Mark Ritson: Tesla’s online-only move doesn’t herald the retail apocalypse

There is so much to like about Elon Musk. So much. The ball-busting media interviews in which declares himself “bored” with Earth and intent on moving to Mars.

His occasional acts of supreme market orientation, in which he listens to customers, changes his business model and responds back to the customers to confirm the fix – all in a few short hours.

And then there are the moments of Barnum-like promotional alacrity in which Musk decides, apparently on a whim, to do something ‘big’. Like sending his own car into space.

I loved that last one especially. I followed ‘Starman’ and his journey into space more keenly than any other PR stunt I’ve ever encountered. Something about the real-time images of a Tesla Roadster leaving Earth’s orbit and shooting past Mars at 44,500mph playing Bowie on the radio got to me. The images were dream-like. The idea that the car is now 226 million miles from Earth on the other side of the solar system still blows my mind.

And it started to work. At least on me. The sudden surge of interest in Starman led to an equal interest in the Tesla Roadster. I started reading about the car. I switched to exploring the cost of buying a second-hand one.

Then I learned a new Tesla Roadster was being readied for launch. I looked up the specs. I considered the deposit. I prepared for the discussion with my wife when I drove it home for the first time. I spent lot of time working on that last one, actually.

Tesla was still top of my mind a week later when I went to service my Porsche at the local dealership. While I was waiting I found George, the man who had sold it to me a few years earlier, and told him about my new-found desire for a Tesla.

He agreed but then showed me the confidential specs for a new, totally electric Porsche codenamed Mission E. It would launch in 2020 and George had two he could pre-sell (I know, I know).

We looked at pictures, we looked at specs, he raised his eyebrows suggestively, I blew the occasional impressed whistle. Two hours later I’d put down a deposit for what would eventually be named the Porsche Taycan and which will arrive on my driveway at the end of next year. Which still gives me loads of time to work out what I am going to say to Mrs R.

It’s a classic bait and switch story. One company gets you through the top of the funnel only to lose you in the lower reaches of the funnel to a bigger, better-run operator who steals away the sale.

Private labels have been doing it for decades to manufacturer brands. Heinz spends a small fortune convincing you that beans are a healthy, versatile meal for the whole family and ensuring the brand has the requisite level of salience to close the deal. Then, with every stage of the funnel from awareness to preference paid for and established by Heinz, it loses out in the last six inches of the sale, somewhere between preference and purchase, to a private label.

As your hand reaches for the Heinz beans you spot the baked beans from Sainsbury’s in a similar blue livery but less than half the price. And it’s over. That price differential is only possible because a big part of the cost of goods for Heinz are all the advertising investments and promotional costs that a private label can not only avoid, but parasitically feed off.

I used to call this ‘cuckoo marketing’ after the eponymous bird. The cuckoo is an amazing animal. It often can’t be bothered with motherhood so flies into someone else’s nest, kicks out the existing tenants, drops her future progeny off in the newly vacated spot, and then fucks off on a cuckoo 18-30 holiday and drinks heavily for a fortnight boasting about what she has just pulled off.

The power of physical retail

Aside from cuckoo marketing, my Tesla story – correction, my Porsche story – also illustrates the power of distribution. Yes, it’s the place where we buy stuff. But it’s also the place where we meet the brand and, to use Scott Galloway’s accurate and arousing analogy, have sex with it for the first time.

Yes, the internet pornography of online shopping and ‘social selling’ exists. But for a lot of purchases we need more than a virtual hand job to get us down the aisle. The real relationship can only be consummated with an initial, and sometimes repeated, bout of physical intimacy at point of sale.

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That’s a crucial point for Tesla because last week the company announced it is closing its whole distributor network. The company had 378 stores and service facilities worldwide with 23 of them in the UK and Ireland. A few large showrooms will apparently remain but servicing and sales will now be conducted for the most part via smartphones.

The company claims that you can now buy a Tesla on your phone in “about one minute”. “We are also making it much easier to try out and return a Tesla, so that a test drive prior to purchase isn’t needed,” according to Tesla.

It’s easy to read about the decision and immediately jump to the ‘shopping apocalypse’ theory beloved of every disruptive marketer on the planet. You know the story by now: high street retailers are closing down because the future is clicks not bricks. In an Amazon/Google world of ‘online consumers’, physical stores are an unnecessary cost and strategic complication.

By 2025 the techno-porn fantasy of drones/artificial intelligence/online everything will render shops obsolete. Toys R Us did not close because it was shit, it closed because the future is totally different from the present. Also, bitcoin, blockchain, wearables, millennials and TikTok.

Except, as usual, this simplistic narrative does not hold up to even three minutes of scrutiny. It’s true that many stores are closing but that’s been happening since biblical times. It was Moses, I believe, in Deuteronomy who first observed that: “The shiteth merchant will inherit shiteth results and then the wind.”

Bad stores are closing, but good ones are also opening. Payless Shoes closed 408 doors last year in America and spawned a hundred articles about the end of retail stores as we know it. Dollar General opened 900 new shops in America and no-one mentioned it. The retail apocalypse is not quite the end of days that was predicted.

While most ‘modern’ marketers get lathered up about the growth of online shopping and Amazon’s steely grip on all of us, the hard statistics confirm that more than 90% of all shopping continues to happen in stores, not online. Which is not to say that that Amazon is not an amazing retailer or that it does not have a spectacular share of online shopping. Almost half of all online sales in America and a third in the UK are made via Amazon’s site.

