Tesla has announced it will not be closing nearly as many stores as it claimed 10 days ago and that it will have to raise prices across its vehicle fleet as a result. The plan is a partial reversal of the announcement that surprised investors and company fans alike. The $ 35,000 Model 3 will still be available, but prices on every other vehicle are going to rise.
Tesla now claims it will only be closing stores that it would have already intended to close, no matter what. The company writes:
Over the past two weeks we have been closely evaluating every single Tesla retail location, and we have decided to keep significantly more stores open than previously announced as we continue to evaluate them over the course of several months. When we recently closed 10 percent of sales locations, we selected stores that didn’t invite the natural foot traffic our stores have always been designed for. These are stores that we would have closed anyway, even if in-store sales made up our entire sales model.
A further 20 percent of Tesla retail locations are being reviewed and may be cut if performance does not improve over the coming months.
Tesla’s PR statement offers no context or explanation for why the company has made this dramatic change less than two weeks after unveiling a significantly different strategy. The Wall Street Journal, however, may have fielded an explanation several days ago: Rent.
The whole “We’re not gonna pay rent” argument works better in a musical. Image by Wikipedia
According to the paper, investors, employees, and the general public weren’t the only ones surprised by Tesla’s sudden decision to walk away from most of its public-facing retail locations. Tesla’s landlords also weren’t apprised. And as the WSJ wrote: “Store landlords show no signs of giving the company an easy way out of its leases.” The article also notes that Tesla has $ 1.6B in lease obligations, with $ 1.1B due in rent between this year and 2023. Most of Tesla’s leases didn’t have cancellation clauses, either, leaving the company exposed to potential lawsuits.
Tesla’s PR notes that all vehicles sales will still be conducted online, though it also states that a small number of vehicles will be on-hand for immediate purchase. The 7-day/1,000 mile test drive policy will still apply as well, though test drives will still be available in stores.
On balance, this seems like further evidence that Tesla’s initial announcement wasn’t really planned. Announcing a radical change to your business model only to then reverse course is embarrassing. Tesla sales have also fallen off steeply since last year, according to InsideEVs. While this is normal in the auto industry, a close comparison of Tesla’s 2019 sales figures shows steeper declines for the company compared to other vendors. Sales of the Toyota Prius Prime and Honda Clarity PHEV, for example, are down roughly 55 percent from December 2018. Sales of the Model 3 have fallen nearly 80 percent since that time. Sales of the Chevy Bolt EV fell even less, from 1,412 in December to 1,225 in February.
The most likely explanation for this demand drop, over and above seasonality, is that Tesla did everything it possibly could to pull sales into Q4 in order to qualify the maximum number of buyers for expiring EV tax credits. But while these declines could be entirely explained by such events, they could still cause problems for the company at the end of Q1, particularly given that it’s plowing ahead with the introduction of the Model Y this week. Bringing up new vehicle models is never cheap.