Tesla (NASDAQ: TSLA) made waves when it embarked on a direct sales model for the first time, avoiding the traditional dealer systems of virtually all major automakers. The emerging electric vehicle company has been promoting the perceived benefits of this alternative strategy for years. Therefore, it was a shock to many – including thousands of their own employees – when Tesla announced at the end of February to close almost all branches. Instead, Tesla would postpone all sales online.
Since this fateful announcement, much has changed this month. Tesla has frozen the closures soon after the announcement, but this has mainly contributed to adding to and not relieving confusion and inner suffering. On March 27, Tesla announced his update on the situation. In an e-mail to all employees, CEO Elon Musk said the closures would continue, although much more would remain open than previously announced. According to Musk, it is now up to all branches and sellers to prove themselves so they do not get the ax.
A radical strategic shift (followed by another turnaround)
In January, Tesla had advertised its stores. In its Letter to Shareholders for the fourth quarter of 2018, the company reaffirmed its commitment to this strategy and praised the number of new store openings during the year:
"In the fourth quarter, 27 new business and service locations were opened by the end of the quarter."
A few weeks later, Tesla's strategy seemed to radically change: in a February 28 blog post, the company announced that it would close its stores and move all its sales online, Tesla said to bring down all of its products, and introduce the long-awaited Model 3 sedan with a standard size of $ 35,000:
"All sales implemented online combined with the continued cost savings we can average all vehicle prices by about 6 %, so that we could reach the price of Model 35,000 (Model 3) earlier n than expected, and in the next few months we will handle many of our businesses with a small number of stores in busy locations such as galleries, showcases and Tesla information centers. "
Tesla was seriously beginning to shut stores, with dozens closed within the first week, many more seemingly side-by-side, and few employees informed of the major strategic change announcement
Many salespeople said of the whole Business Insider interviewed several of these employees and found great annoyance and confusion, in fact many business executives and managers reported that they had a severe breakdown of inner morale, no wonder, because most had the Possibility to get the ax in a short time.
Unfortunately, the strangeness of Tesla's sales teams was far from over: just a few days after the closures were announced, Tesla returned – albeit temporarily – on 8 March It announced that it would freeze the closure and offered employees a "Ge to prove themselves "and to justify not firing them down again.
Tesla's decision to postpone the closures appears to have been heavily influenced by the aggressive pushback it received from a number of key landlords. According to the company's most recent securities release, the company has a total lease obligation of $ 1.6 billion, of which $ 1.1 billion is due in 2023. It seems that Tesla had believed that many of these leases could cede without significant sanctions.
Obviously, Tesla did not expect much recoil from polluted landlords, but was quickly dismissed from imagining when a number of heavy hitters, including REITs such as the Federal Realty Investment Trust (FRT), fouled. In the face of this unexpected challenge, Tesla clearly suggested that the prudent decision would be to halt the restructuring.
Forced Labor of Employees
Tesla may have halted the wave of business closures, but this did not seem to have caused them to reverse their efforts to cut costs. The sales staff experienced steep pay cuts following the initial closure announcement. Many employees have reported that these cuts, which included the elimination of most performance bonuses, were little more than a stealth dismissal:
"Sources told Electrek that many employees are leaving due to the substantial pay cut, and some employees told Electrek they did Suspect that Tesla is extending the transitional period and cutting her salary to displace her so they do not have to pay severance pay. "
Instead of firing dismissed salespeople, Tesla seems to push many. From the point of view of the company, this is preferable because it does not have to pay the unemployment and severance pay.
