Dealer vs. Direct Sales

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Not to clutter the already cluttered Tesla thread here is a look at the Dealer vs. Direct Sales business model conundrum.

Both have their advantages and disadvantages. In fact there are more options, Franchising and Value Added Resellers (VAR)come to mind.

The benefit of Dealers is that it relieves the producer from the investment in the sales network specially important for low priced items. Imagine Coca Cola having to service the final consumer!

The drawback of Dealers vs. Direct Sales is that there is a pipeline to fill and that can be a huge investment. It does not matter whether it’s the producer or the dealer who foots the bill, it raises the price of the product to the final consumer. When you have both models operating in the same industry, the price elasticity of demand favors the direct model.

Since autos is a topic too hot to handle, think back to DELL vs. IBM. DELL was the Tesla of the PC era, they assembled and shipped PCs on demand with no sales pipeline. IBM was impacted so severely that they tried to imitate DELL. Their resellers objected so strongly, that even without a law protecting the resellers, IBM caved.

A little know factoid is that for DELL to be able to build PCs piecemeal on demand they required a huge inventory of available parts. To solve this problem DELL required its suppliers to have warehouses next to DELL’s assembly plants for “just in time manufacturing” to work.

When the first auto dealers popped up it made sense for OEMs to rely on dealers, they didn’t have the resources to deal directly with the public and there was no need for a law protecting dealers, the economics of the industry was sufficient. Very few retail businesses need laws to protect them from manufacturers, economic realities suffice. At some point auto makers found that they had grown large enough that dealers no longer provided an economic benefit. Dealers fought back and got the laws passed. From an economic point of view consumers are paying for the inefficiency mandated by these laws.

In the current auto market, the dealer protection laws favor Tesla in some ways (price elasticity of demand) while it hinders them in others.

The Captain

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WOW! Thanks for awakening that part of my memory banks that brings back the 1990’s. I was not a big fan of Dell back then, as I would compare the overall value between Dell and Gateway 2000 PC’s and found the GW2000 to be a better overall value for desktop PCs. I always sold IBM or Dell PCs in the Server category, but for desktops, GW 2000 were fine.

Gateway, Inc. - Wikipedia.

'38Packard
=> Remember the cow boxes?

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Loved my Gateway. Went on line, picked exactly the parts I wanted, and they delivered it directly to my home. What a beautiful machine, then the owners moved from North Dakota to San Diego and the business went down hill. Then I started building my own machines.

Andy

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Which is interesting, because the warehousing and inventory issues still existed - the costs didn’t just disappear - and somebody paid for it - but Dell was able to wring enough other efficiencies out of the supply chain to make it viable. More than viable, actually, incredibly successful.

The history is a little different. The very first model was direct to consumer, but that was an icky business, with unreliable autos and almost no service knowledge in the populace. On top of that, at the beginning there were over 200 manufacturers, and as you might imagine they popped into existence and back out frequently.

As the auto was a major major purchase for people at the beginning, this roiled the population and it was people, not dealers who clamored for protections in law. Manufacturers found it advantageous to supply cars to dealers, who would then have to deal with service issues and other problems that consumers would have.

Over time the dealers became more powerful, and (regulatory capture here) became their own powerful bloc, but at the beginning - in the progressive era - it was a consumer issue that fomented the first regulations over car manufacturers.

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I think the challenge is that a car is a stand-alone item, which as a commodity, can be sold either directly or through a dealer network. The “PC” was a similar device, in concept, but since PC manufacturers, at least at the beginning, didn’t sell terminals, printers and so on, there was a requirement for an “integrator” of sorts. Even network equipment firms who generally started using a direct-sales, found that they did far better when presented by a third party.

I spent a good part of my adult life in that capacity, wearing whatever mantle the vendor was looking to sell through and the end user was willing to buy from (frequently, in order to get the best price/terms of sale the avatar of the firm was different depending who was looking at it. Over the years, frequently simultaneously, we were known as a distributor, OEM, contractor, dealer, value added reseller (a pretty popular term for us), and installer, an integrator, a design-build firm and so on.

If it was on the physical layer, we claimed it, as well as the software layer, other than applications (except for CAD).

We covered the power side of things by designing and installing diesels generators and UPS systems along with the interconnecting power wiring, transfer switches, transformers and similar toys. We supplied most of the popular manufacturers of network equipment, as well as installing the network cabling (copper, fiber and wireless). We supplied file servers, storage equipment, communications equipment as well as the racks and do-dads that went along with them. We also did quite a brisk business in surveillance camera networks as well as commercial audio-video ranging from conference rooms to large theater venues. To top it off, we were a leading supplier of AutoCAD based computer aided design systems to architectural and engineering firms (as well as schools).

And, of course, in the grand scheme of things we also supplied large quantities of all nature of PC’s printers, monitors, plotters, digitizing tablets and stuff.

The face we put towards our customer was that we were capable of design-builds (with nearly every aspect done in-house in order to optimize multi-manufacturer solutions), but on the procurement side, we had access to hundreds of thousands of different items sold though dozens of suppliers of one sort or another. On any given day, our purchasing agents might be buying memory sticks, digital cameras, a 10 KVA transformer, fiber optics connectors and wireless microphones.

And I got to play with all the toys :slight_smile:

So, back to the direct/dealer question: An end user could probably save some money on the material by (assuming he knew the optimal source in each case) buying all the material direct, but then he would have to figure out how to build the job on his/her own. In a corporate environment, that means they would take “ownership” if the design didn’t work out which means, it would take either a brave soul, a fool or their depending on a party with vested interests (like asking Cisco to design the network - which they would be happy to do for free, but using equipment about 4X as expensive as was really required - not to mention that their physical layouts tended to be childish as they had no clue of the clever tricks that understanding the cable layout would allow to save money as well as provide a functionally better design).

All that said, the major advantage I can see to a car manufacturer of having a dealer base is the cost of the capitalizing of the regional facilities as well as possibly reporting “sales” on the basis of when they passed into the dealer’s inventory, rather than when the cars were bought by the end user.

Jeff

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