to be replaced in Texas, with another 100,000 in Florida. Some analysts expected 2017 sales to finish up at about 16.5 million, down roughly a million from the record-setting 17.55 million vehicles sold in 2016. Not all of the vehicles lost in Texas and Florida will be new, but a reasonable percentage likely will be, so the industry can expect sales to come in at around 17 million for the third consecutive years, even as pessimism mounts for sales in 2018. <div class="margin-top"> <h3>NOW WATCH: <a href="http://www.businessinsider.com/tesla-value-surging-because-vision-so-intoxicating-2017-10">Tesla's value is surging 'because the vision is so intoxicating'</a></h3> <div> </div> </div>

Auto-dealers' stocks got a bump after the hurricanes - but that appears to be ending

CarMaxCarMax initiated curbside, contactless pickup in April.<ul class="summary-list"><li>The COVID-19 has forced car dealers to radically alter their business models in a matter of weeks.</li><li>With showrooms shut down and both customers and employees worried about safety, dealerships have embraced online sales, digital financing, and touchless deliveries in ways that they had resisted for years.</li><li>Going back to business-as-usual isn't an option. </li><li>"The consumer's behavior has undoubtedly been changed in a lasting way," said Jim Lyski, chief marketing officer of CarMax, the nation's largest used-car dealer network.</li><li><a href="https://www.businessinsider.com/?hprecirc-bullet">Visit Business Insider's homepage for more stories</a>.</li></ul>Weekends are usually a busy time at car dealerships, with customers using their days off to shop for and often buy or lease new and used vehicles.Over the past five years, motivated shoppers have pushed the market to record highs: since 2015, 17 million or more cars, SUVs, and pickup trucks have rolled off dealer lots and into customers' driveways and parking spaces. A combination of favorable credit conditions, extended loan terms, and the popularity of large SUVs and full-size pickups has filled the automakers' coffers; since 2010, fresh off bankruptcy, General Motors alone has booked around $100 billion in profits.The COVID-19 pandemic has brought a drastic end to the boom. The carmakers are <a href="https://www.businessinsider.com/ford-financial-crisis-playbook-borrows-15-billion-for-coronavirus-response-2020-3">scrambling to bolster their balance sheets</a> as they've shut down all North American and European production. And car dealers are hustling to figure out how to safely sell and service vehicles while showrooms are closed in most US states.Selling cars online seems like a no-brainer, given that people now use e-commerce to purchase everything from washing machines to groceries. Younger consumers have grown up in a one-click-to-buy world; Amazon has remade the retailing landscape. But car dealers - despite some experiments over the past few years and the arrival of some startups, including Tesla - have clung to the old ways. <h2>Necessity has broken down resistance</h2>REUTERS/Carlos BarriaFace-to-face transactions are a problem in the pandemic."There was a small rate of adoption before the coronavirus," said Karl Brauer, senior director of content and executive publisher for Cox Automotive, where he manages editorial for Autotrader and Kelley Blue Book. "And then a pandemic hit. Suddenly, that wasn't a bizarre option for dealers."Dealers' digital sluggishness was a consequence of how the business is set up in the US. The major automakers wholesales vehicles to dealers, often providing what's known in the industry as "floor-plan financing" to cover the short-term costs of inventory. The dealers themselves operate under state franchise laws; they're either independent business, often family-owned by multiple generations, or they're part of big national dealer networks, such as AutoNation, Penske Automotive Group, and CarMax, which dominates the used-car market.Tesla is a notable exception. The all-electric automaker uses a direct-sales model, where permitted by states.The franchise-dealer model dates to early 20th century, and although automakers have sought to displace it, they haven't succeeded. Almost all Americans buy and lease their new cars from a dealership, and they do it in-person. Despite vast changes in the rest of the commerce world, dealers still think that a consumer is more likely to do a deal if they're physically on-site.With that tradition now completely upended, a brave new world of car sales is taking shape.<h2>Some dealers are in a better position than others - but they're still figuring it out</h2>"Approximately a year ago, we rolled out our omni-channel offering," said Jim Lyski, CarMax's chief marketing officer. "It's a highly personalized car buying-experience that lets customers do as little or as much online as they like."He added, "A lot of consumers assume the only way to buy a car is to go to the dealership and spend hours in the finance office."CarMax, as the largest mega-dealer in the US, is right in the middle of the pandemic. The company operates in 41 states and is accordingly subject to many different definitions of what constitutes an essential or nonessential business, as well as varying rules about which of its retail showrooms it can keep open.According to Lyski, 50% of CarMax's stores