NEW YORK – Tesla Inc. said it would begin shutting stores and move to selling vehicles only over the internet, an extraordinary step aimed at cutting costs so the company can sell its Model 3 compact at a long-delayed starting price of $35,000.
Lowering the price to $35,000 – a key part of the Silicon Valley company’s effort to become a mainstream auto maker – is a goal Tesla has discussed for years and repeatedly delayed, but the shift in its sales strategy was a surprise.
The move to online-only sales is likely to further rile car dealers around the U.S. that have spent about a decade fighting Tesla’s effort to sell directly to customers through company-owned stores. For more than 100 years, auto makers have relied on a network of third-party franchised dealers to sell their vehicles across the U.S.
Those dealers have amassed, in some cases, immense political capital with local lawmakers, and Tesla has spent years battling in statehouses across the U.S. for the ability to sell directly to consumers.
Chief Executive Elon Musk highlighted the significance of what Tesla is attempting to do.
“Ultimately this will be a very strong competitive strength for Tesla,” he said on a conference call on Thursday. “This will be a fundamental long-term competitive advantage of Tesla that… only a startup could replicate.”
Some Tesla stores will be closed, resulting in staff cuts, he said, without detailing how many. Tesla had 378 stores and services centers globally at the end of last year. Other stores will remain for shoppers to learn about its vehicles, but would-be buyers would be sent online to make the purchase. In North America, customers can buy a vehicle via their phone in about one minute, Tesla said.
Tesla has been pushing to cut the cost of the Model 3, trying to get the starting price for the compact car down from the level of $49,000 when it debuted in 2017. Thursday’s announcement marks the third price cut for the car since the start of this year. The most recent had brought it to $42,900.
Tesla said its sales change is essential to meet its price goal. “To achieve these prices while remaining financially sustainable, Tesla is shifting sales world-wide to online only,” it said in a blog post.
Cutting prices has put further strain on Tesla’s finances, however.
The company reported consecutive quarterly profits for the first time ever in the last two periods of 2018, and Musk in January expressed confidence that Tesla could consistently make money as it continues to sell more Model 3s.
But in Thursday’s conference call, Musk said Tesla doesn’t expect to be profitable in the current quarter, though it hopes to resume profitability over the following three months.
Tesla shares fell 3.4% in after-hours trading following its announcement.
Musk said that shifting sales online could cut costs by 5% to 6%, and that Tesla would use those savings to reduce prices of its two other automobiles, the Model S sedan and Model X sport-utility vehicle.
Going to online-only sales reduces Tesla’s ability to provide a personal experience for buyers considering one of the biggest purchases most people make. The move comes as Tesla already is struggling to service its existing customers and expand its customer base. Musk said Tesla is increasing the number of people working on servicing cars as part of efforts to improve customer experience.
Tesla’s distribution system already is unorthodox. It upended the automotive industry in the U.S. by forgoing the traditional franchise dealership sale model, instead selling directly to customers through its website and company stores.
State franchise laws require auto makers to sell their vehicles through their existing dealership network, making it difficult for them to sell online – and impeding the growth of new internet sellers. Much of the growth in delivering vehicles directly to consumers has come from startups like Carvana Co. and Shift Technologies Inc. selling used vehicles, which don’t have to be sold through franchised car dealers.
Several traditional car dealership chains have taken steps in recent years to pare back property holdings as car buyers increasingly use smartphones and internet tools to shop for cars instead of visiting the dealership lot.
“Closing its stores potentially saves Tesla a lot of money on real estate,” said Sam Abuelsamid, a senior analyst with Navigant research, especially because the stores were often in expensive, high-traffic areas.
The switch to online-only sales could also be a benefit for Tesla customers because some consumers had to drive several hours to pick up a car at the nearest store, Abuelsamid said.
However, Abuelsamid expressed doubts about a new return policy Tesla announced, in which buyers can now return a car within seven days or 1,000 miles for a full refund.
“While in theory the seven-day return policy is a great thing if you can’t test drive, you have to pay for the car in full,” said Abuelsamid. “With a traditional dealer, you can do it for free.”
The decision underscores the challenge Tesla has in bringing a mainstream electric car to market. Car companies and customers have shied away from electric cars in the past in part because of the added cost that batteries bring to the vehicle.
The arrival of the Roadster sports car in 2008 and Model S large sedan in 2012 helped change minds about electric vehicles. The sedan, typically selling for about $100,000, helped establish Tesla a global luxury brand. But Musk’s goal for Tesla has long been to produce a mainstream electric vehicle for the masses.
When Tesla unveiled the Model 3 in 2016, it stunned the automotive industry as customers lined up around street corners at stores to plop down $1,000 deposits for the car. While Musk stoked enthusiasm, he has struggled to increase production of the vehicle after starting assembly in July 2017.
Tesla said the $35,000 version of the Model 3 has a 220-mile range and can go from zero to 60 in 5.6 seconds.