Business model is changing

Business model is changing

It seems to me that the decision to close stores and move to online sales is the first step of a two-step change to Tesla's business model. Step two is franchise dealerships.

(Ducking head... waiting for the rotten tomatoes to land behind me... Stands up...Ouch! That was a late tomato!)

The decision to own all of their own stores was important when the brand was being established. We've seen how dealers for other automakers push their ICEmobiles and barely deign to mention their electrics. It was important to have the education and handle the entire customer experience to build the brand.

The Brand is now built. The Model 3 outsold all but a few cars--of all brands and types--in the US last quarter. People want Teslas now.

Now is the time where Tesla can set appropriate terms for franchise dealerships. They have proven demand for their cars. The franchise fundamentals will be a bit different than for ICE franchises. Service is not going to be the cash cow that it is for ICE dealerships. But warranty repairs would still be a viable service. They can also maintain the online order experience, splitting delivery costs with a dealer for final prep. The details of the franchise agreement will be written with the present realities in mind rather than founded in the world of 70 years ago. GM did that with Saturn dealerships, and everyone I know who had a Saturn really liked those dealerships.

And with this change, they will stop having to spend on lobbyists and lawsuits trying to overturn bans on their stores. And they will be able to have dealerships in every state, immediately.

NKYTA | 01/03/2019

I've always thought that the fall of the stealership model was in the back of Elon's mind as part of the mission.

So, no, I really hope not.

Buy online. If your state doesn't allow deliveries to you, call your congresscritters and raise a ruckus. We don't need no stinkin' middlemen.

Mike83 | 01/03/2019

Great points but this argument seems reasonable also. An article that argues that Tesla doesn't really need stores for people to test drive since 82% bought a Tesla without test driving. In addition as Taxi Teslas become common there will be no need for stores and test drives. | 01/03/2019

@johnse - Sorry - one rotten tomato from me :)

The dealers are now comprised of a group of billion dollar corporations (the largest has over $20 billion in revenues each year). They do provide a bit of value to legacy car companies, but not much. They slow product development, add significant costs, hide true sales, and work in general at opposite desires of the manufacturer. The best car to sell is the one that has the most maintenance. If the car is in for warranty work - make sure it's padded with everything you can think of as it's a major profit center for the dealer. Have a hot car - jack the price up to screw the customer. If the manufacturer wants to sell an EV - the dealer can just say no or "redirect" every potential customer to some other junkmobile.

Sorry, but I see zero value for Tesla to switch to a dealer network.

NKYTA | 01/03/2019

TT, you meant sub-zero. ;-)

greg | 01/03/2019

Tesla is just taking the next step as the only really sensible/practical way round the ban on direct sales in some US states.

Thats why Musk wanted to expedite home deliveries and mobile service - so they can focus more resources on the delivery/service processes where you are than put money into bricks and mortar stores.

I don't think Musk in any way intends to have franchised dealers. He knows that model is broken and is not the future. We all know it too, and even most ICE car customer all say so. They hate going to the Car dealership under any circumstances. Worse than the damn dentist.

Musk is actually taking the same [and safe] gamble that Bezos took with Amazon back in the day. That is people will feel comfortable with ordering stuff online and having it delivered over buying the same stuff more more money from physical stores.

Musk is just selling a lot higher priced item, some 30 years after Amazon started selling books online. Musk is sure people are now willing to spend big money buying a car online, especially with the 7 day 1000 mile right of return.

I am sure Musk will be proven right, just as Bezos was shown to be. I am also sure, that longer term, the referral program will return, more along the lines of the Amazon affiliate program, where you need to do a bit more work to claim a smaller reward will help with that 18% or so who want to try the vehicle before buying..

I've never even sat in or driven a Tesla of any kind, nor seen one in real life, but I also know its the best EV available. And I feel quite happy to buy and take delivery of one completely sight unseen if that is necessary.

Just wish he'd hurry up and open up RHD orders. To let me give him my money.