That still makes Amazon significantly smaller in the UK than retailers like Tesco and Sainsbury and also prompts the question why such online domination would warrant a move to offline stores? In acquiring Whole Foods and opening physical bookstores Amazon appears intent on expanding into bricks-and-mortar retailing at the very time we are being told that the retail apocalypse renders the move foolish.

Amazon’s intransigence is relatively simple to understand. Despite what we are told at conferences, the online consumer does not exist. She inhabits her own world and manages, amazingly easily, to traverse online and the offline as if they were part of the same thing.

Smart organisations are replicating this fluidity through omnichannel retailing. Whether you visit in store, or online, or a bit of both, you can rely on the same prices, same loyalty card, same service model and even the ability to pick up your abandoned basket wherever you shop.

In truth, most brands enjoy top- and bottom-of-funnel effects from online retailing but also enjoy significant impact from physical interactions in stores for the middle of the journey. Omnichannel brands like Apple want the immediacy and efficiency of online e-tailing but also the experiential wow and prescriptive capabilities of physical stores too. And there is no reason, other than fallacy or funding, why both cannot be utilised accordingly.

While most ‘modern’ marketers get lathered up about the growth of online shopping, the hard statistics confirm that more than 90% of all shopping continues to happen in stores.

To be more prosaic, you clearly need a fully commercial online presence. But you also need George in the Porsche showroom, drinking his flat white, ready to spring into action when he sees me wander past his desk.

It’s not flash and we do not write many marketing articles about it. But do not mistake the power of physical retail presence. It might be costly, but it endures. Take my own car purchase as an exemplar. George beat Elon Musk, David Bowie, a rocket ship to Mars and a car navigating the solar system to win my business. Not bad, eh?

Surely Tesla understands this? It set up its 378-location retail footprint for exactly this reason. Why suddenly close everything down and move to an exclusively online model?

Short-term v long-term profit

Its shift has nothing to do with a retail apocalypse and a lot more to do with cash flow. On paper Tesla is now impressively profitable and incredibly cash rich. Its Q4 gross margins of 24% are enough to make most other auto makers green. And, as a result, Tesla has now amassed an impressive cash mountain of $3.7bn.

But Tesla is not your normal, established car company. Elon Musk has wonderful dreams but they come with nightmarish cost implications. He needs to build a Chinese production facility, a solar tile capability and a global super-charging network to keep his growing fleet of cars on the road, and he needs to start manufacturing the all-important Model 3 in gigantic numbers to match demand.

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To finance the Tesla journey Musk has already borrowed big. On Friday a massive repayment of convertible debt was due. If Tesla’s share price had been trading at or above $359.87 the company could have repaid that debt with stock. But it wasn’t. And the whole $920m – about a quarter of Tesla’s reserves – will need to be paid in cash instead. More debts are ultimately due down the track – about $10bn in total. Liquidity has suddenly become a Tesla priority.

And while the Model 3 is the car that was always meant to transform Tesla into an established automotive giant it comes with its own significant problem: profitability. The Model 3 was never intended to be an exclusive vehicle. Musk needs to sell around half a million of these cars every year to reach the kind of scale he now needs. All of Tesla’s previous cars, from the Roadster to the Model S, were premium line extensions designed to build Tesla’s brand associations of being high-end and superior, so it could then launch the Model 3 and clean up the mass market with an affordable sub-brand.

To achieve that mass market penetration Musk promised to set the Model 3 price at $35,000 (£26,400). That makes it less expensive than a Toyota RAV4. And while that price will certainly drive enormous interest and probably deliver the half a million-unit sales, it also means that operating costs must be clipped to retain the margins.

Musk himself admits that it is proving “excruciatingly difficult” to make a profit from the Model 3 at this price. Killing the tremendous fixed costs associated with showrooms, sales staff and their associated operating expenses is the only way he can sell the Model 3 at this price and make enough profit.

And while Musk has tried to dress the decision as one consistent with the modern Tesla approach, his ultimate trait of unfailing honesty reveals a CEO ill at ease with the decision. “I wish there was some other way,” he admitted last week. “Unfortunately, it will entail a reduction in force on the retail side. There’s no way around it.”

Rather than another example of the retail apocalypse and the shift to exclusively online sales, Tesla’s move should be seen as an illustration of the more mundane corporate agenda to generate profits and cash flow to fund growth. Dress it up in 21st-century language all you want, but this is the story of a company making a decision to drive short-term profitability at the expense of the long-term health and prospects of the brand.

Sometimes such moves are unavoidable and Musk, who gets long-term better than anyone, surely appreciates the trade-off he has just made. It’s easy to be precious about such moves. But there is no long term if the short term cannot be delivered and it’s time to pay the fiscal piper.

Tesla sits finely poised between becoming either a century-shredding saga of future greatness or a cautionary tale of entrepreneurial folly from the pioneering early days of the solar revolution. No-one, including Musk I suspect, knows how it ends yet.

As strong as the Tesla brand is, and as impressive and enigmatic as Musk continues to be, omnichannel beats either an exclusive focus on offline retailing or an exclusive move to online sales. According to Musk 78% of Model 3 sales were already conducted online and 82% secured without a test drive. But that’s a clumsy example of last-click attribution if I ever I saw it and beneath the Musk I have grown to admire. How many of those sales were sparked or secured by a visit to a showroom?

Maybe most of his existing Tesla fans bought without a test drive but he is now penetrating the mass market. A test drive is a crucial moment of truth – especially when its your first electric vehicle, let alone your first Tesla.

In automotive marketing you need a physical network. It’s costly but it’s essential. You need test drive options. You need stuff explained. You need to open the doors. To close the boot. To sit in the seat. To “squeeze your bananas” before the sale, as one retailer once explained it to me.

You need George, sipping on his flat white. Waiting.