Update: Tesla has since backtracked and will not be closing as many stores as initially suggested. More from Bloomberg.
Consumers are increasingly willing to purchase big-ticket – and physically big – items online, but will they ever be willing to purchase items like cars without leaving the confines of their homes and offices?
Tesla is about to find out as the electric carmaker stunningly announced that it’s moving to an online-only sales model that will see it shutter most of its brick-and-mortar showrooms.
The primary potential benefit of Tesla’s online sales strategy is obvious: by cutting the costs associated with selling its cars through physical stores, Tesla can pass the savings on to customers.
In fact, in a conference call with reporters, Tesla CEO Elon Musk himself didn’t pull any punches and admitted that the new strategy will allow his company to cut per-car costs by 6%, a necessity to reach the $35,000 price point he promised for the new Model 3.
Even if Tesla’s new online sales approach was driven more by necessity than a true desire to totally disrupt the auto industry, according to Morgan Stanley analyst Adam Jonas, Tesla’s move is “a major event in U.S. auto retailing.” No other car manufacturer in the US sells this way, although others apparently would like to.
Jonas explained, “From our discussions with [traditional automakers] over many years, most auto companies would love to sell vehicles the way Tesla does.”
They don’t, however, because it’s essentially illegal for carmakers to do so. Tesla’s online sales, however, will likely pass muster in Jonas’ estimation because Tesla is, to his knowledge, the only auto manufacturer in the US that is exempt from dealer franchise laws and capable of selling its vehicles through company-owned stores.
The big question: will Tesla actually succeed with its new model?
From questions about the appeal of electric vehicles and its leader, Musk, to doubts about its long-term financial viability, Tesla has for years defied skeptics and critics. So if there is an automaker that can sell its cars using an online-only model, Tesla would seem to be it.
But the company’s ability to do so is far from guaranteed and some even sense desperation in the company’s abrupt shift, which comes after announcing plans to expand its physical footprint.
For one, while many consumers loathe the traditional car-buying experience and there’s evidence demonstrating that some segments of the car-buying population are quite comfortable handling some of the car-buying process digitally, there are obvious challenges associated with asking consumers to
complete a vehicle purchase start-to-finish the same way they would buy a book, television, rug or bottle of shampoo.
Beyond the basics, like taking a test drive, there’s the fact that well over a third of new auto purchases in the US involve a trade-in and trade-ins almost always realistically require a physical inspection.
Tesla is going to have to try to find ways of addressing these challenges.
In addition to the hurdles any car manufacturer would need to overcome to convince consumers to buy online, Tesla’s shift to an online sales model comes at a time when the carmaker appears to be facing significant headwinds.
The company is dealing with reliability issues that cost its new Model 3 a Consumer Reports recommendation. Significant overnight price cuts have left recent buyers incensed, and even led to physical protests in China and Taiwan. In addition, a report by CNBC found that a number of Tesla customers have struggled to get the company to deliver on its guarantees, with some “waiting months to be paid back for returned cars or canceled reservations.”
The latter are most concerning and could even prove to be a threat to Tesla’s online sales. After all, if consumers come to distrust Tesla’s ability to make good on its promises, including the ability to return their new cars for a full refund within 7 days or before 1,000 miles, the willingness of even the most
open-minded consumers to make an auto purchase sight unseen over the internet could fall by the wayside.
In other words, for Tesla to convince prospective buyers to purchase a Tesla online, it will have to maintain a stellar reputation, and the only way it can do that is to deliver a near-perfect customer experience.
While it’s hard to question Tesla’s bonafides as an automotive innovator, Tesla’s move to an online sales model will put its ability to innovate to the test, and in an area – digital retail customer experience – that it has relatively limited experience in.
That, coupled with the challenges inherent in trying to sell cars online, will make Tesla’s efforts a must-watch for both the automotive and retail industries.