Online-Only Model Proves Expensive for Tesla

Tesla’s late February announcement that it would close nearly all of its gallery and store locations to fund price reductions on all of its cars came as a surprise given its past state-by-state legal challenges to franchise laws that prohibit manufacturer direct sales. The announcement also came less than two months after the automaker announced it would lay off 7 percent of its full-time workforce in addition to all nonessential contractors. So, this change in retail strategy was meant to shore up the company finances more than move boldly into an untested online-only sales model.

Elon Musk and the media immediately focused on the legality of automaker online sales and speculated as to when other automakers would join Tesla in selling directly online, rather than questioning whether it made financial sense. Then, just 10 days later, Tesla reversed its decision and announced price hikes on all models except the Model 3 instead of reductions. As the iconic Roseanne Roseannadanna  character from Saturday Night Live would say at the end of an absurdly ridiculous sketch, “Never mind.”

Although Tesla offered few reasons for reversing its decision, upon further examination, the financial ramifications were probably negative rather than positive. Two areas of concern most likely influenced Tesla’s new stance: the combination of ongoing expenses (e.g., real estate leases and associated costs) as well as the high probability of lower unit sales due to potential buyers being unable to test or be educated locally about the cars.

Mall operators were quick to remind Tesla that it was on the hook for leases that represented multiyear obligations of $1.6 billion. There were also financial obligations to some fired employees. Since store and gallery employees are the equivalent of dealership sales staff, the company call center would have had to add staff to provide product education online as well as sales assistance. Tesla bragged about a one-minute car purchase via a cellphone, but this is not how even the wealthiest individuals spend more than $100,000. They want to configure cars to their specifications, perhaps trade an existing car, finance the new car, and arrange delivery. They want to test drive these so-called engineering marvels. Tesla offered the seven-day or 1,000-mile full refund option for buying cars to mitigate risk, but anyone who has returned items bought online holds their breath until they see the credit card charge reversed. If Tesla made buying easy, it would quickly discover that enterprising individuals would treat the seven-day promise like a free rental just as other automakers who have made similar offers in the distant past have discovered.

I always doubted that other automakers would follow Tesla’s lead since they already control dealer operations, including online sales, through various requirements for brand image adherence, loaner car policies, and even the sale of OEM branded extended warrantees, parts, and accessories. Plus, automakers take no risk on the eventual actual selling price of their vehicles since they are paid as soon as a vehicle is designated to a specific dealer.

Automakers are very good at engineering and assembling cars, but they know very little about the retail process as recent attempts, such as GM’s Shop. Click. Drive. program, have demonstrated. When they have tried to engage directly with consumers in countries where direct sales are permitted, factory owned stores have underperformed those owned independently. Over the last few years, many luxury brand company owned stores have been sold to dealers. So, as is too often the case with Tesla, the company reversed an innovative strategy that proved to be anything but.

Teslas are brilliantly designed and engineered vehicles, but the company’s Achilles’ heel, apart from overpromising, is rooted in sales and service and managing the redistribution of its used cars, which are now being sold by independent and franchise dealers who will determine the future residual values for the vehicles.

Maryann Keller is principal of Maryann Keller & Associates, a New York area automotive strategy consultancy.