Tesla, other EV makers likely cost California dealers $910 million in 2022 profit opportunity

Direct-to-consumer electric vehicle makers likely cost California franchised dealerships $910 million in gross profit opportunity last year.

That breaks down to nearly $700,000 on average across the state's 1,303 franchised dealerships based on an Automotive News analysis, with the missed profit affecting luxury outlets the most because of EV brands' high transaction prices.

EV makers Tesla, Rivian and Lucid Motors are encroaching on sales that for a century have been exclusive to California's franchised dealers, and they accounted for 12 percent of the state's new-vehicle market last year. Now, as traditional automakers trickle out their EV lineups, the impact of the direct-to-consumer rivals is beginning to show.

Tesla sold 188,001 vehicles in California last year, according to S&P Global Mobility, at an average transaction price of about $67,000, according to data from Kelley Blue Book. The other direct sellers chipped in 5,706 registrations.

J.D. Power estimates that dealers across the U.S. made an average of $4,700 in gross profit per new vehicle in 2022, including finance and insurance income. Last year was exceptional for dealers: The gross profit figure more than tripled from 2019, according to J.D. Power.

Accounting for California's direct-to-consumer sales, the state's new-vehicle dealers lost out on an average gross profit opportunity of $698,713 last year. The six publicly traded new-vehicle retailers, which according to their financial reports earn a higher average gross profit of about $5,300 to $6,700 per vehicle, missed gross profit opportunities from nearly $800,000 to almost $1 million per California dealership. Gross profit per vehicle represents the selling price of the vehicle minus the direct cost of the vehicle.

Much of Tesla's EV share dominance last year came down to supply, dealers and analysts told Automotive News. Traditional automakers have tepidly rolled out their EV entries, while Tesla secured its place atop the EV market more than a decade ago.

Automotive News focused on California because it has the highest EV market share, at 36 percent of the U.S. last year, according to S&P Global Mobility — and allows direct-to-consumer sales for new entrants. Moreover, other states are emulating its EV-favorable environmental policies.

Tesla, Rivian and Lucid made up about 71 percent of EV sales in California last year, according to S&P Global Mobility data. The three EV makers operate on a direct-to-consumer sales model vs. the dealership franchised model under which regulation prohibits direct sales by legacy automakers. Those EV makers have more flexibility to adjust prices and offer a more streamlined sales process, while traditional dealerships have more opportunity to sell add-on products and provide vehicle service.

Not every direct-to-consumer automaker will survive, and none has mirrored Tesla's success. Rivian reported a $1.35 billion net loss in the first quarter, and Lucid reported a $780 million net loss. Tesla made $2.51 billion in net income during the quarter.

It's hard to say that California dealers would have captured all $910 million in gross profit if direct-selling EV makers didn't exist, said Brian Maas, president of the California New Car Dealers Association. Still, they would have earned some of it, if not most of it, he said.

The sheer volume of sales that went to Tesla shows that dealers have an opportunity to win back share as legacy players broaden their EV lineups.

"Product rules this industry," said Maas, whose dealer association represents most of California's franchised new-vehicle dealers. "Dealers should be going to their OEMs and asking for product to beat Tesla."

Mike Sullivan, owner of LAcarGuy, is renovating his 14 dealerships in Southern California to sell and service more EVs, spending about $500,000 per store to install charging equipment. EVs made up about 5 percent of his sales last year. He expects that share to more than double this year and is preparing to compete.

"We're all taking it very seriously," he said. "When I drop a half a million dollars on a charging station times 14, I'm not doing it cavalierly. It's fighting. And I'm excited about it."

But California dealer Howard Drake said it's too late for traditional brands to claw back sales lost to Tesla.

The EV maker's customers are typically part of "the higher-educated, higher-income crowd," said Drake, dealer principal at Casa de Cadillac in Sherman Oaks, Buick-GMC Sherman Oaks and Subaru Sherman Oaks in Van Nuys. Competing brands have to realize that they are "talking to a different group of people ... and they're going to fill a different mix of cars because the higher-end part of the market's gone."

Dealers should focus on improving profitability within their product lines rather than comparing themselves to Tesla, said Stephanie Brinley, a principal automotive analyst at S&P Global Mobility.

"It's not about getting a Tesla buyer to buy a Cadillac. It's about getting a Cadillac ICE buyer to switch to an EV," Brinley said. "We cannot grow EV volume without conquesting internal combustion engine buyers."

The missed profit opportunity extends to other states. Thirty-five states allow some form of direct-to-consumer sales for EV-only automakers, according to AlixPartners. Those states accounted for most new-vehicle registrations in 2022 — nearly 80 percent, according to AlixPartners.

Moreover, 15 of those states are following at least some portion of California's aggressive transition from sales of combustion engine vehicles, creating more market opportunities for EV makers, including the direct-to-consumer sellers.

The market share of franchised dealers in Washington, Colorado and other states that allow direct sales and follow California's climate standards also is declining and starting to eat into their potential profit pool.

In Washington, for example, Tesla sold about 16,000 vehicles last year, according to S&P. That amounts to potentially $244,000 in missed gross profit for dealers on average.

Tesla sold 9,391 vehicles in Colorado last year, according to S&P, leading to nearly $175,000 in average missed gross profit for franchised dealers in the state.

Now that traditional automakers are launching more EVs, Colorado dealers are "more than excited to compete," said Matthew Groves, interim CEO of the Colorado Automobile Dealers Association.

Luxury legacy brands, such as Mercedes-Benz and Cadillac, are bringing out compelling EV options that will show Tesla models' age in comparison, said Mark Barrott, a principal in consulting firm Plante Moran's automotive practice.

"Tesla's products are getting pretty long in the tooth from a refresh perspective," he said.

As legacy brands roll out competitive vehicles, Tesla's advantage will soften, he said.

Automakers, including Tesla, will have more than 50 EVs on the market by the end of this year.

So far, Tesla sales haven't cut into dealers' EV volume, said David Long, executive general manager at Hansel Auto Group in Santa Rosa, Calif.: There weren't enough EVs available on the market. Instead, Tesla took share from gasoline vehicle sales, he said. Now that EVs from traditional automakers are becoming more available, "at least I'm in the ring," he said.

"Before, I couldn't even get in the fight because I didn't have anything to compete," Long said. "Now, everything I get that's EV sells. Now they have a contender."