On Monday, a 400-square-foot Tesla (NASDAQ: TSLA) gallery opened in the Nordstrom (NYSE:JWN) store at The Grove in Los Angeles -- the second most productive mall in the U.S.
The small Tesla gallery, strategically located within Nordstrom's men's department, is scheduled to remain open through the end of 2016. But while Tesla and Nordstrom currently have modest ambitions for this unusual arrangement, it could develop into a bigger and more permanent partnership if it is successful.
Two luxury brands unite
The foundation of the Tesla-Nordstrom partnership is brand strength. Nordstrom's legendary customer service has set it apart from other retailers, generating huge customer loyalty. Tesla is quickly gaining the same reputation. A stunning 97% of Tesla Model S owners would buy their car again, despite the vehicle's reliability issues, according to Consumer Reports.
This mutual brand strength enables Tesla and Nordstrom to work together. Tesla wouldn't want to dilute its brand by putting showrooms in a store with a mixed reputation. Meanwhile, Nordstrom wouldn't want to display products that are likely to disappoint its customers.
Beyond this basic issue of compatibility, both Nordstrom and Tesla could get important benefits from working together. Let's take a look at what each company hopes to get from this relationship.
For Nordstrom, the Tesla gallery could help bolster store traffic. Last quarter, comparable store sales in Nordstrom's domestic full-line stores plunged 7.7% year over year. Management blamed the sales slump on an ongoing drop in mall traffic driven by retail's shift toward e-commerce.
A Tesla gallery could attract some foot traffic, given that hardly anyone would buy a luxury car without looking at it in person. (Tesla is even offering test drives in the parking lot outside Nordstrom at The Grove.) And based on the recent drop in Nordstrom's sales per square foot, the company can easily afford to give up 400 square feet of space.
More broadly, partnering with Tesla could help Nordstrom burnish its image. Nordstrom has received negative press coverage this year due to its sales growth challenges. This could turn into a self-fulfilling prophecy if the negative coverage influences consumers' interest in the Nordstrom brand. By associating itself with the "cool" Tesla brand, Nordstrom may be able to break this cycle.
The partnership has plenty of upside for Tesla, as well. First, while the two companies have not disclosed financial terms of their arrangement, Tesla is probably saving quite a bit of money by opening a gallery within a Nordstrom store rather than having its own store.
Second, even though customer traffic at Nordstrom is a little lower than it was a few years ago, Nordstrom stores still attract plenty of wealthy shoppers. This is exactly the demographic that Tesla wants to target, especially for its pricier Model S and Model X vehicles. The Tesla gallery at Nordstrom will expose numerous potential customers to the electric car maker's products.
Success could breed closer ties
A temporary Tesla gallery in a single Nordstrom store isn't likely to have a meaningful impact on either company. However, if the partnership lives up to its potential -- generating good sales leads for Tesla and driving higher foot traffic at Nordstrom -- it could become permanent and be expanded to other Nordstrom stores.
Nordstrom has more than 100 full-line stores across the U.S. and Canada, most of which are located in popular malls. By partnering with Nordstrom, Tesla may be able to open showrooms faster, at lower cost, and in better locations than would be possible with a stand-alone strategy. Meanwhile, Nordstrom would give customers a new reason to visit its stores.
It makes sense for Tesla and Nordstrom to start small in order to test the concept of displaying cars in a department store. But over the next few years, Tesla galleries could become a common sight at Nordstrom's full-line stores.
Adam Levine-Weinberg owns shares of Nordstrom. The Motley Fool owns shares of and recommends Tesla Motors. The Motley Fool recommends Nordstrom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.