are open, 30% are closed, and 20% are allowed to operate in limited fashion, either by appointment only or by using new curbside-pickup policy that the company rolled out in April.Given how quickly the entire US economy and especially car dealerships have been forced to deal with a near-total dropoff in consumer activity under shelter-in-place order implemented since mid-March, the adaptation has been rocky."In the very early days, there was a lot of confusion," Lyski said. "Consumer sentiment was negative."Dealership workers were also uneasy."Very early, some of our associates wanted to know what we could do to protect them," he added. CarMax established a "distancing and disinfecting" protocol, sanitizing stores every day and cleaning high-touch surfaces, as well as sanitizing vehicles before and after test drives. The company also maintains six-feet of distance between showroom customers and employees, following federal guidelines."Our associates and customers are more comfortable now," Lyski said.Some of their comfort is a function of necessity. Cars need to be repaired, a fact that's enabled dealerships to keep their service operations going, defined as essential by state governments. But Lyski noted that consumer attitudes are also changing. "People are deciding that they need a vehicle," he said. "They don't want to ride on public transportation, an they don't want to take an Uber."On the service side, Lyski said that CarMax was actually conservative when shutdowns were initially ordered."We were told to close, and we didn't argue about it. But after we spent some time talking to local health authorities, we opened up and implemented social distancing. In most service bays, workers are outside of six feet apart, and customers can drop off their vehicles and pick them up while also social distancing."<h2>A struggle for many dealerships that were committed to the traditional business</h2>TeslaTesla doesn't use the traditional franchise-dealership model, favoring direct sales.As much as CarMax has tried to turn a crisis into an opportunity, it's been a struggle for other dealerships."Change is hard," said Cox's Brauer."If you didn't get the customer on the lot and in the car, your ability to close the deal was greatly compromised," he said. "And that's an accurate appraisal for certain demographics. The idea that you'd buy a car online is tough for people of my dad's generation. And dealer principals are also of that generation."Brauer argued that the most shocking thing about the pandemic was its speed. There was essentially no preparation to shutting everything down. "Everyone is now kind of figuring out their new operations. They can't be 100%, and they know 0% is a path to insolvency or bankruptcy. So they're finding a middle ground, not making the profits they'd like, but mitigating the financial crisis that would occur if they did nothing."Some dealerships are getting cover from the automakers whose vehicles they sell. General Motors and Porsche are promoting shop-from-home programs, and <a href="https://www.businessinsider.com/car-companies-helping-consumers-during-the-coronavirus-pandemic-2020-4">many other carmakers are using the financing arms to offer good deals</a> to prospective customers and support for economically stressed buyers and leasers. Some new players have also found themselves in a good position, due to the way their operations have always been organized. <h2>No turning back from the post-pandemic new normal</h2>Thomson ReutersVehicles are displayed at a Carvana dealership in Austin.Carvana - a used-car dealer known for its "vending machine" deliveries - already had touchless sales in place before COVID-19.With the pandemic, Carvana has been able to provide zero in-person contact, and it's enhanced its relationship with Ally to support $2-billion in digital financing for vehicles, along with a 90-day delay in making a first loan payment."The whole genesis of our business was to offer a broad selection at a fair price," said CEO Ernie Garcia. "Our model is very well-situated for this moment."The big question is whether dealers will finally switch to a more 21st-century approach to selling cars when the pandemic is over - or revert to the old ways."The consumer's behavior has undoubtedly been changed in a lasting way," CarMax's Lyski said."I don't forecast the dealership going away, but the consumer is going to demand that they be able to customize the experience, not be pressed into a dealership's model. If you can't do that, you aren't going to be viable."Do you have a personal experience with the coronavirus you'd like to share? Or a tip on how your town or community is handling the pandemic? Please email <a href="mailto:covidtips@businessinsider.com">covidtips@businessinsider.com</a> and tell us your story.Get the latest <a href="/coronavirus-business-impact">coronavirus business &amp; economic impact analysis</a> from Business Insider Intelligence on how COVID-19 is affecting industries. <h3>NOW WATCH: <a href="https://www.businessinsider.com/online-car-dealership-carvana-vending-machine-2016-10">This online car dealership lets you pick up your car from a vending machine</a></h3>

The coronavirus pandemic is pushing car dealers to change the way they sell and deliver vehicles. But not everybody is sure how to do it successfully.

