Tesla's move to dismantle store network enters uncharted territory

Tesla Inc’s move to dismantle its network of high-end showrooms as part of a plan to launch the long-awaited cheaper version of its Model 3 sedan has pushed the electric carmaker into uncharted territory for an industry that has long relied on physical stores to move the metal.

Retailers from Amazon to Apple to traditional automakers have trumpeted the benefits of physical stores, and Apple and automakers also rely heavily on advertising, which Tesla has eschewed, making the electric carmaker an outlier in its dependence on the web.

As Tesla pushes to broaden its appeal and drive up sales with the arrival of the $35,000 Model 3, the impact of the store closings announced on Thursday will play out over time, answering questions about whether a national physical footprint is necessary in an increasingly digital world, analysts and investors said on Friday.

“Customers are becoming increasingly comfortable making purchases online, and that is especially true for Tesla,” Chief Executive Elon Musk said in an email to employees, which CNBC posted online.

However, some analysts and investors question whether Tesla closing most of its 250 stores was the panicked decision of a company seeking to build the lower-cost model profitably. Shares in Tesla closed 7.8 percent lower to $294.79 on Friday.

It was only last month that Musk said a $35,000 version that could be sold profitably was perhaps six months away. And in the company’s annual report released last month, Tesla talked about growing its network of stores.

“There’s a bit of a leap of faith that’s required to have confidence that the moving from a physical distribution model to an online distribution model will succeed,” Tom Vandeventer, portfolio manager with Tocqueville Opportunity Fund, said in a telephone interview. He has owned Tesla stock in the past and still follows the company closely.

“People like to go to car showrooms and kick the wheels and sit in the car,” he added.

However, Musk pointed out in the email that 78 percent of all Model 3 orders were placed online and 82 percent of customers bought such models without ever taking a test drive. He said shifting to an online sales model, cutting jobs and reducing spending on marketing will allow Tesla to offer the lower vehicle price. Tesla also said Thursday it now expects to record a loss in the first quarter.

To overcome any remaining hesitation, Musk said Tesla would make it easier for customers to return a car within seven days or 1,000 miles for a full refund.

“Given its seeming abruptness, it does not appear that yesterday’s announcement was made from a position of strength,” Bernstein analyst Toni Sacconaghi Jr said in a research note entitled, “The $35k Model 3 - Genius or Desperation?”

Vandeventer still likes Tesla’s innovative, forward-thinking nature, but worries about the short term.

“Cutting prices is more often a sign of weakness unless you are Amazon,” he said. “And only Amazon is Amazon.”

Adding to the pressure Tesla faces is the growing level of competition from Chinese electric carmakers as well as established players like Volkswagen’s Audi and Porsche brands, and Jaguar Land Rover.

Meanwhile, US dealers remain sanguine about their position in the sales chain.

“We still believe that the franchised dealer model is by far the best way to sell, distribute and service new vehicles,” National Automotive Dealers Association spokesman Jared Allen said. “The vast majority of consumers want to do some combination of both online and traditional shopping for new vehicles.”

Since unveiling the Model 3 in 2016, Musk has been promising a $35,000 version. A lower-priced Model 3 is seen as critical to Tesla’s long-term viability as it needs to reach more customers who can afford the vehicles to offset slowing sales of costlier sedans.

The lower price could expand the Model 3 market by about 600,000 cars in the United States alone, based on historical sales figures for similarly priced sedans, Baird analyst Ben Kalo said in a research note. However, the lower-cost model also could squeeze profit margins at a time when Tesla has said it is targeting 25 percent margins for the vehicle sometime this year.