MilesMD88 | 01/03/2019

Yea, disagree with @johnse. Franchises make their money on maintenance, and ripping off ill informed or uneducated car buyers.
The Subway outside of my subdivision recently closed. They could not afford the 7K monthly rent in a very upscale area where we live...sad.
Tesla is paying top $$$ for upscale mall retail space, & employees. Let’s let Elon try his business plan! He’s proven to be smarter than 99% of us. Try starting a rocket company in the US...haha. Who are we to question the closing of stores.
@Johnse..I would not invest millions into a facility (franchise) that produced no revenue on new car sales on cars that required little maintenance....
What we can do is to continue to promote his vision, promote the product, debate the other manufacturer’s EV’s as they are rolled out, and encourage our friends, family & coworkers to embrace EV’s & all the benefits vs gas.

johnse | 02/03/2019

I agree that I could easily be wrong. But what would be a prerequisite to creating a franchise model p? Closing (or selling as franchises) your own stores. So it may just be a cost cutting effort, or it may be a necessary first step.

The ICE stealerships are certainly not the model to follow. I don’t think they can force a dealership to be exclusive to one company...but I think they can require it to be exclusively EV. The dealer business model would need to be different than an ICE stealership. But they could serve as the home bases for Ranger service as well as having full service bays.

The huge thing that dealers would help with is handling the resale or disposal (auctioning, etc.) of trade-ins. Trades, used cars, etc. do not serve Tesla’s needs at all. They also provide a distributed financing mechanism.

So, definitely not stealerships as normal, but possibly multi-brand, all-EV stores where people who are not early adopters can come, kick the tires, compare different models, and drive an EV home the same day.

suelueb | 02/03/2019

If someone wants to order a Tesla, Tesla should offer an existing owner that is close by to the prospective buyer the opportunity to bring their car over for a test drive. Let the buyer take a test drive. If the buyer orders a Tesla then
The existing owner can be compensated for the sale. A new referral program. We can make the sales for Tesla,
Spend a little bit of time being a virtual on demand sales force and be compensated. No need for galleries.

El Mirio | 02/03/2019

@Mike83 the 82% is a bit deceiving, I suspect many of those buyers went to stores to at least sit in the car to get a feel without a test drive, then went home and ordered online.

A car purchase is still a big deal, not sure if the average buyer will pull the trigger sight unseen.

However I believe there will be still enough demand with an online only model for a while. My prediction is that you will be able schedule a test drive and Tesla will come to your location, similar to the mobile service model, or a referral program as suelueb suggested.

Imagine you are at work, schedule a test drive and invite coworkers to spend lunch test driving a Tesla.

Mike83 | 02/03/2019

El Mirio. I don't think it is at all deceiving. I've had people come up to me at Superchargers years ago and when I told them what I paid they said they will wait for the 35 Tesla since they couldn't afford a MS. I believer there was around 400,000 reservations on the M3 reveal without test drives.
In addition with the many hundreds of thousands of new M3 owners giving the curious rides and such I'll bet the demand continues to increase.
The mission of Tesla is succeeding in spite of anti Tesla news and short's lies.
Cash flow is probably $1 billion per quarter now and they paid off the big bond on Friday which the shorts said they couldn't do.
I think this is the last ditch effort to slow Tesla down but now it doesn't matter what the stock price is anymore except for those who may be forced to cover their short position. And China production for Asia is just beginning this year along with the Semi production.

jordanrichard | 02/03/2019

In Tesla’s announcement it would have been nice if they addressed the obvious questions about this new 7 day return policy. You trade your car in (sell to say, Carfax), Tesla shows up at your house with your Model 3. 4 Days later you decide to return the Model 3. Does Tesla come pick it up or you take it somewhere, like a local service center? Either way, now you have no car, until Tesla returns your money which they don’t exactly have a great track record doing. So in the interim you are car less, using Lyft or Uber...... There are far too many moving parts to a car purchase and registration to pass it off as like buying a pair of jeans on Amazon and deciding to return them.

At least at the moment, Tesla is trying to make it seem

Yodrak. | 02/03/2019

"There are far too many moving parts to a car purchase and registration to pass it off as like buying a pair of jeans on Amazon and deciding to return them."