<div class="KonaFilter image-container display-table"><div><div class="image on-image">GettyUber CEO Dara&#xa0;Khosrowshahi</div></div></div><ul><li>Uber is selling its money-losing auto-leasing business to Fair.com, a startup that's trying to upend the auto-leasing industry.</li><li>The sale price isn't known but the deal includes Uber taking a stake in Fair.com.</li><li>Partnerships like this one are quickly becoming a cornerstone of the management style of Uber's new CEO Dara Khosrowshahi.</li></ul> Uber is selling its money-losing auto-leasing business to the startup Fair.com, <a href="https://www.wsj.com/articles/uber-to-sell-u-s-auto-leasing-business-to-startup-fair-com-1514284201">unnamed sources have told The Wall Street Journal.</a>Fair is a car marketplace cofounded by industry vets Scott Painter, the former CEO of TrueCar, and Georg Bauer, the former VP of finance at Tesla and BMW. Fair is trying to change the car-leasing industry by allowing people to lease cars based on how much money they are willing, and qualified, to spend, and then letting them return the car anytime they want with five days notice. Everything from the approval process to the car shopping to the payments is done through an app.The Journal didn't know how much Fair may have spent to acquire Uber's leasing unit. Uber declined to comment to Business Insider on the deal. At the time of the sale, Uber had about 30,000 cars in the program worth about $400 million, the Journal reports. But, as part of the deal, Uber will take a stake in Fair and the startup will become an exclusive partner with Uber, offering drivers the ability to lease cars. Fair will also employ 150 people out of the Uber unit that once employed 500.This kind of partnership is quickly becoming a cornerstone of Uber under its new CEO Dara Khosrowshahi, who became CEO in August after a serious of scandals forced CEO Travis Kalanick to resign in June.Uber hired former Asian Goldman Sachs exec Brooks Entwistle in August and, under Khosrowshahi, he has been busy striking partnership deals with taxi companies throughout Asia to allows riders to book taxis through the Uber app. And earlier this month, Uber struck a <a href="https://www.techinasia.com/uber-comfortdelgro-deal">$474 million joint-partnership deal with taxi company</a> ComfortDelGro in Singapore that sold a 51 percent stake in Uber's car leasing subsidiary in that country to ComfortDelGro.These deals mark a <a href="https://techcrunch.com/2017/11/11/uber-takes-a-different-approach-to-asia/">major shift of Uber's attitude toward taxi companies,</a> at least in that part of the world, attempting to view them as potential partners instead of as arch enemies.Uber has been looking for a buyer since it decided to close the unit down in August. The company never expected to make money on the program, it said, but it was losing far more money than anticipated. It expected to lose about $500 per car but was losing about $9,000 per car, according to The Wall Street Journal.Drivers leased the cars, with the payment deducted from their earnings, and were allowed to return them easily. But to make a living with these cars and pay for them, they drove the cars hard and often returned them in poor condition.Uber has been trying to clean up its balance sheet <a href="http://www.businessinsider.com/ubers-losses-grow-in-q3-but-bookings-rise-2017-12">after losing about $2.52 billion in the last two quarters</a> as it marches toward <a href="http://www.businessinsider.com/uber-board-says-it-approved-equality-among-shareholders-and-to-move-forward-with-softbank-deal-2017-10">a potential 2019 IPO</a>.With this deal, Fair cements its place as startup to watch, too. It attempted to acquire Beepi last year, a startup that raised $150 million for an exclusively online used-car marketplace, but the sale fell through and Beepi was shut down. In October, <a href="https://techcrunch.com/2017/10/20/flexible-car-ownership-marketplace-fair-com-nabs-up-to-1b-from-bmw-penske-and-sherpa-capital/">Fair said it raised over $1 billion</a> between venture investment and loans. Investors include BMW's iVentures, Penske Automotive Group, and Mercedes Benz. <div class="margin-top"> <h3>NOW WATCH: <a href="http://www.businessinsider.com/difference-between-splenda-equal-sweetn-low-sugar-2016-11">The differences that matter between Splenda, Equal, Sweet'N Low, and sugar</a></h3> <div> </div> </div>

Uber has found a buyer, and a partner, for its auto-leasing business that was losing more money than expected

