Tesla moves to dismantle store network

$35,000 Tesla Model 3

Tesla Inc’s move to get rid of its network of high-end showrooms as part of a strategy to release the long-awaited cheaper version of its Model 3 sedan has pushed the electric automaker into uncharted territory for a market that has long depended on physical stores to move the metal.

Retailers from Amazon to Apple to established automakers have trumpeted the advantages of physical stores, and Apple and automakers also depend heavily on advertising, which Tesla has avoided, making the electric automaker an outlier in its reliance on the web.

As Tesla pushes to expand its appeal and increase sales with the introduction of the $35,000 Model 3, the impact of the store closings announced on Thursday will show effect over time, answering questions if a national physical footprint is required in an increasingly digital world, analysts and investors stated on Friday.

“Customers are becoming increasingly fine with making purchases online, and that is particularly true for Tesla,” Tesla CEO Elon Musk stated in an email to employees, which CNBC published online.

However, some analysts and investors have doubts. They ask whether the automaker closing majority of its 250 stores was the panicked decision of a company looking to build the lower-cost model profitably.

It was only last month that Musk stated a $35,000 version that could be sold profitably was maybe six months away. In the company’s annual report released previous month, Tesla discussed about growing its network of stores.

“There’s a bit of a leap of faith that’s needed to have confidence that the moving from a physical distribution model to an online distribution model will succeed,” stated Tom Vandeventer, portfolio manager with Tocqueville Opportunity Fund, in a telephone interview.

Since revealing the Model 3 in 2016, Musk has been discussing a $35,000 version. A lower-priced Model 3 is observed as critical to Tesla’s long-term viability as it looks to reach more customers who can afford the vehicles to offset declining sales of costlier sedans.

The lower price could expand the Model 3 market by about 600,000 cars in the United States alone, based on historical sales estimates for similarly priced sedans, Baird analyst Ben Kalo stated in a research note. However, the lower-cost model also could squeeze profit margins at a time when Tesla has stated it is targeting 25 percent margins for the vehicle some time in 2019.

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