When most people think about SolarCity Corp (NASDAQ:SCTY.DL), they think about this innovative company that's revolutionizing energy as we know it, giving control of electric power back to the people. In some ways, that's true, but it overstates how SolarCity's operations really work -- and the reason the company has struggled so much lately.
In reality, SolarCity is really a pushy door-to-door salesman and telemarketer that's urging you to sign on the dotted line as fast as possible so he can move on to the next sale. SolarCity doesn't advertise that these are its sales tactics, but that's the reality of residential solar as we know it today, and it's why the company's sales costs have skyrocketed over the past year. Customers aren't signing as quickly as they once were, and SolarCity is having to spend more and more money to get new contracts.
The evolution away from primarily door-to-door sales was inevitable for the solar industry, but it'll cause shock waves as well. As the residential solar industry grows and evolves, customers become smarter shoppers, and the sales tactics and products being offered need to keep up with what they want. And therein lies the problem SolarCity faces long term.
Moving from push to pull
Until now, residential solar has been pushed onto the market. Very few people would say, "I want to go solar, and I have shopped around and know exactly what I want." That's why the door-to-door model has worked so well for SolarCity and Vivint Solar (NYSE:VSLR), which was founded on that very sales model. In fact, that's exactly why Vivint Solar's original customer base is located in small geographic areas in Boston -- it pounded the streets hard there. This sales strategy gave sales people a chance to talk with customers and explain why solar was right for them.
But that kind of sales model can become...pushy after a while. Today, customers know what solar is and how it works, and they often want to shop around before making decisions on what they buy, especially when you're talking about something that might cost $30,000, or lock you into a 20-year agreement. If you were buying a new car, would you really want that person to come to your door looking for you to sign on the dotted line today? Absolutely not.
What the solar industry is moving to today with concepts like Google's Project Sunroof, EnergySage, Pick My Solar, or direct quotes online directly from companies like SunPower (NASDAQ:SPWR) is more of a pull sales model. Customers are allowed to browse around, get multiple quotes, research equipment and financing choices, and make a decision in their own time.
This creates a number of challenges for SolarCity. It brings more competition into the market, which will reduce margins long-term for all solar installers. The company also has thousands of people in its installation crews, and it needs to keep those people busy, keeping a steady flow of contracts coming in. This puts a lot of pressure on sales staff to close deals, and as SolarCity recently showed, the sales costs go up as a result.
The solar lease is dying...and that's a problem for SolarCity
Hidden in this move to shopping for solar systems is the fact that customers are also shopping for financing. If SolarCity showed up at your door and laid out its offerings, the sales person would obviously push you to a lease because it's the most profitable for SolarCity long term. But if you shop around, you'd find out that a cash purchase or solar loan will likely cost you less, and probably help your home value more.
A recent report from EnergySage, an online marketplace for solar installers dubbing itself the Kayak.com of solar, says 90% of its customers are choosing cash purchases or loans over leases or PPAs for this very reason. I recently talked to EnergySage CEO and founder Vikram Aggarwal, and he argued that customers using his company's platform are more educated in their choices because they're shopping around to make the best decision possible for each component going into their solar system. The odds that a customer will choose solar go up dramatically the more quotes they get. If more educated consumers are picking cash and loan purchases, isn't that telling you something?
As the market shifts away from leases and power purchase agreements, it will increase competition based on cost and take away the opportunity for the financial engineering (think retained value) that has created so much value for SolarCity. I will note that SolarCity doesn't participate in the competitive markets I've outlined, while SunPower and Vivint Solar do.
Considering SolarCity has typically lost money on solar system sales, it could be the case that the company's cost structure isn't as far ahead of competitors as we thought. Otherwise, it should be cleaning up in competitive bidding processes.
Before you think MyPower is the answer for SolarCity, consider that industry reviews show that the purchase price of MyPower systems aren't competitive with the market and don't give customers choice about what components are actually installed. And MyPower's interest rate of 5% is likely higher than most homeowners could get with a secured bank loan.
Long term, I think it's becoming clear that leases and power purchase agreements won't be the dominant financing option for homeowners. SolarCity may already be playing from behind with these market changes.
Where are the national construction companies?
Over the last few years, I've done a lot of debating both on this site and with industry executives about whether vertical integration, from sales to financing to installation, is a good strategy. It's what SolarCity is doing, and it's been wildly successful so far, even moving into solar panel and racking manufacturing recently. But is vertical integration a good idea long term?
The downside of "owning the trucks" is that you have a set level of expenses from installation crews and sales staff. This makes a company susceptible to changes in individual markets, like we saw in Nevada earlier this year. Companies that contract out to installers are more nimble in adapting to the market -- or that's the theory.
As I've talked to industry executives and analysts over the last few years, the constant theme outside of SolarCity is that owning the trucks won't work long term. It's not what homebuilders do, it's not what HVAC companies do, and it's not what roofing companies do -- no one in the homebuilding business owns a national network of installers, and there must be a reason. That reason is that it's more cost-effective to use local installers to build systems than it is to have your own people all over the country.
Given the slowing growth for SolarCity and the stagnant system costs, I think it's becoming clear that something is amiss in the company's strategy. Maybe it's not as efficient as management says it is owning the sales and installation supply chain, especially when your pricing isn't competitive with local companies who are bidding into competitive markets like EnergySage.
People want choice
SolarCity has grown by making solar a simple option for consumers and pushing sales with a large fleet of sales people. Until now, that's worked well, but as customers become more educated on what it means to have solar on their roofs, how solar is financed, and how quality plays into their purchase, it becomes a more competitive market, pulling demand from suppliers. I think SolarCity is in a tough position because it's bet on the fully integrated sales model.
Either the company is going to have to become more transparent and offer competitive pricing, or it's going to get run over by a growing number of local solar installers with the backing of major solar panel manufacturers and inverter suppliers.
Maybe SolarCity's growing sales costs, slowing growth, and continued losses are a sign that it's already losing that competitive battle? That's something for investors to think about.