In a sudden reversal of course early Monday morning, Tesla announced in a blog post that they would be keeping most of their stores open while raising prices of Model S, Model X, and “more expensive variants” of Model 3 on average 3% to make up for the increased costs. This comes after Tesla’s decision to close all stores in order to pass on cost savings to consumers.
We are still closing stores, just not as many as before. This basically splits the difference — about half as many stores closed, but then can afford only about half the price reduction. Was discussed with exec team & board.
— Elon Musk (@elonmusk) March 12, 2019
Tesla has shifted strategy to closing just 10% of its underperforming sales locations, with an additional 20% under review. Stores in high-profile locations that have closed will re-open with a smaller team. Altogether, Tesla plans to close half as many stores as outlined in their prior plan which saw a small number of stores remain open as galleries or information centers.
While this move will affect the price of Tesla’s more expensive models, the base price of the Model 3 will remain at $35,000. The price change won’t take effect until after March 18th, so potential customers still have time to finalize orders. The value of most models should increase roughly 3%, slightly raising values on the used market.
Tesla may be re-evaluating their move since cost savings may not have been as significant as planned. It is unlikely that Tesla would have been able to terminate its leases leaving the company on the hook for for $1.6 billion in total lease obligations for its stores and other properties. According to Fortune, $1.2 billion is still owed between now and 2023.
Tesla’s wildly unpredictable decision-making may be too disruptive for its own good. The company should carefully evaluate its long-term strategy before making further changes to its business model.
Regardless of lease obligations, I think that Tesla re-evaluating its decision to close all of its stores is the right move. Showrooms are a valuable asset that can attract new Tesla customers and allow them to experience Tesla firsthand. For marketing purposes, the company should retain a number of flagship stores in high-traffic areas across the world.
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