I agree. It will be interesting to see how this new approach works out. I have some doubts. On the other hand, if it doesn't we've seen that Tesla can change directions quickly.

NKYTA | 02/03/2019

Yep, this one comes down to the devil is in the details. It will be interesting to watch unfold.

carlk | 02/03/2019

100% disagree. Tesla will take care of the service. Beside that dealership is totally useless. When was the last time you go to a dealer after you bought the car (other than to the service department) or talked to the salesman? Tesla is just so innovative many still need some time to make it to sink in.

My guess is Tesla has learned a lot from selling cars in states that do not allow stores. Tesla would not go store-less if the experience is very bad and there is no good solution for that. Like some said the devil is in the details and details can be worked out. I believe it will work out just fine. Looks dealership resistence actually helped Tesla to move to this direction. Happy to see they finally got what they wished for.

Tesla has already made compelling cars. The next step is to make affordable mess market cars. This is one big step to get there, 6% cost saving if you believe Elon. There is zero chance that Tesla will want to have the middleman.

mcdonalk | 02/03/2019

When we bought our first Model S in 2014, there was no store here in AZ for legal reasons. Therefore, we ordered the car on the web page, after a few questions were answered during a phone call to Tesla. The entire transaction went very smoothly, and I'm sure it will do so when and if the store in AZ closes.

The only disadvantages at that time were:

a) We had to go the the local DMV to register the car. The DMV was very efficient, and this didn't take very long.

b) Registration fees could not be included in the financing.

I can live with this again. It is how Tesla plans to market solar that is my primary concern.

Tdreamer | 02/03/2019

With the shift to online only sales, how long will it be before the Tesla Store on Amazon has more product offerings...

SCCRENDO | 02/03/2019

We are in the age of disruptive technologies and the internet has opened up new avenues. The old fashioned way worked well. But indeed the modern way creates more success. The largest taxi company Uber owns no cars. The company with the most rooms for rent Air B&B owns no rooms. The largest commodity store Amazon owns no stores although they are beginning to look at some. In the same vein Tesla owns no dealerships and is closing down its showrooms. The idea is to eliminate the middle men who provide minimal value for their cost. Human labor also cost a lot more than machines, computers and software. Tesla obviously feels that they are at a stage where the car can market itself. Perhaps they could have isolated stores where people who feel the need to test drive could travel. For the amount of people who won’t buy without a test drive Tesla likely has enough demand that it won’t be a problem. Contrary to the philosophy of our present government some jobs need to disappear. But we need to create new job suitable for the 21st century such as green jobs. Perhaps one should listen to AOC instead of mocking her. Some of what she says is certainly open to negotiation. But we need to start listening to the new generation instead of trying to patch up the ideas of yesterday.

carlk | 02/03/2019

One thing I'm wondering is whether it's legal for traditional auto companies to do direct online sales. That's ~10% margin right there. Too bad for them if they can't and too bad for stealerships if they can.

SCCRENDO | 02/03/2019

Unfortunately they are locked into the dealership model. That is why they will lose out. It’s like regular taxis. That’s why they struggle to compete with Uber.

jhbeak | 02/03/2019

Carlk: under the dealership model, even online orders are delivered thru the authorized dealer for each customer’s address. Dealers get the same cut on the sale. There is no loophole to save 10% or anything

bp | 02/03/2019

The decision to close stores and only do online sales coupled with the significant price decrease are shots across the bow for dealerships and the other manufacturers.

I've purchased 3 Tesla vehicles in Texas - all through online sales. The Tesla stores and auto dealerships provide very little value when there isn't any haggling on price and the configuration process is simple. Elimination of the stores eliminates a major expense, and is a further demonstration of why dealerships are obsolete and no longer needed.

The one challenge will be test drives. Even as a strong Tesla supporter, we've done a test drive prior to each of our purchases, and there's likely to be many customers who would prefer to do a test drive before purchase, and not risk dealing with the after-delivery return. Without the stores, Tesla could do a limited number of test drives at service centers or offer periodic test drive events. Plus, current owners may help out by providing test drives for friends.

