Tesla’s Online Selling Is a Big Bet on Millennials

(Bloomberg Opinion) -- Last week, Tesla Inc. said that it is closing almost all its dealership showrooms in order to cut costs as it steps up production and sales of its midpriced Model 3. If markets are to be believed, this isn’t a good look; the company’s stock price has tumbled in response.

Closing retail stores could be a sign of desperation, a view reinforced by concurrent announcements that the company has reduced its earnings expectations and will be cutting jobs.  And the news was certainly jarring, coming just a few weeks after Tesla said dealerships were an important part of its retail strategy.

But there’s a chance the move will turn out to be prescient. Tesla sells premium cars that cost a lot to make. And Tesla markets those cars differently from most of its competitors: It uses direct sales, rather than working through franchised dealerships — and there’s no haggling on the price.

Relying on direct sales means there’s no dealer taking a cut or adding a markup. But in many states, laws requiring that cars be sold through franchised dealerships limited or barred Tesla from opening retail stores. As a result, Tesla already has significant experience selling online, and the process is so polished that Consumer Reports recently called it “a source of inspiration.”

Meanwhile, although no-haggle pricing is convenient, it means that Tesla can’t adjust price in response to individual buyers’ willingness to pay.  The lack of pricing wiggle room and Tesla’s high production costs forced the company to aim both its cars and its marketing at wealthier buyers.

As one consequence, Tesla put many of the showrooms it did have in upscale shopping malls. That may have been cost-effective for selling Tesla’s early, more expensive models like the Model S, which has a base price of $76,000. But upscale showrooms make less sense for midmarket customers buying the $35,000 Model 3.

So closing stores might be a solid strategy, even if it is being viewed as a retreat by some investors and analysts.

But will the move work? It could. There’s already robust demand for the Model 3, so it’s not clear that Tesla needs showrooms right now.

Nevertheless, Tesla is counting on a real change in consumer behavior. The company has to persuade customers to buy online, without trying out the car first. That’s quite different from how most people expect to buy cars today, although the company hopes consumers will think of a seven-day return policy as an extended test drive.

Yet 78 percent of all Model 3 sales were already online last year. And millennials — one of the key targets for the Model 3 — have highly favorable views of the Tesla brand and are keen to buy products over the internet. So despite the bad press around the move to close stores, this may not be the sign of weakness the naysayers make it out to be. How will we ever know if selling cars online is the way of the future unless someone tries it?

Although it’s a better look than criticizing your Securities and Exchange Commission investigation.

My Bloomberg Opinion colleague Liam Denning published a fantastic run-down of the announcements this past Thursday.

Except through ridiculous add-ons.

Millennials have even shown willingness to buy used cars online through platforms like Shift and Carvana — the latter of which doesn’t provide test drives.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Scott Duke Kominers is the MBA Class of 1960 Associate Professor of Business Administration at Harvard Business School, and a faculty affiliate of the Harvard Department of Economics. Previously, he was a junior fellow at the Harvard Society of Fellows and the inaugural research scholar at the Becker Friedman Institute for Research in Economics at the University of Chicago.

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