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The Future of Franchise Value in a Tesla World

The industry saw a dramatic swing toward electrification in 2021 with nearly every OEM laying out their plans to develop an electrified vehicle fleet.  These announcements are partly a result of political pressure; however, they are also a reaction to Tesla’s tremendous success, both with the consumer (Tesla’s electric vehicle market share is 79%) and Wall Street (Tesla is valued more than 2.5 times higher than General Motors). The financial markets clearly believe electric vehicles are the future and digital retailing, despite poor customer service, is the more successful model in the long term.

The implications of this shift are not insignificant for future franchise values. As OEMs transform their vehicle fleet, dealers will be required to convert their facilities to accommodate electric vehicles, while also maintaining the service capacity for their legacy customer base of combustion engines. Many Cadillac dealers decided this investment was not worth the risk and took General Motors buyout offer last year. 

The move to electric vehicle sales will also prompt some OEMs to consider new retail models, similar to that of Tesla. In February, Volvo announced its plans to exclusively sell electric vehicles by 2030. More notably, the OEM declared all sales would be online at a non-negotiable price. This dramatic move calls into question Volvo dealers’ future retail business model, making its franchise value difficult to predict. It is important to keep in mind that 2020’s record earnings were driven in large part by auto retailers’ ability to adjust pricing on a dime. In a one-price online arena, dealers’ pricing latitude would be significantly curtailed.  

Ultimately, how OEMs execute on the transformation to electric vehicles and online sales will determine future franchise value.  Manufacturers who are supportive of their dealer networks will likely see their franchise values rise, knowing they need healthy and profitable dealers to succeed.  OEMs who view their success through a zero-sum paradigm will likely see their franchise values decline as a result.    

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