Cars and iPods Are Different – Tesla’s Retail Strategy Is Flawed…and Arrogant

By Jason Lancaster

Based on an article from the July 26th edition of Automotive News, it seems that start-up automaker Tesla plans is to sell cars the same way that Apple sells iPods. Tesla won’t have dealer showrooms – they’ll have manufacturer-owned “galleries.” Tesla won’t have service departments – they have field technicians called “Tesla Rangers.” Tesla’s stores won’t have a lot full of new cars to choose from – they’ll have a couple of floor models to sit in, a demo unit for test drives, and a website to visit when it’s time to buy.

Unfortunately, all of this means that Tesla won’t have much success with sales, especially once big automakers bring out their own electric cars. Until they recognize the limitations of their strategy, they will be nothing more than a small, niche manufacturer that will probably be swallowed up by a larger automaker down the road. Here’s why:

1. Instant gratification can’t be ignored, and no inventory means no urgency. Ask any auto dealer and they’ll tell you that people don’t like to wait for their car. Because Tesla dealerships won’t have any cars in-stock, there is a real risk that some consumers will opt to buy a competing vehicle rather than wait for their Tesla to arrive.

There’s also the fact that a lack of inventory means there’s no urgency – if a consumer is told “this is the last red one on the lot,” they feel some pressure to consummate a transaction right away. If they’re told “sign here and your car will arrive in 6 months,” they’re much more likely to investigate alternatives. The bottom line is that dealers need inventory to maximize sales, and without ready-to-buy inventory Tesla dealers will be at a disadvantage compared to the local Ford, Toyota, Honda, and Nissan dealers with in-stock inventory.

2. Larger dealers are more effective. Tesla’s plan centers around small little dealers in select markets. However, larger dealers are more capable of selling and marketing vehicles. Specifically, larger dealers can:

• Justify larger marketing and advertising budgets, including brand-level ads
• Afford to invest in long-term marketing strategies
• Expend the resources to be active and visible in the local community (things like baseball team uniforms and sponsoring local events)
• Offer consumers more on trade-in (more on that below)

3. Apple doesn’t sell used iPods, but Tesla will sell used cars. Trade-ins are an especially important aspect of the retail automotive business, and represent a significant flaw in Tesla’s strategy. Since many consumers aren’t able to buy a new car without getting rid of their old one, the average Tesla dealer is going to have to take trade-ins. These dealers can either try to market these trades to the limited number of visitors they get, or they can auction these trades off to other dealers. Auctioning off trades (which will mostly be gas powered) seems like the most likely option for Tesla dealers specializing in electric cars.

Of course, if Tesla dealers are going to the auction, they’ll be forced to offer customers auction value. Large dealers, with thousands of visitors and a wide variety of cars, rarely auction off trade-ins because they can usually sell anything they get. As a result, large dealers can afford to offer a consumer more than auction value for their trade to facilitate a transaction…and that gives them a financial, transactional advantage over Tesla’s small dealers. What if Tesla dealers, as a result of this fundamental disadvantage, gain a national reputation for under-valuing trade-ins? That’s not going to do much for the brand.

4. Manufacturers probably can’t sell cars. In the late 1990′s Ford conducted a dealership experiment. Beginning in 1997, Ford bought back all of their franchises in five markets – San Diego, Tulsa, Oklahoma City, Rochester, NY, and Salt Lake City. These franchises were formed into “auto collections,” and once these dealers were all under Ford’s control, they began to “fix” all the problems that consumers had with dealers.

A little less than three years later, Ford’s auto collection experiment was deemed a failure. According to an Automotive News article from 2002, one of the stores that Ford “fixed” saw a sales decline somewhere between 75-90% over the three years that Ford ran the show, forcing Ford to give up or lose their presence in these vital markets.

While it could be argued that Ford’s factory-owned dealership failures were a result of poor management or a poor market, consider this: The only remaining independent Ford dealer in Salt Lake – Butterfield Ford – saw tremendous sales increases every month while Ford’s Salt Lake Auto Collection suffered. Ford’s corporate stores sank while a local independent in the exact same market thrived. Is a large corporation like Tesla really going to be better at selling cars than a local franchise with ties to the community and very little overhead?

According to Tesla, one of their advantages over bigger automakers is their small size. If Tesla really does understand the value that a small company with low overhead can bring to the table, why do they reject a franchise strategy?