It's likely Tesla will invest in upgrades to their online presence, to make investigating a purchase and going through the configuration process easier, such as online chat or teleconference support. [Wish they would list actual prices - not use the projected net cost after potential savings.]

We're skeptical about the 7 day/1000 mile return policy. There are other products that offer similar return policies on major purchases - usually after you've sold or had towed off your old product (like a new bed) - and if you return the new purchase, you're stuck and can't go back to what you had before the purchase. The same would be true with a Tesla return - you'd be committed to buy something - quickly - to replace the old vehicle and the temporary use of a Tesla. However, Tesla likely did some analysis on this strategy, and is confident few of their customers would exercise the return.

The major price decrease and introduction of the $35K Model 3 will make it considerably more difficult for other manufacturers to match Tesla's price, range and performance, even with the US tax credit. More of the manufacturers may be forced to sell their new EVs at a loss, just to be competitive.

Yes, these changes are a change in the business model - but not a step towards Tesla dealerships, instead it's going to force the other manufacturers more challenges to compete with Tesla, especially when they have to carry the financial burden of including dealerships in their sales process.

Yodrak. | 02/03/2019

"Without the stores, Tesla could do a limited number of test drives at service centers"

This is somewhat in line with my thoughts - the service centers will take over some of the functions that might previously have been sales center functions, but not those functions that can be handled online. Test drives are one example, another might be trade-ins. On the other hand, demo cars available for sale might be added to the online list of used Teslas.

DTsea | 02/03/2019

Thats just silly johnse. Closing showrooms so they can CUT THE PRICE. So why add dealerships who would havebto MARK UP THE PRICE?

NKYTA | 02/03/2019

@bp “Yes, these changes are a change in the business model - but not a step towards Tesla dealerships, instead it's going to force the other manufacturers more challenges to compete with Tesla, especially when they have to carry the financial burden of including dealerships in their sales process.”

And there you go. You said that way better that I did.

+1 Yodrak and DTsea

johnse | 02/03/2019

I believe the vast majority of car buyers are not willing to wait multiple weeks to buy a car. Especially in the cases where a car died, or was totaled in an accident.

I was holding a reservation for my daughter to get a Model 3, but she could not afford the more expensive versions. But her car needed to be replaced. They had to get a car that day...kinda took Tesla out of the running, even had the $35k been available about a month ago.

Local inventory is something that helps people. I hear well that folks here think there can be no such thing as a good dealership, operated ethically. I think the business rules mandated by a newly created franchise contract could enforce ethical operations.

Things needed in local areas:
* delivery prep
* service... rangers cannot handle it all.
* trade-ins

Tesla has found that these things are expensive and have been seeing how hard it is to create them all themselves. Some states don’t even allow service centers. Farming all this out to independent businesses cuts down on the drag to Tesla Corporate.

Are they going to do this? I don’t know. But none of you know for sure they won’t. I trust Tesla will make decisions that will continue their growth and I wish them all the best. And I’ll be along for the ride. I love my X and I’ve got a good percentage of retirement money in Tesla.

NKYTA | 02/03/2019

“Tesla has found that these things are expensive and have been seeing how hard it is to create them all themselves. Some states don’t even allow service centers. Farming all this out to independent businesses cuts down on the drag to Tesla Corporate.”

Expensive like the Superchargers?

Yeah, let’s not farm that out please.

So wrong.

carlk | 02/03/2019

The 7day/1000mile return policy is to be used as the last resort for buyers who really regreted the purchase and to give everyone a peace of mind. It's not for people who have second thoughts about color and option choices. Otherwise it will be open to a lot of abuse. Tesla could tell those people it will accept the return but they will not be allowed to buy another car in a year or so. Costco and Amazon all have generous return policies but when they detect abuse you will be banned forever.

Shock | 03/03/2019

LMAO nobody is going to dump their own 6-digit cash into a Tesla franchise after the company has, overnight, indicated it will shutter most of its retail locations. This is really outrageous a prediction.

SCCRENDO | 03/03/2019

Hey Shock speak for yourself. I guess Musk is not listening to you. You should sell all your shares.