<div class="KonaFilter image-container display-table"><div><div class="image on-image">Kim Kyung Hoon / ReutersA Tesla store.</div></div></div><ul class="summary-list"><li><a href="https://www.businessinsider.com/category/tesla">Tesla</a> is closing its retail stores and <a href="https://www.businessinsider.com/tesla-is-eliminating-most-of-its-stores-and-going-to-an-online-only-sales-model-2019-2">going to an online-only sales model.</a></li><li>This sounds crazy, but it might actually work.</li><li>And even if <a href="https://markets.businessinsider.com/stocks/tsla-stock">Tesla</a> fails, that could be part of the master plan.</li></ul>Just over a week ago, Tesla announced the arrival of its long-awaited $35,000 Model 3 sedan - but also revealed that it would close nearly all its retail locations and move to online-only sales.The second part was greeted with shock and jeers, but Tesla is serious. And the move could be brilliant.I'll admit that I didn't think so at first. Tesla doesn't use franchised dealers, as every other major manufacturer selling in the US does. Instead, Tesla favors direct sales and has met stiff resistance from auto dealers in a number of states (laws governing car sales are state-by-state, as Tesla has been given permission to do direct sales in some of them). I asked CEO Elon Musk about this on a controversial conference call with the media after the announcement, and he said that he expects pushback from established dealers who don't want to allow a nationwide, online end-run around the franchising laws. If they stand in Tesla's way, they'd interfere with interstate commerce - unconstitutional, according to him."Good luck with that," he said.Read more: <a href="https://www.businessinsider.com/tesla-is-eliminating-most-of-its-stores-and-going-to-an-online-only-sales-model-2019-2" data-analytics-position="15">Tesla is shuttering most of its stores as the company switches to an online-only sales model</a><h2>Tesla's direct-sales challenges</h2><div class="KonaFilter image-container display-table"><div><div class="image on-image">Diego Donamaria/Getty Images for SXSWTesla CEO Elon Musk.</div></div></div>After the announcement, I thought through the implications. In the US, the states are often seen as "laboratories" for legal changes that might later become national. The federal government keeps an eye on the experiments. A good current example is marijuana legalization. Eventually, if enough big states go that route, weed might be legalized throughout the US.My theory had been that Tesla was undertaking a direct-sales experiment, and that it could someday petition for a federal exception. Truthfully, I thought it would fail, largely because every time a big car company has attempted to cut out dealers, the dealers with their staunch allies in local governments and in Washington has fought back.I figured Tesla would accept a hybrid model, with direct sales in some states but ultimately franchised dealers in others.They, too, might have mulled this over and concluded that it would be better to take the plunge and impose their own solution. "People want to buy stuff online," Musk told me. And he's right. Besides, a large number of Tesla sales are evidently already conducted mostly online, and the wider auto industry has been exploring more streamlined, frictionless ways to provide buying advice, pair buyers with cars, arrange test drives, and modernize the time-consuming, dealer-centric financing and insurance part of the process.<h2>Tesla frontrunning the risk for everybody else</h2><div class="KonaFilter image-container display-table"><div><div class="image on-image">Lucy Nicholson / ReutersThe Tesla Model 3.</div></div></div>Tesla has always served as a sort of risk frontrunner for the car business. The General Motors and Fords of the world have been happy to let Musk and his company absorb all the early challenges of validating a market for electric vehicles. Contrary to what many auto-industry outsiders think, Tesla is widely admired and rooted for in Detroit. They know how hard it is to start a carmaker - much less one making only electric cars.That's why I now think the online-only sales effort makes sense. It's classic Tesla: risky, but if Tesla's succeeds, the big automakers would have more ammunition to modify the franchise system than they have in the past.I also came up with another theory about why Tesla is doing this: Tesla intends to fail.The company was already operating over 300 stores, and it's possible that a hard business analysis concluded that with online sales become prevalent with just about everything except cars, and with Tesla facing down entrenched dealer resistance to direct sales, it simply wasn't smart to keep fighting a losing fight and following a sales model that was off-putting to customers.Running a retail network is tough, after all. And if you try to do it yourself - and the major automakers don't - it's also quite expensive. So Tesla decided, perhaps, to wind down. Give the online-only approach a shot. If it works, great.And if it doesn't? Well, there huge national dealer firms, operating franchises in many states, that could take over Tesla's business - companies such as AutoNation and Penske Automotive Group. A partnership would make it much easier for Tesla to get vehicles to customers, although it would obviously compromise Musk's desire to vertically integrate Tesla's operations and could detract from Tesla's profits (although I think Tesla could be more profitable if it offloaded some sales and manufacturing to outside contractors).Now, you could say that I'm overthinking this decision, and you might be correct. But it is a big deal - bigger, really, than the arrival of the Model 3. While Tesla is superb and car design, technological innovation, and crowdsourced marketing, it struggles with manufacturing, logistics, and fulfillment - the boring, blocking-and-tackling stuff that the rest of the auto industry has perfected.Tesla could use some excuses to tap that expertise. But the company has to devise ways to do it that won't make Tesla look like it isn't Tesla. Get the latest Tesla stock price<a href="http://markets.businessinsider.com/stock/TSLA-Quote"> here.</a> <div class="margin-top"> <h3>NOW WATCH: <a href="https://www.businessinsider.com/elon-musk-left-tesla-fired-2018-10">What would happen if Elon Musk left Tesla</a></h3> <div> </div> </div>

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