Last week Tesla announced that in order to offer its long-promised, $35,000 Model 3, which aims to make electric vehicles a mass-market reality, it would close almost all of its retail showrooms—it has 108 in the U.S. at current count—many of which are located in high-end malls and shopping districts. In order to offset this shift, the company’s new “return policy” will let customers buy or lease a car for up to seven days or 1,000 miles, returning the vehicle if they aren’t satisfied for a full refund. While most companies aren’t keen on encouraging returns, Tesla’s press release did the opposite, stating that: “Quite literally, you could buy a Tesla, drive several hundred miles for a weekend road trip with friends and then return it for free.” Casper’s 100-night free mattress trial now seems paltry.

While Tesla is confident that closing its stores and introducing this return policy will work, pulling out of retail introduces a lot of new complexity to its business, given its stores’ ability to act as real-life advertisements and revenue drivers. Now that it is retreating from a multi-channel strategy at a time when many direct-to-consumer brands are expanding their own, peculiarities in Tesla’s business model raise questions about how the company will attract customers and achieve the mass-market penetration it promised.

Retail = Advertising

Tesla notoriously does not pay for advertising. As of this writing, the company is not running a single ad on Facebook, Instagram or Google, according to the Loose Threads Q1 2019 Megaphone Report. It also has not run any recent print or television advertisements. As per its 2018 Annual Report:

Historically, we have been able to generate significant media coverage of our company and our vehicles, and we believe we will continue to do so. To date, media coverage and word of mouth have been the primary drivers of our vehicle sales leads and have helped us achieve sales without traditional advertising and at relatively low marketing costs.

But this doesn’t mean that Tesla never paid for advertising—it just chose do so in non-traditional ways. Tesla’s retail showrooms filled a lot of this void, acting as localized advertisements in top-notch shopping destinations. Opening 100 brand-owned showrooms in the U.S. was uncharted territory given that every other car company embeds in the dealer network; Evading wholesale also meant that Tesla had to allocate much more capital to achieve its retail footprint, signing leases, hiring employees, and building out and maintaining stores. In its 2018 Annual Report, Tesla said it has over $1.6 billion in operating lease commitments, and while most of these are not for its retail stores, it is likely paying an estimated $40 million per year in rent to retail landlords. Still, Tesla signed some of these leases at a rather favorable time in the real estate market.

As Tesla closes the majority of its showrooms and loses the accompanying advertising benefits, it will have to rely on a range of other methods to keep driving vehicle sales, which raises new challenges, considering the specificities of Tesla’s business and brand.

Twitter and the press

Elon Musk, Tesla’s CEO, has garnered an immense amount of attention for his musings on Twitter and in the press, which have likely given Tesla billions of dollars worth of earned media. But while these moves drew immense attention for Tesla early on, Musk’s recent settlement with the SEC—which, since the “Taking Tesla Private” fiasco, limits his ability to tweet about the company—and other events have complicated Musk’s legacy and caused investors and customers to lose interest. Tesla will not be able to rely on these methods to the degree that it did in the past.

Service Centers

In its 2018 Annual Report, Tesla mentioned that opening a service center in a new area can increase demand for its products. Additionally, a lack of service centers in a consumer’s vicinity might dissuade them from making a purchase. Tesla says it will keep investing in these service centers, and expects its service capacity to double this year. As the company has grown, service centers have also created bottlenecks because of prolonged car repairs, which the planned expansion can alleviate. But it’s hard to believe that more service centers will replace the impact of its retail showrooms from a sales effectiveness perspective.

Superchargers

Superchargers are Tesla-owned re-charging stations (“gas stations”) for its cars. There are more than 1,441 Supercharger stations in North America already in operation or coming soon, all of which also act as mini-billboards for the company. But while their number will grow over time, they are a softer sell than a retail showroom, lacking the staff of a brick-and-mortar store. In terms of attracting new customers, the Superchargers are a lot easier to miss than a showroom as drivers zoom past them on a highway or in a city.

Word-of-mouth

Tesla credits word-of-mouth for a lot of its growth. While aided in part by its referral program that uses existing customers to garner new ones, word-of-mouth is also spurred by Musk’s tweets, press, and retail showrooms. But Tesla’s retail rollback and Musk’s SEC settlement could paralyze these word-of-mouth drivers, further harming its flywheel.  

Tesla’s road from here

While hundreds of thousands of people made reservations for the Model 3, Tesla will need to continue increasing the speed of its sales and marketing engine as it starts ramping up its production capacity and delivering cars. As the initial hoopla around the Model 3 launch dies down and Tesla closes its retail showrooms, it’s questionable as to whether the company can hit the milestones it needs to continue being profitable and grow. There is a good chance the company will need to lean into more traditional marketing to support its growth.

Even brands such as Kylie Cosmetics—whose founders have hundreds of millions of followers and endless attention—have shifted from an online-only to multi-channel strategy after observing the restrictions of the former. Not only is Tesla reducing its multi-channel presence, but Tesla’s products are also far more expensive than cosmetics, making them an even harder sell online. Tesla’s decision to sell online-only will set a record, either as a true outlier among digital-first brands (with a pioneering return policy), or as a high-profile case study outlining the immense limits of selling online-only.