Yodrak. | 03/03/2019

"I’ve got a good percentage of retirement money in Tesla."

I fear you're taking quite a gamble, hope it works out for you.

jerrykham | 03/03/2019

Back on the 82% without a test drive number. I definitely test drove a Model S before purchasing one. When I had it in for its 12,500 mile service I got the chance to sit in and go over a Model 3. I went home and asked my wife if she wanted one. She went back with me the next week to look it over and we got to go through it and sit in it before any other folks had arrived (as it gets busy). We then decided to get it. No test drive - they still were not offering them in Dublin, CA in early August of 2018 believe it or not. But would we have bought it without getting to sit in it, go through it, check the space, check how well made it was, etc.? Heck no. | 03/03/2019

Note that Tesla has not said they are closing delivery centers. Some existing stores may be turned into delivery centers too. I also expect most locations that are stores/service will become larger service centers, helping to solve a different need Tesla has.

Another tact Tesla may take is to have "Test Drive" days in various cities. The did this in the very early days before there were many Tesla stores, so it's nothing new for Tesla. I can see them offering a week of test drives, perhaps as often as once a quarter. They can just rent a parking lot and have it all scheduled on-line. Far cheaper than running stores and they can even make it an "Event" that garners local attention.

SCCRENDO | 03/03/2019

I have faith in Tesla and have held stock for about 3 years. I will not sell. But I am 65 and there is no way I would be stupid enough to place the bulk of my retirement in Tesla. It is presently under 2 % of my investments.

scottharkless | 03/03/2019

I think Tesla can operate successfully without their own retail stores or franchise dealerships. They already have the best sales force that any manufacturer could hope for; devoted owners who love their product and believe in their mission. All they need to do is bring back a re-vamped referral program that offers more reasonable rewards to owners that successfully convince others to buy a Tesla. Among other things, these owners will let others drive their car...solving the test drive problem.

The only other part of the equation is deliveries and service, which can both be done with mobile fleets that don't have to be tied to a retail location.

SCCRENDO | 03/03/2019

The referral program was BS and subject to a lot of abuse. It is not necessary. | 03/03/2019


johnse | 03/03/2019

Please note that I said a good percentage. It's more than your 2%, but definitely less than "bulk of" :)

Re: Those who want to pay owners to give test rides: Many states have laws prohibiting "bird-dogging". The early referral program ran into this issue because it gave money back to the referring owner.

SCCRENDO | 03/03/2019

@johnse. The only point I was trying to make was that anyone who puts all their eggs in one basket is foolish. How much you put in depends on you risk tolerance and how close you are to retirement. At times I have been tempted to buy more and anything below $300 is likely a good buying opportunity. Interestingly most of my money is managed and as it turns out there is a great reasonably large investment in TSLA among my mutual funds and I ma overall be at a higher percentage.

Tesla2018 | 03/03/2019

I think we all agree that the referral program was getting out of hand. Some people were using it as they are primary source of income by setting up websites and getting free cars and stuff and then selling them.

It should have had a limit of one free car but you would have to put some of your own money down too instead of just giving them out. The most frequent ones like free supercharging make more sense since it is not costing the company that much money. The shipping charges on the wall Chargers and kiddie cars alone must have been a fortune.

jordanrichard | 04/03/2019

Tesla2018 +1

jpcollins9 | 04/03/2019

In support of jerrykham, my experience was similar. When I ordered my S85D in October, 2014, I had never seen a Tesla in my area (Alabama) and had only the web site to go by. I ordered, set up a lender relationship, and tracked the construction process online. The car was delivered to my house in March 2015. Fast forward to January 2018, Had a need to take my S to the Atlanta service center for a warranty issue and was loaned an X to use for a few days. My wife, who didn't like the S because it was "too big" fell in love with the loaner X, prompting us to order the X100D in January, online, and it was delivered to my home in March. Even service has been primarily done at home by the mobile service people. As a 73 year old, I'm old enough to say that the good old days weren't that good. We just didn't know better or have better options. As a 6 year old, was panicked having to speak to an operator to make a phone call. Rotary dialing was a big step up. Just sayin'.