Tesla's move to online sales gives customers what they want: No car salesman

Key Points
  • While some industry analysts still question the decision, others say CEO Elon Musk may be giving consumers exactly what they want: no shady car salesman.
  • The auto industry has ranked among the Federal Trade Commission's top 10 most-complained-about topics over the last five years.
  • More and more drivers are doing most of their research online before even stepping onto a car lot.
The Tesla showroom at Park Meadows Mall March 31, 2016
John Leyba | The Denver Post | Getty Images

Tesla's recent announcement to shift most of its sales to online had investors and analysts questioning everything from the company's cash flow to its ability to grow market share without physical showrooms.

The automaker plans to cut back on its showroom staff and direct customers to order its electric vehicles through their phones. CEO Elon Musk said all purchases will come with a seven-day, money-back guarantee in case anyone has second thoughts about the purchase.

"It's going to be super easy to get a refund," he said. "People should not have concerns about placing an order."

While some industry analysts still question the decision, others say Musk may be giving consumers exactly what they want: no shady car salesman.

"What Tesla is proposing is actually consumer friendly," said Rosemary Shahan, president of the advocacy group Consumers for Auto Reliability and Safety. "It gives you more of an opportunity to take control of the action. and you're not on the dealer's turf."

Buying a car has become one of the most dreaded chores in America — and one of the most complained about, according to the Federal Trade Commission. The auto industry has ranked among the FTC's top 10 most-complained-about topics over the last five years, including more than 104,000 complaints filed last year. While the data includes auto repair, gas prices and related complaints, consumer grievances about auto sales and leasing made up almost 70 percent of the complaints filed against the industry last year, according to the FTC.

Numerous studies show that more and more drivers are doing most of their research online before even stepping into a car dealership. Some are skipping dealers altogether or opting for sellers like Tesla that offer "no-haggle" pricing where the buyer knows exactly what they will pay when they walk off the car lot. Roughly 85% of car shoppers would more likely buy from a dealership that allows them to start or complete nearly all of the vehicle purchase online, according to Cox Automotive

"We don't like negotiating," said Jack Gillis, executive director of the Consumer Federation of America. "We're matching wits with a person who is trained to negotiate to get as much money from us as possible from us, who does it 24 hours and is most likely rewarded for doing so. That simply lends itself to a very uncomfortable experience."

The move to online sales is also likely to further pit Tesla against conventional car dealers, which have spent decades fighting the electric car maker to prevent it from selling directly to consumers through its company-owned stores. It's a fight that's as old as the industry and enshrined in laws across many states that prohibit automakers like Ford and General Motors from competing against their dealer networks by selling directly to consumers.

Auto analysts suggest that the disconnect will weigh on traditional car dealerships in the near future and may put many out of business. Just 35% of U.S. car dealers say they are "likely "or "very likely" to sell their cars online, according to a recent survey by Roots & Associates.

"Over the next decade, many car dealerships will close," said Gene Munster, founder and managing partner at Loup Ventures, a venture capital firm that focuses on technology. "We will look back at some of the absurdity about the way people bought cars."

While Musk's decision may baffle some now, "ultimately, this will be a very strong competitive strength for Telsa," Munster said. "This will be a fundamental long-term competitive advantage of Tesla that ... only a start-up could replicate."

According to the National Automobile Dealers Association, going to a car lot is still "by far the best way to sell, distribute and service new vehicles."

"But the reality is the vast majority of consumers want to do some combination of both online and traditional shopping for new vehicles," said NADA spokesman Jared Allen. "Those are our customers, and we're going to continue meeting their expectations and catering to their needs."

Online shopping has disrupted nearly every industry, starting with books when Amazon CEO Jeff Bezos started selling them out of his garage in Seattle in 1994.

"All products will ultimately move online, and now it's autos' turn," said Paul Hennessy, CEO of Vroom, a used-car sales website. "It's a natural progression given how much of the car shopping and buying experience already happens online, from research to price comparison to financing and paperwork."

Tesla's move to online sales received mixed reviews from some investors, who acknowledge it will reduce costs, but worry store closures will hurt demand.

"The move to direct sales is bold," Bernstein analyst Toni Sacconaghi wrote in a research note shortly after Tesla's announcement late February. While he estimated that 70% of Tesla's buyers didn't even test drive a car ahead of purchasing one, he said "we do believe that salespeople have been important in up-selling Tesla customers, as well as selling Tesla solar products."

Others worry that Tesla's shift to online-only sales is less about innovating the car shopping experience and more a sign of desperation to generate needed profits for the company's survival.

"Tesla is financially challenged and has a big bill coming due," said Michelle Krebs, an analyst at Autotrader. "That's the reason they're doing this."