In addition to today’s announcement of the standard $35,000 Model 3, Tesla has also described a significant shift in their sales strategy. Tesla will now focus primarily on online sales, with only a few physical locations in high-traffic areas, functioning as “Tesla information centers.”
This will be accompanied by the closing of “many” stores and a “reduction in retail headcount” (layoffs), though Tesla did not specify how many as a percent or in real numbers.
In addition to the shift to online sales, Tesla announced that they will expand on their “return policy” and allow new owners 7 full days and 1,000 miles to drive their car and return it if they are not satisfied. They even (perhaps unwisely) suggest that owners could “buy a Tesla, drive several hundred miles for a weekend road trip with friends and then return it for free.” Tesla is confident, though, that after this experience, new owners will be satisfied enough that they would prefer to keep the car than to return it.
Apple Store Model
Originally, Tesla focused on having stores in high-traffic mall areas, thinking that it would be easier to introduce customers to a new brand in areas where there was a lot of foot traffic, with a strategy laid out by Apple/Gap’s former retail boss George Blankenship. As a result Tesla ended up breaking records for revenue per square foot of retail space. And had one of the biggest days in retail history, with huge lines at stores worldwide.
Over time Tesla opened more “sales and delivery” combined centers which functioned a little more like traditional dealerships.
Regardless, one of the reasons Tesla has been able to sell cars at a higher margin than the rest of the industry is that they run both manufacturing and sales themselves, which allows them to maintain the margins from both sides of the equation on their own balance sheet, instead of dealerships taking half of the profit. In this way, Tesla’s sales team was more trim than the rest of the industry already.
Reasons to change: Dealerships, politics, inefficiencies
But Tesla was restricted from opening stores in many states due to antiquated dealership laws. In some states they had to call their stores “galleries” where orders were not taken and employees were unable to discuss prices with customers, telling them instead to go online to look for orders. Tesla seems to be standardizing this across the country – focusing on using the stores as a space to show off Tesla technology, rather than to push cars. And despite the lack of dealership laws overseas, this strategy will likely affect worldwide sales as well.
In the blog post, they mention this is a large part of the reason: “the important thing for customers in the United States to understand is that, with online sales, anyone in any state can quickly and easily buy a Tesla.”
Another reason given is that it will “reduce inefficiencies” in sales. This should help to make lower vehicle prices, like today’s $35,000 Model 3, possible while still maintaining profitability for the company.
The problem is, those “inefficiencies” are people. Tesla confirmed on a press call today that there would be further layoffs in retail. What does this mean for those employees? Will they be let off, or will there be other places for them within this quickly-growing company which already shows signs of being understaffed (with customer service becoming poorer by the day as sales grow faster than service does).
Last month, Tesla announced a significant round of layoffs, which included mostly Model S and X production employees due to increased efficiency in hours of labor required per car. But many retail sales employees were also cut during that round of layoffs. This was likely due at least partially to the big delivery push at the end of last year and expected drop in US demand for Model 3s at the beginning of this year due to the partial expiry of tax credits.
But in retrospect, it seems like it must also have been in preparation for this move to online sales only. Today, Tesla confirmed that more layoffs will come, and that there is “no other way” to achieve the savings required. On top of Tesla’s already-trim sales organization, they are going to have to fire more people.
Tesla did mention they would “significantly increase headcount in service” on the same press call. One hopes that employees who want to transfer within the company will be able to transfer from sales to service. Perhaps even those locations could be repurposed, as Tesla is falling behind on service at the moment with the large increase in cars on the road after the successful launch of the Model 3. And the impending increase now that the $35,000 model is out.
When asked how many employees would be affected by these layoffs (and possible hirings), Tesla declined to answer. CEO Elon Musk seemed irritated at the question, stating that that was not the purpose of today’s call. But with all due respect, employees who aren’t sure whether they’ll have their jobs for long are probably irritated to hear that some of their entire teams/stores will be closed, without knowing specifics until some nebulous later date. Have some empathy for your loyal workers, Mr. Musk.
For a fast-growing company, which is increasing sales by 50-100% per year, cutting sales staff does not seem like the most forward-thinking idea. Tesla has flirted with this before by offloading sales responsibilities to owners through the referral program, but that recently ended as well, leaving Tesla themselves to do the selling.
To be fair, the cars do sell themselves. They are great cars, and owners are happy to evangelize about them whether they are compensated for it or not. And Tesla gets plenty of interest on the internet, through social media and media outlets like ours.
But if Tesla is trying to sell a million cars per year with little sales staff, and without advertising? Will that really be possible? And if so, for how long? Sure the initial interest will buoy them for a time, but will they need to return to retail in the future? What will happen to those retail locations in the interim? Might they be repurposed as service centers, keeping much of the staff on (*hint: good idea)?
What do you think about this change in Tesla’s retail strategy? Let us know in the comments below.