Regardless of whether they are a bull or a bear, everyone who follows Tesla Inc. (TSLA, Financial) should be able to agree on at least one thing: they can never predict what will happen next.
Less than two weeks after announcing plans to close over 90% of its stores and shifting to an online-only sales model, Tesla is changing course. Late on Sunday evening, the electric car manufacturer released a statement on its official blog detailing the change of heart. The key parts of the statement were:
- Only 10% of stores have been closed with an additional 20% "under review."
- As a result of fewer closures, vehicle prices will increase by 3%.
- The $35,000 variant of the Model 3 will not increase in price; only the more expensive Model 3, as well as the S and X models, will cost more.
As a reminder, the original plan, unveiled at a closed, invite-only press conference on Feb. 28, saw Tesla promising to close most of its stores, cut prices for all its vehicles by 6%, initiate a new round of layoffs and introduce the long-awaited $35,000 Model 3. Bulls interpreted the move as a sign of strength, bears as a desperate ploy to sell cars amid falling demand. Even heavily pro-Tesla website Electrek questioned the feasibility of increasing sales by “50-100%” per year using an online-only model.
Mixed signals
There was also confusion surrounding the announcement, with many employees supposedly unaware of the layoffs right up until the minute they were let go. Moreover, it did not go unnoticed the recently filed 10-K makes a number of references to Tesla’s store network and the key role it plays in the company's long-term plan.
“Our Tesla stores and galleries are highly visible, premium outlets in major metropolitan markets, some of which combine retail sales and service. We have also found that opening a service center in a new geographic area can increase demand. As a result, we have complemented our store strategy with sales facilities and personnel in service centers to more rapidly expand our retail footprint.”
The 180-degree about-turn has become a complete 360-degree pirouette. This raises the question: why would a company radically overhaul its entire sales strategy, then reverse the changes less than two weeks later? One likely reason is Tesla’s existing agreements with its landlords cannot be ripped up unilaterally. The Wall Street Journal recently reported that mall owners have voiced their opposition to this sudden move. In fact, Tesla currently owes $1.6 billion in “non-cancellable operating lease agreements.” Given that the closures were not announced as a restructuring plan, the company would be on the hook for most of that sum. Ironically, Tesla’s unique model of owning its own stores, where most carmakers sell through dealerships, seems to be coming back to haunt it.
Strength or weakness?
Whether you view this new change as a positive or negative development ultimately comes down to whether you buy the bull thesis that the original store closure strategy was done from a position of strength, or whether you subscribe to the bear argument that it was done from a position of weakness. Observers have pointed out that Tesla’s own statement shows it carried out an analysis of its stores only after announcing the closures.
This is not typically something multibillion-dollar companies do. It would be completely unthinkable for a company like Ford (F, Financial) or GM (GM, Financial) to announce a complete overhaul of its sales strategy less than one month after affirming the importance of the existing model, then perform an after-the-fact analysis over the course of 10 days and then reverse the changes in another surprise twist. At the end of the day, there are two possibilities: either the original decision to close the stores was a good one, in which case the reversal is a bad one, or the original decision was poor, in which case Tesla shouldn’t have announced it in the first place. Either way, things do not look good for the company.
There is a third possibility: the store closures were done in an attempt to make the promised $35,000 Model 3 temporarily viable by offsetting the losses incurred on the sale of every car (we know the first quarter at least will not be profitable) with the savings from the altered sales strategy. However, opposition from landlords has forced Tesla to keep some stores open and, consequently, to raise prices on most of its cars. The fact Tesla is willing to subsidize this symbolically important (but not actually special) variant of the Model 3 should be a telltale sign this whole story has been an exercise in marketing, rather than prudent business management.
Disclosure: The author owns no stocks mentioned.
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