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Tesla needs 'more stores not less'

March 1, 2019

A cheaper Tesla Model 3 is likely to be an even bigger hit. But will the company's planned store closures hamper demand in a sector where customers always try before they buy?

The Tesla store in Berlin
Image: Getty Images/S. Gallup

Tesla boss Elon Musk has made good on a promise he made three years ago when he said company's electric car for the masses — the Model 3 — would eventually sell for just $35,000 (€30,750).

By cutting $8,000 from its current price, an era of e-mobility is now within the grasp of a wider band of consumers, who could finally help Musk to generate the revenues the ambitious automaker needs to survive.

In order to achieve the new lower price, Musk has ordered the closure of "many" of the company's 378 stores and service locations. Teslas will, instead, be almost entirely bought online.

The new plan, which Musk admitted was a "difficult" decision, flies in the face of the rest of the auto industry, where almost all of the estimated 79 million new cars sold globally in 2017 were purchased through vast networks of motor dealerships.

Existing stores are convenient

"It's not a brilliant idea," Jürgen Pieper, auto analyst at the Frankfurt-based Metzler Capital Markets, told DW in response to Telsa's store closure plan. He said consumers in large cities like Munich or Frankfurt find Tesla's existing stores convenient.

Read more: Every third new car in Norway powered entirely by battery

Pieper warned that Tesla was "saving money in the wrong place," and that "more stores would be the better alternative" to help the brand get close to its key customers.

Journalist Maarten Vinkhuyzen, complained recently about a lack of Tesla stores in Europe, just as the fledgling automaker rolls out the delivery of the Model 3 outside of the US market. In an article earlier this month for the website CleanTechnica, he said Tesla needed an extra 60-80 branches across European Union states.

While plans to streamline the sales process in the US "makes a lot of sense," Vinkhuyzen told DW, "In most of Europe, the Tesla brand is not known well enough to sell only by word of mouth." 

To boost the online offer, Tesla has promised that buyers will get their new vehicle delivered within 30 days, although production issues mean a Model 3 ordered in the US today still faces a 4-month delay.

Elon Musks stands next to a Tesla Model 3
Tesla's shares fell after the announcement of store closures, amid revived worries over the automaker's profiabilityImage: picture-alliance/dpa/A. Sokolow

A week to decide

Buyers will have a week to return their car for a full refund if not satisfied. During those seven trial days, they can clock up 1,000 miles (1,600 kilometers) testing out Tesla's state-of-the-art technology.

Axel Schmidt, auto-analyst at Accenture, insisted that Tesla's distribution model is already built around the internet, and that true fans of the brand "want to purchase online."

Read more: BMW, Daimler team up to develop self-driving cars

He told DW that Tesla faces bigger problems in aftersales and servicing, because of a lack of capacity, while "the showrooms are used more for vehicle presentation than for sales."

Rather than stores, Tesla could expand its network of "offline touchpoints to showcase their product," after all, electric cars still need a lot of education, Schmidt said.

Half a million sales target

Musk believes there's enough pent-up demand to sell about 500,000 Model 3s annually at the new lower price and is now ready to make the savings needed to boost demand.

Some investors, however, have voiced concerns about whether Tesla can maintain profit margins through cost-cutting.

On top of the store closures, which will likely mean hundreds of new job losses, Tesla has already announced it will cut 3,150 positions — about 7 percent of its total workforce.

Metzler's Pieper thinks the announcements are "just the beginning of more savings" from the Palo Alto, California-based company.

Read more: How Volkswagen wants to drive e-mobility revolution

Schmidt, meanwhile, thinks Tesla's immediate task is to normalize production capacity, having ramped up output to help US customers benefit from a federal government tax incentive.

That increase highlighted weaknesses in distribution and customer experience management that the company must tackle, industry analysts have noted.

This must happen "against a background of falling demand," Schmidt told DW.