UPDATE (12/21) - This issue has been resolved in the latest release of ESXi 5.0 Update 2, you can refer to the release notes for more details on other updates and fixes.
Though it is actually pretty easy to get around this problem by deleting the VMFS partition prior to starting the new ESXi installation. Below are three methods depending on the installation option you have chosen. Please be absolutely sure about the VMFS volume prior to deleting the partition.
Method 1 - While you still have login access to previous ESXi install
If you still have access to the system before the re-install, you can delete the VMFS partition before rebooting and starting the installation (ISO or kickstart). You will first need to identify the device that is backing your local datastore, you can use the following ESXCLI command which will provide a mapping of your datastore to device.
partedUtil we can check the partitions found on the disk and we can confirm that partition 3 is being used for VMFS. Using the "getptbl" option and specifying the full path to the disk which is under /vmfs/devices/disks/naa.* we can retrieve the partition info as shown below.
Note: The disk that contains the local ESXi 5 install will always have VMFS as the 3rd partition, where as other VMFS volumes will only have a single partition.
Method 2 - During manual installation using ESXi 5 ISO
When you boot up the ISO, you are brought to the "Welcome to VMware ESXi 5.0.0 Installation" page, you will need to login to ESXi Shell by pressing ALT+F1. The username will be root and there is no password, just hit enter. Just like in Method 1, you will need to identify the device for your local datastore but instead of using esxcli, you will need to use localcli as hostd is currently not running.
Here is a screenshot of the identifying the local datatstore device and deleting the VMFS partition:
Method 3 - Kickstart Installation
If you wish to ensure that the default "datastore1" label is always available for scripted installs, you can using the following snippet in your %pre section of your kickstart. This will search for all disks under /vmfs/devices/disks and find the deivce that is backing a local ESXi installation and delete it's VMFS partition prior to starting the installation.
Note: To be extra cautious, you should also consider disabling any additional remote LUNs that can be seen during the installation using the trick found here.