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Cars Published on March 7th, 2019 | by Steve Hanley
Love It Or Hate It, Tesla Online Sales Strategy Creates Plenty Of ControversyTwitterLinkedInFacebookMarch 7th, 2019 by Steve Hanley

Tesla’s sudden announcement last week that it is closing most of its stores and transitioning to a 100% online sales model has created a firestorm of criticism and pushed the company’s stock price to a 5 month low. In the media, Forbes and Fortune have run stories this week decrying the move as wrongheaded and possibly dangerous to the company’s very existence.
The UpsideOne investment professional who is not concerned about Tesla’s new online sales strategy is ARK Invest CEO Cathie Wood. According to Fortune, she told Bloomberg on March 4 that, even though the decision to close stores and go fully online was “abrupt,” she wasn’t as surprised as other investors. “We got the sense something was up because he is still competing against other auto manufacturers who have their costs screwed down, but at some point, his pricing is going to drop below theirs.” At 9%, Tesla represents the largest investment in the ARK Invest portfolio.
Wood tells CNBC she believes Tesla stock will soar to stunning new heights in the years ahead. The least favorable scenario will see the stock rise 146%. But the most favorable scenario sees it powering up a stunning 1,306% to more than $4,000 per share. “This is a five-year time horizon. Four thousand dollars is the bull case, $700 is the bear case. It’s rare for us to a have a stock that meets our minimum hurdle rate of return in the bear case, so it’s north of 15 percent compound annual rate of return to get to our bear case target.”
Wood added that Tesla is “scaling the electric vehicle market. We think the electric vehicle sales in 2023 will be in total globally 26 million units, up from 1.3 million last year, so that’s a 20-fold increase. We’re talking about exponential growth.”
What Wood is relying on is not Tesla selling bunches of cars but rather Tesla emerging as a significant force in autonomous driving and ride hailing. “The big story [for Tesla] is autonomous taxi platforms. We’re moving from a hardware-centric, low gross margin model which is 25, 30 percent to a transportation-as-a-service model. They’ll get a piece of every ride taken because they’ll own the platform that these fleet operators will be riding on, and that’s more of an 80 percent gross margin business,” she said.
Through the first two months of 2019, ARK Invest’s valuation is up 25% even after taking into account the recent slide in Tesla’s share price.

The DownsideOn the other side of the ledger, several recent articles in Forbes and Fortune question the wisdom of Tesla’s 100% online sales model. Let’s start with Jeremy Alicandri, writing for Forbes. He claims buyers are simply not ready or willing to give up the traditional car-buying experience. They want to be able to sit in the car they are about to purchase and take it for a test drive. Then there is the issue of correctly evaluating trade-ins, which he claims has to be done in person. Add to that the myriad of financing options and Alicandri says the online model just won’t work for many people. (Elon Musk has noted on Twitter some of this stuff will be done via delivery centers.)
Alicandri thinks Elon Musk’s assurances that people can simply return their new car for a full refund is naive. “As someone who oversaw an extended test drive program with the BMW 7 Series only a few years back, I can attest that these programs often cost more than they achieve, while also attracting chronic abuse from non-buyers,” Alicandri writes. “While Tesla will likely initiate safeguards to prevent abuse, such as requiring full payment upfront, it remains unclear how Model 3 customers can ‘test drive’ vehicles without undergoing major inconveniences if they wish to return them.
“Being responsible for sales tax (which is likely not refundable by state law) as well as the vehicle depreciation (as the vehicle is considered used once registered) are just two issues. It’s also uncertain how these customers will be able to purchase a different vehicle as their credit will be weakened before/during the refund process and likely weeks after.”
Alicandri also says that, while eliminating stores will save money in one area, it will increase costs in others. “There are obvious expenses, like extra call centers, shipping and logistics costs, and IT infrastructure. But there are also less obvious costs, like those related to providing support for vehicles damaged or having mechanical malfunctions at delivery, as well as educating new owners on their vehicles. Advertising and marketing efforts may need to be enhanced to counter the lack of physical presence.”
