National Post (National Edition)
Tesla swerves on its retail strategy
RETREAT SUGGESTS FOUNDER MUSK IS ‘WINGING IT,’ EXPERT SAYS
Tesla’s sleek stores embodied its green vision for upending the transportation and energy business: a one-stop shop for electric cars, solar panels and battery storage. Less than three months ago, the company announced 11 new store locations across the country.
Now Tesla is in retreat, shuttering most of its stores in a bid to cut costs. The move signalled the broader vulnerabilities of an upstart that for a time was the most highly valued American car company.
A spate of price cuts in the U.S. points to a slowdown in sales, and the company says it is currently making cars for Europe and China only. But plans to bring the company’s mass-market car, the Model 3, to overseas buyers have been hamstrung by logistical challenges.
A long-promised US$35,000 version of the Model 3 is finally being offered, but the price will test the company’s profitability. Tesla now expects a loss in the first quarter, rattling investors’ faith in the company and its enigmatic founder, Elon Musk. In recent days, its shares have tumbled more than 13 per cent.
“I think this company is in scary territory,” said Erik Gordon, a management expert at the University of Michigan’s Ross School of Business. The “flip-flop” on retail strategy, he added, “makes it seem like Musk is winging it and the board is letting him wing it.”
Musk has promised a revolution in pretty much every business he has entered. His Space X rockets are meant to take passengers to other planets someday, while his Boring Co. aims to solve traffic problems with underground tunnels.
At Tesla, Musk wanted to transform car manufacturing with a highly automated production process. But the company has struggled to master the basics.
Production lines sputtered when Musk pushed to churn out a few thousand cars a week — something established automakers do in a day. Tesla sent customers US$70,000 cars with dings, scratches and malfunctioning screens. Some owners needing repairs were told to wait weeks or months for an appointment.
Recently, the financial stress on the company has become more evident. It laid off seven per cent of its workforce in January, the second job cut in the past eight months. And the company had to use up a quarter of its available cash last week to make a US$920 million payment to bondholders, giving it less of a cushion to expand or absorb losses.
Next week, Musk intends to unveil Tesla’s newest offering, the Model Y, a small sport-utility vehicle that uses some of the same parts as the Model 3. But those ambitions will further strain Tesla’s capital and could pose a risk to sales of other models.
And the abrupt change to online-only sales is a rare strategic reversal.
In the final three months of 2018, Tesla opened 27 sales and service locations to keep up with rising demand for the Model 3. Overall, it had more than 100 stores and showrooms nationwide and others overseas. In a Feb. 19 regulatory filing, Tesla said company-owned stores strengthened its brand and helped reach potential customers in major markets.
Just nine days later, Musk said Tesla was going to close all but “a small number” of its stores, which take orders, and galleries, which increase exposure. He also said that the company would no longer offer test drives, and that all sales had to be completed by computer or smartphone.
At a darkened Tesla outlet in the Dallas Galleria, one of the locations that opened in December, a security guard sat inside the store this week as passersby snapped photos of the three cars visible though the glass. A sign proclaimed, “All Tesla Sales Now Online.”
As Musk lays it out, the change is not so radical. In an email to employees, he said that 78 per cent of Model 3 orders were already placed online, and that 82 per cent of the model’s buyers made their purchase without a test drive.
Musk has made two arguments. He said store closings and related job reductions would enable Tesla to lower costs enough to make money selling Model 3s for US$35,000. Financial analysts are not so sure. In a note to his clients, Toni Sacconaghi of Sanford C. Bernstein & Co. estimated that the profit margin on the base Model 3 was “close to 0 today.”
Musk also said the move to online-only sales would become a strategic advantage. But Gordon, the University of Michigan professor, questioned whether Tesla would be able to maintain growth without brick-andmortar stores. “They are not going to grow faster by being online only than by online plus stores,” he said. “It’s a logical impossibility.”
In the last three years, Tesla has missed several of the ambitious goals Musk has set. He once forecast that Tesla would turn out 500,000 cars in 2018, twice what it ultimately produced.
Musk announced last week that Tesla was accepting orders for a Model 3 priced at US$35,000 — US$8,000 less than the current basic model. But the federal tax credit on Tesla cars has been scaled back, so none of the cars will be available for a total of less than US$30,000, as he once heralded.
Tesla has reduced prices on its other cars several times in the past two months, including cuts of up to 30 per cent on its priciest models last week, suggesting sluggish sales. The online publication Inside EVs, which follows Tesla closely, estimated that the company sold fewer than 8,000 cars in January, down from nearly 30,000 a month at the end of 2018.
Asked about sales trends, a Tesla spokesman pointed to a statement by Musk in his conference call about first-quarter earnings: “The demand for Model 3 is insanely high. The inhibitor is affordability. It’s just that people literally don’t have the money to buy the car.”
Many Tesla customers say they have purchased cars online with no problems. For trade-ins, they were able to upload photos and get a quote back without going to a showroom for appraisal. But many still balk at buying an automobile — the second most expensive consumer purchase after a home — without seeing it first.