Tesla's decision to close all its stores and sell cars online only sounds crazy — but it might be brilliant (TSLA)

tesla store

Tesla is closing its retail stores and going to an online-only sales model.
This sounds crazy, but it might actually work.
And even if Tesla fails, that could be part of the master plan.

Just over a week ago, Tesla announced the arrival of its long-awaited $35,000 Model 3 sedan — but also revealed that it would close nearly all its retail locations and move to online-only sales.

The second part was greeted with shock and jeers, but Tesla is serious. And the move could be brilliant.

I'll admit that I didn't think so at first. Tesla doesn't use franchised dealers, as every other major manufacturer selling in the US does. Instead, Tesla favors direct sales and has met stiff resistance from auto dealers in a number of states (laws governing car sales are state-by-state, as Tesla has been given permission to do direct sales in some of them).

I asked CEO Elon Musk about this on a controversial conference call with the media after the announcement, and he said that he expects pushback from established dealers who don't want to allow a nationwide, online end-run around the franchising laws. If they stand in Tesla's way, they'd interfere with interstate commerce — unconstitutional, according to him.

"Good luck with that," he said.

Tesla's direct-sales challenges

Elon Musk

After the announcement, I thought through the implications. In the US, the states are often seen as "laboratories" for legal changes that might later become national. The federal government keeps an eye on the experiments. A good current example is marijuana legalization. Eventually, if enough big states go that route, weed might be legalized throughout the US.

My theory had been that Tesla was undertaking a direct-sales experiment, and that it could someday petition for a federal exception. Truthfully, I thought it would fail, largely because every time a big car company has attempted to cut out dealers, the dealers with their staunch allies in local governments and in Washington has fought back.

I figured Tesla would accept a hybrid model, with direct sales in some states but ultimately franchised dealers in others.

They, too, might have mulled this over and concluded that it would be better to take the plunge and impose their own solution. "People want to buy stuff online," Musk told me. And he's right. Besides, a large number of Tesla sales are evidently already conducted mostly online, and the wider auto industry has been exploring more streamlined, frictionless ways to provide buying advice, pair buyers with cars, arrange test drives, and modernize the time-consuming, dealer-centric financing and insurance part of the process.

Tesla frontrunning the risk for everybody else

tesla model 3

Tesla has always served as a sort of risk frontrunner for the car business. The General Motors and Fords of the world have been happy to let Musk and his company absorb all the early challenges of validating a market for electric vehicles. Contrary to what many auto-industry outsiders think, Tesla is widely admired and rooted for in Detroit. They know how hard it is to start a carmaker — much less one making only electric cars.

That's why I now think the online-only sales effort makes sense. It's classic Tesla: risky, but if Tesla's succeeds, the big automakers would have more ammunition to modify the franchise system than they have in the past.

I also came up with another theory about why Tesla is doing this: Tesla intends to fail.

The company was already operating over 300 stores, and it's possible that a hard business analysis concluded that with online sales become prevalent with just about everything except cars, and with Tesla facing down entrenched dealer resistance to direct sales, it simply wasn't smart to keep fighting a losing fight and following a sales model that was off-putting to customers.

Running a retail network is tough, after all. And if you try to do it yourself — and the major automakers don't — it's also quite expensive. So Tesla decided, perhaps, to wind down. Give the online-only approach a shot. If it works, great.

And if it doesn't? Well, there huge national dealer firms, operating franchises in many states, that could take over Tesla's business — companies such as AutoNation and Penske Automotive Group. A partnership would make it much easier for Tesla to get vehicles to customers, although it would obviously compromise Musk's desire to vertically integrate Tesla's operations and could detract from Tesla's profits (although I think Tesla could be more profitable if it offloaded some sales and manufacturing to outside contractors).

Now, you could say that I'm overthinking this decision, and you might be correct. But it is a big deal — bigger, really, than the arrival of the Model 3. While Tesla is superb and car design, technological innovation, and crowdsourced marketing, it struggles with manufacturing, logistics, and fulfillment — the boring, blocking-and-tackling stuff that the rest of the auto industry has perfected.

Tesla could use some excuses to tap that expertise. But the company has to devise ways to do it that won't make Tesla look like it isn't Tesla.

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