The other irony here is that Tesla has promised to “revolutionize” the auto industry before. Tesla claimed that they could shorten the development cycle of the automobile and bring technology to the consumer faster than their bigger rivals. When they launched the Tesla Roadster in 2006, it was supposed to be the beginning of a new era. Four years later, Tesla has squandered much of their technological advantage, failed to produce more than about 1,000 vehicles, and lost buckets of money. Yet despite this humbling experience, Tesla remains arrogant, assuming that they can re-invent the auto industry in every respect. Good luck.

Author Information

Jason Lancaster is a nine year veteran of the car business and the president of Spork Marketing, a dealership Internet marketing firm.

Will Tesla Motors Hit The Mainstream Market?

Electric vehicle manufacturer Tesla Motors has been a pacesetter when it comes to lithium-ion powered cars, but with one important caveat: only the rich can afford their $109,000 Tesla Roadster. Even as a second model is being planned (Tesla S), a six- or seven-passenger sedan expected to retail for close to $57,000 when it goes on sale in 2011 or 2012, only people who currently purchase BMW, Mercedes and Lexus models will be able to afford these pricey cars.

Mass Produced Tesla Model

Now, Tesla Motors says that they plan on mass producing a third model that should retail for just under $30,000 thanks to a $465 million low interest loan from the U.S. Energy Department. Expected to go on sale in 2016, the unnamed Tesla vehicle could help the automaker expand from the exotic car segment to a family friendly, budget preserving segment.

For certain, the Tesla Roadster hasn’t been much of a seller yet. Just over 700 cars have been produced on a Heath, UK assembly line, a facility that also builds Lotus models. Tesla is looking at a California facility for the Tesla S, a model that may sell as many as 20,000 units annually, thanks in part to a $7500 federal rebate.

Recently, Tesla announced that the company was investing $100 million to open up a powertrain plant to be located on the grounds of the Stanford Research Park; the company is currently looking at several sites in Southern California for its manufacturing base. Tesla also made it known that it isn’t interested in NUMMI, the former joint Toyota-GM venture that is slated to close down next Spring.

Extended Range Helps Tesla

Despite its high price, the Tesla Roadster has a strong advantage when it comes to range, able to travel as far as 244 miles on a single charge. This compares to about one hundred miles for the upcoming Nissan and proposed Coda Automotive models or to the Chevy Volt which will travel some forty miles before a small gas engine kicks in to extend its range.

The Tesla S is expected to be offered with several different battery range options of 160-, 230- and 300-miles. Tesla is engineering the “S” to allow owners to swap out batteries as needed which means that a buyer could choose the shorter range battery when ordering their car, but rent a larger range battery if needed. No word yet on what sort of battery option would be made available for the third Tesla model.

Source: Automotive News

Avoiding Insolvency, Tesla Motors Borrows $40 Million

America’s all-electric car maker – Tesla Motors – has been wowing fans ever since its small two seat sports car finally rolled off a British assembly line earlier this summer. Lots of delays pushed back the car’s release, resulting in Tesla bleeding through more cash than it had expected to before production got going.

As a result of the delays, Tesla’s financial picture suddenly became very bleak as cash reserves dwindled to below ten million dollars, a small amount of money on hand even for a tiny automaker. Talk that the company would seek bankruptcy protection began to surface, but those fears have now been allayed thanks to new funding that has become available.

Prior to its most recent announcement, Tesla Motors had received cash injections of $145 million from private investors including tens of millions of dollars contributed by Elon Musk who is the company’s chairman and chief executive officer. Indeed, it was Musk and a team of private investors who coughed up the most recent forty million dollars which should be enough money to keep the car company going for the long run.

So far, just fifty Tesla Roadsters have been produced, an all-electric sports car with a phenomenal zero to sixty speed of just 3.5 seconds. Priced at $109,000, the Roadster has some 1200 buyers on its waiting list, people who have put down deposits for the rare sports car.

Tesla says that the new funding will be used to speed up Roadster production while freeing up funding for a second vehicle, the S Model. The “S” is a four door sedan that the company plans to build at a new factory being assembled near San Jose, California. That car was to make its debut near the end of 2010, but production isn’t likely to begin much before summer 2011.

The Tesla Roadster is the first of what will likely become several electric cars produced by a variety of manufacturers worldwide. Fisker Automotive has a sedan in progress, while General Motors will be producing the Chevrolet Volt, a small sedan that should be ready late 2010. Toyota, Nissan, and Chrysler each have several models in the planning and/or production pipeline, while other manufacturers including BMW are currently testing pre-production models of their own.