Will Tesla's Apple Retail Model Work?

Tesla (NASDAQ: TSLA  ) stock rose this week on optimistic figures and comments from Tesla management at the Detroit Auto Show. Beyond the higher than expected Q4 vehicle deliveries management announced, Tesla also revealed aggressive plans to expand its service and sales centers. Refusing to rely on the dealership sales model, this rapid expansion isn't surprising. But can Tesla's direct sales approach work? Is the expansion of sales centers rapid enough?

Relentless growth
Tesla vice president of sales Jerome Guillen said this week that the company will double the number of its sales and service locations globally in 2014. Investors should keep in mind that many service centers are also sales centers. Tesla explained its efforts to turn service centers into sales centers in its Q3 letter to shareholders: "We are finding that opening a service center in a new geographic area can drive demand. As a result, we have complemented our store strategy with sales personnel in service centers to more rapidly expand our retail footprint."

Tesla's new Toronto store and service center. Source: Tesla's official Facebook page.

Some of the new service centers are actually dubbed store and service centers. Tesla called its new Toronto store on its Facebook page a "State of the Art Store and Service Center."

At the end of Q3, Tesla had over 100 service center and sales locations combined. So doubling that number in 2014 would put Tesla well over 200 locations.

Can Tesla's sales system handle its audacious goals?
Earlier this week Automotive News journalist Mark Rechtin examined some of the biggest challenges facing Tesla. Among them, Rechtin discussed major challenges for Tesla's sales model in relation to its optimistic outlook.

"Industry executives predict Tesla will need to join with an established dealership group that will allow the company to spread its retail and service wings in states that restrict Tesla factory stores," Rechtin said.

But Tesla CEO Elon Musk disagreed. "I don't think we're going to need an enormous amount of stores. We'll have some flagships in major markets. What will sell cars in the long term will be other customers -- word-of-mouth," he told Rechtin.

Musk hopes Tesla can eventually sell hundreds of thousands of cars a year sometime after its affordable car goes on sale -- about three years from now. But Musk insists that maintaining control over the retail experience is key to Tesla's success, refusing to sell cars through the existing dealer system. Tesla plans to stick to its current sales model, which is similar to Apple's model for its own retail stores: Cars are displayed and sold through shopping malls and boutiques.

So far, Tesla is successfully defying the traditional sales model. But will it work as Tesla expands production?

In the company's Q3 letter to shareholders, Tesla paid lip service to its word-of-mouth advantage.

As more people see our car on the road, take a test drive or talk with another Model S owner, more demand is created for our product. Demand exceeds supply, despite no advertising, no discounts and no paid endorsements. ... Customer testimonials and test drives remain our strongest demand drivers.

Will the story change when the numbers grow larger?
The company managed to deliver more than 20,000 vehicles in 2013 -- the story may look very different when Tesla is producing hundreds of thousands of cars per year. Will Tesla's current model work? It's certainly never been done before, so Tesla will have to prove the concept. But what we do know is that it's going to take an aggressive expansion of sales and service centers. Doubling its existing installed base of locations is a good start.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2014, at 6:37 PM, bluegill88 wrote:

    Seems like it's working already.

    And who wouldn't want an electric car that's safer than a minivan?

    I sure want one.

  • Report this Comment On January 19, 2014, at 11:01 PM, EVnergy wrote:

    Yes, the Tesla Business model is viable as a Lamborghini type company. If it wants scale they will have to move very quickly with someone like us who has positioned billions towards a finance arm for our own or other (such as tesla) who's CEO still hasn't returned my call, towards making sure as manufacturing for scale happens we can compete against the dumping that will occur by the major manufactures on the back end of leases. This is what drove coda out of business. Nissan could dump with ridicules lease payments and the government looked other way because they said its a green area. BMW, Mercedes and others will do the same in three years or sooner and since individual profit EV manufactures don't have the ability to Obsorb the losses they won't be able to scale without joining an existing large manufacture. Elon. I wait your call. Maybe your CEO thought we were not capable. We are and waiting.

  • Report this Comment On January 19, 2014, at 11:03 PM, EVnergy wrote:

    Sorry that was CFO. Auto check,

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