The Legal IssuesDuring his conference call with journalists last week, Elon Musk rather blithely swatted away any concern that franchise dealer groups and individual states could thwart the new online sales model. “I’m sure the franchise dealers will try to oppose us in some way, but to do so would be a fundamental restraint on interstate commerce and violate the Constitution. So, good luck with that,” he said.
Leonard Bellavia, an attorney and franchise law expert, disagrees with Musk’s legal opinion. He tells Forbes, “The statement by Musk that state dealer franchise laws prohibiting factory direct sales are unconstitutional is an overly simplistic and rather bald-faced generalization.” Expanding its service network is also fraught with legal issues, says Bellavia. “An online sale only model would require both a sales and service facility to satisfy state licensing authorities, which defeats the purpose of online sales.”
There are other legal concerns, including how so-called lemon laws, which vary from state to state, will apply to online sales. In some parts of the country, digital signatures are not enough to satisfy local laws, which often require a “wet signature” on all vehicle delivery paperwork. The devil is in the details and Musk’s rather casual insistence that the commerce clause will sweep aside all opposition to online sales seems rather simplistic. If nothing else, years of litigation will ensue before Elon gets his wish.
The Sudden Change In CourseForbes is focusing this week on the abruptness of the announcement and suggests Elon may not have thought the new strategy through. It reports on one stock analyst, Alex Chalekian, who heads Lake Avenue Financial in Pasadena, California. It manages more than $150 million in client assets but sold all its shares in Tesla for its advisory clients last Friday.
“This was a total 180-degree turn,” Chalekian says. “Tesla had been talking about expanding stores, and all of a sudden they are closing them. To me, this signals a huge financial concern and a possible cash-flow issue for Tesla.” In the fourth quarter of 2018, Tesla opened 27 new retail and service centers, the most in any quarter since the middle of 2017.
In its most recent 10-K filing with the SEC just a few weeks ago, it touted its brick and mortar strategy. “Our Tesla stores and galleries are highly visible, premium outlets in major metropolitan markets, some of which combine retail sales and service. Opening a service center in a new geographic area can increase demand. As a result, we have complemented our store strategy with sales facilities and personnel in service centers to more rapidly expand our retail footprint.”
Is Tesla Being Managed By Adults?For Alex Chelakian, the suddenness of Tesla’s reversal hints at a company that operates on the whims of its leader, rather than on sound business practices. Such erratic and — to an outsider — irrational changes in course are red flashing lights warning of danger ahead for investors. There has been dark muttering this week that it’s time for Elon Musk to step into a new role, one in which he continues to be chief engineer for the company while a professional management team takes over supervision of the company.
Musk’s treatment of employees is another concern. Despite impassioned emails extolling them for their hard work and dedication, Musk seems ready at a moment’s notice to toss them overboard when it suits his convenience. At the start of the year, he announced that 7% of Tesla’s workforce would be let go right after the company achieved its production goals for the Model 3. This latest announcement came via a private conference call with journalist (disclosure: CleanTechnica reporters were on the call) and it blindsided many of those working in the stores that will now be closed.
The message to employees is that you are all expendable on short notice, so keep your resume up to date and don’t make any life decisions based on the assumption you will have a job with Tesla tomorrow. If online sales are the wave of the future, job security is clearly a thing of the past.
Elon always has been and remains an enigma. To some, he is a real life Tony Stark. To others, he is given to wild mood swings that may or may not be associated with the use of Ambien, a drug that helps people deal with insomnia but has worrisome side effects, including impairment of judgement. People who use it are advised not to operate heavy machinery.
Musk is a polarizing person. His single-minded determination has already upended the global auto industry and is rapidly bringing sweeping changes to the energy storage market. On the other hand, his insistence on buying SolarCity is seen by many as a straight up bailout for his cousins. The heavily touted Solar Roof is missing in action and Gigafactory 2 in Buffalo, New York, is hardly ever mentioned in Tesla’s corporate communications. Closing Tesla’s stores will likely deal another blow to an already underperforming aspect of the company.
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