Model 3, Take 2

An interesting public conversation on the importance of retail real estate has played out this week in Tesla’s recent statements about its stores. Cars are not typically sold on the high street, and Tesla’s foray into traditional retail has served as a poster child for a new breed of showrooms. Hence, when Elon Musk announced a couple of weeks ago that it was closing all its dealerships in favour of a pure pay online model, a few hackles might have been raised. The move was thought to elicit a 6% reduction in the cost of production of the new lower-priced Model 3 – a not insignificant saving. Given that Tesla’s target segment is the tech savvy early adopters that are comfortable buying online and are well exposed to the brand, this felt like a justifiable move. However, in a reversal of position, this week Tesla has announced that it will not be shutting the stores, but instead increasing the product price by about 3%. The manufacturer is understood to have considered that the revenue loss from store closures would outweigh the cost savings. This feels like a significant inference on the value of the physical store to a business that on the face of it might not need one. In all Tesla stores the transaction (and the majority of the fulfilment) is still carried out online, with sales staff directing customers to the website. Hence the purpose of the store remains in customer engagement.