By Craig Patterson
California-based electric car company Tesla is backpeddling on its recent announcement that it would shut down most of its physical stores. It’s good news for landlords and consumers seeking a tangible experience with the brand, though the company has said that sales will continue to be driven online with a modest increase in car prices in order to make its operations viable.
On February 28, Tesla’s CEO Elon Musk announced that most of Tesla’s storefronts would be closing as the company shifts its sales online. The idea was that the closures would result in cost savings to Tesla, allowing it to reduce the price on its Tesla Model 3. The Wall Street Journal subsequently revealed that Tesla would be on the hook for about $1.6-billion (US) in lease obligations. Many Tesla stores are in high-profile locations with lease terms between five and 10 years in duration.
On Sunday evening, Elon Musk sent a memo to employees telling them that he is shifting strategy again. “We are making an adjustment to our plans and will, at least for the next several months, retain more stores than previously announced,” he said. This is good news for landlords that were blindsided by Tesla’s announcement that it was, for the most part, exiting its retail business.
“For the most part, the roughly 10% of Tesla sales locations we closed recently don't pass the Sherlock Holmes test. Meaning, most of these stores are in such difficult or obscure locations, only Sherlock Holmes could find them!” he said.
Mr. Musk went on to say, “A few stores in high visibility locations that were closed due to low apparent demand generation will be reopened, but with a smaller Tesla crew.” The company hasn’t yet announced which locations these might be, though in January the company shuttered its showroom at Calgary’s busy CF Chinook Centre.
“There are another 20% of locations that are under review. Depending on their effectiveness over the next few months, some will be closed and some will remain open,” said Mr. Musk in his letter to employees.
“As a result of keeping significantly more stores open, Tesla will need to raise vehicle prices by about 3% or so on average worldwide. All things considered, this seems like a reasonable compromise between current and future customers,” said Mr. Musk. “We will only close about half as many stores, but the cost savings are therefore only about half.”
Those looking at purchasing vehicles in the next few days won’t be immediately subjected to the announced price increase. “Potential Tesla owners will have a week to place their orders before prices rise, so current prices are valid until March 18th.” Mr. Musk went on to say, “Note, there will be no price increase to the $35,000 Model 3. The price increases will only apply to the more expensive variants of Model 3, as well as Model S and X.”
At the same time, Tesla’s sales will be shifted online as he previously announced, though many showrooms will remain open. “To be clear, all sales worldwide will still be done online, in that potential Tesla owners coming in to stores will simply be shown how to order a Tesla on their phone in a few minutes.” he said. “And the generous return policy of 1000 miles or 7 days, whichever comes first, should alleviate the need for most test drives at stores at the potential Tesla owner's request. Stores will also carry a small number of cars in inventory for customers who wish to drive away with a Tesla immediately.”
Tesla opened its first Canadian showroom at Toronto’s Yorkdale Shopping Centre in November of 2012. The 2,500 square foot retail space is said to do astronomically high sales, with revenue per square foot surpassing that of many Apple stores. Tesla’s second Canadian retail space opened at 929 Robson Street in downtown Vancouver in early 2014.
The company has since opened storefronts nationwide. In the Vancouver area, Tesla operates a showroom at 1636 W. 4th Avenue in the Kitsilano area, and in January of 2017 we reported that the brand was opening its first mall location in BC at West Vancouver’s Park Royal shopping centre. In the Toronto area, Tesla continues to operate its highly productive Yorkdale unit as well as at 1325 Lawrence Avenue East, and at 225 Wyecroft Road in affluent Oakville. Last fall, Tesla unveiled an impressive showroom at Toronto’s upscale CF Sherway Gardens.
Tesla also operates two storefronts in the province of Quebec. That includes a location at 5350 Ferrier Street in Montreal. When it opened in December of 2014, the 45,000 square foot sales and service centre was said to be the largest in North America. Tesla also operates a retail space at 2180 Rue Cyrille-Duquet in Quebec City.
Calgary’s 1,625 square foot CF Chinook Centre Tesla location shuttered in January, surprising some locals who reached out to us asking why it had closed. The Tesla storefront opened in November of 2015 in the mall’s recent ‘luxury wing’ expansion that includes stores for brands such as Louis Vuitton, Tiffany & Co., Burberry, Canada Goose, Harry Rosen, Ted Baker, Kate Spade and, soon, Calgary’s first Mackage store. CF Chinook Centre is one of Canada’s most productive malls in terms of annual sales per square foot, according to Retail Council of Canada’s most recent Canadian Shopping Centre Study. The centre is also considered to be the leading shopping centre in southern Alberta in terms of overall offerings, foot traffic and sales productivity.
Keeping storefronts is a good move for Tesla. We recently reported on an International Council of Shopping Centres (ICSC) study that revealed how physical retail spaces can drive online sales. The report called ‘The Halo Effect: How Bricks Impact Clicks’, found that opening a new physical store in a market leads to a 37% average increase in overall web traffic. Furthermore, it found that for emerging brands, being less than 10 years old, there was an average 32% climb in their share of web traffic when a new store opens, and a 27% increase for more established brands.
It remains to be seen if Tesla will open any more storefronts in Canada after Sunday’s announcement, though the company was said to be in talks with landlord Cadillac Fairview to open more Tesla showrooms in the landlord’s malls. One location, according to a building application, was set to start construction soon at CF Toronto Eaton Centre, which is North America’s busiest shopping centre with nearly 54-million annual visitors. Tesla’s lease includes part of the space currently occupied by leather goods brand M0851, as well as the adjacent A/X Armani space. Tesla’s CF Toronto Eaton Centre space would include frontage on Yonge Street as well as on Queen Street West, facing southward towards the massive Hudson’s Bay Company building which includes Canada’s flagship Saks Fifth Avenue store, as well as the flagship location for HBC’s Hudson’s Bay banner.
Electric car charging stations have been popping up across Canada in anticipation of electric vehicles becoming mainstream in this country. That included installations at several Cadillac Fairview malls as well as with other shopping centre landlords, eager to cater to shoppers capable of affording the pricey electric vehicle options.
We’ll continue to monitor Tesla’s retail operations in Canada to see if any further spaces may either open or close.
Now located in Toronto, Craig is a retail analyst and consultant at the Retail Council of Canada. He's also the Director of Applied Research at the University of Alberta School of Retailing in Edmonton. He has studied the Canadian retail landscape for the past 25 years and he holds Bachelor of Commerce and Bachelor of Laws Degrees. He is also President & CEO of Vancouver-based Retail Insider Media Ltd. Email Craig: email@example.com