Many retail workers are in limbo, facing tough pay cuts, uncertain job prospects, and a seemingly anxious boss to force them to go alone. Jalopnik has treated the experiences of a number of these struggling employees, many of whom report that morale has only worsened:
"The stores, even those that remain open, are completely dead and without guidance there is no concern for the employees. "
Musk has not acknowledged these morale strikes, in fact, he has doubled his stance: On March 27, Musk sent another company-wide e-mail urging salespeople again, prove to be of value to the organization:
"High-turnover stores that generate significant sales are not closed at all. It would not make sense to do so, except in rare cases where the rent is absurdly high and Tesla will continue to open stores around the world that meet the above criteria … The same principles apply to the sales team No one, de r makes a significant contribution to demand management will be dismissed. Of course, performance-based compensation can be an excellent way to match the incentives of salespeople with those of the company they serve, as well as to lay off needy workers, while Musk, in his latest email, has done so The reality of more complicated commissions had already been cut which seems to dampen the economic incentives of top sellers to yield the best possible performance. Recent changes to the compensation system seem to be the situation for the Tesla sales staff To make matters worse:
Such a steep dip will undoubtedly cause many sellers to get out, and instead of pushing low-pressure staff, the step of combining commissions and disproportionately reducing compensation is likely ch crowing out the best and smartest ones first. This can hardly be in Tesla's strategic interest as it tries to sell as many vehicles as possible.
A highly questionable bet
Tesla seems to be banking on its online distribution channel and wants to largely abandon its extensive sales force. No wonder that worries many investors and commentators. Musk has sought to mitigate these fears, claiming that the online only strategy will not lead to revenue losses:
"Last year, 78% of all Model 3 orders were placed online and not in a store. Customers bought their model 3 without ever making a test drive. "
78% are impressive, but far from 100%. Professor Erik Gordon of the University of Michigan points out that eliminating the retail distribution channel will not accelerate the pace of sales:
"They will not grow faster if they are only online than online plus stores, which is logical Impossibility
This unbelief was confirmed by many Tesla sales representatives, including the six interviewed by Jalopnik at the beginning of March:
"When asked about 78 percent statistics, in particular, the first word was from four of the six employees The mouths were "nonsense". Regardless of whether they used that very word, they all mislead the person as misleading at best, and in the worst case, they were fictitious.
"For months, they had been given the order that the cars themselves buy Tesla's website, even if it sits right next to them in the store, but many shoppers place an order on their cell phone after spending hours talking to a seller or others come to the store, think about it, and later buy in online, and in retrospect, several employees now believe this directive to be an instrument to orchestrate their own obsolescence. "
The figure of 78% of Musk It was likely to be further inflated because last year a not inconsiderable number of buyers were early adopters – especially excited about Tesla and the willingness to buy with significantly less coaxing than the general public is likely.
Since Tesla is trying to move into a mass-market enterprise, it will need a less technologically integrated system – and less affluent audiences: the elimination of business now based on the behavior of a small, idiosyncratic subset of consumers seems to be half-done.
Investor's Eye View
Tesla's efforts to justify its sudden strategic fulcrum have had a major impact Investors could not be encouraged as stock prices have slipped in recent weeks, while a number of analysts have given in to the apparent Chaos in the organization criticized.
Investors are there There are good reasons to worry about Tesla's move to shop closures, reasons that have been compounded since the company's bizarre U-turns. Most obviously, the closure of stores will help reduce Tesla's visible footprint and undermine a sales organization that has spent more than a decade training and building. This is a talent that, once lost, can not easily be replaced.
More importantly, the elimination of the retail channel will limit Tesla's addressable market. Sure, many Tesla owners bought their cars online without testing, but they were far more wealthy and tech savvy than the average new car buyers. Even under the best possible conditions, Tesla still sold 22% of its vehicles via stationary channels.
There is no logical reason for a company that wants to fight an aggressive growth narrator in order to close an important distribution channel, except as an attempt to save money. This seems to be what's happening with Tesla. In fact, even some of the company's most passionate boosters are seeing growing signs of poverty. For example, Fred Lambert of Electrek had the following to say:
"After some strange moves this quarter, I believe Tesla is in a fairly severe liquidity crisis, probably due to higher than expected costs of bringing Model 3 to Europe and Europe China. "
Tesla is clearly under increasing operating pressure. It has undertaken several layoffs and repeatedly lowered prices for all of its products to move metal. Closing stores can help in the short term, but is likely to cost a long time. Without a dealer network, Tesla's stores are virtually the only way consumers can physically interact with the product before making a purchase decision.
In order to save costs, Tesla today runs the risk of closing a significant vulnerability of the potential market – and undermining its own long-term growth narrative.
Disclosure: I am short TSLA. I wrote this article myself, and it expresses my own opinion. I can not get any compensation for it (except from Seeking Alpha). I have no business relationship with a company whose warehouse is mentioned in this article.