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What SMEs can learn from Tesla's ongoing decline

8 min read

04 March 2019

Reporter, Real Business

Thought the issues plaguing Elon Musk and his electric car behemoth Tesla had no bearing on your humble SME? Well, think again. Musk is making a series of changes in order to respond positively to the consumer market and the huge change in culture that's underpinning it. All businesses, great and small should follow his lead and do the same if they want to survive.

It’s no secret that the way we purchase goods and services are changing – and changing for good. Online is where it’s at, and online is where it’s probably going to stay.

We don’t need to engage in a sales history lesson to see why this is the case, (cue the Amazon revolution, and the availability, choice, cheaper prices and easy accessibility of goods these kinds of online retailers provide).

We can’t deny that the e-commerce revolution and accompanying change in consumer buying culture have precipitated the decline of high-street retail, perhaps forever.

All businesses should respond to this change

But it’s not only the humble shop-owner who should fear the culture change that the world of sales and commerce has undergone, as the latest news, coming fresh out of the Californian techosphere, says all businesses great and small should fear it.

– Why? Because even business and tech oligarch Elon Musk is responding to this global shift.

He is making big changes in his electric car company in order to create cheaper products and is scaling down the brand’s global store-based presence to achieve it.

What’s happening with Tesla?

It’s well known that Tesla has become something of a luxury car brand in the green-motors market, with its Model X SUV costing between £80.2-87.2k.

But after facing declining sales in late 2018, Musk and co are realising that their mission to make the world drive clean will not happen if their goods remain at such a premium price.

What’s their solution? Bringing their goods down to scale and going online

The company has announced that it’s shifting to an ‘online-only’ sales model and is closing down a number of its 378 stores around the world to cut costs. This, they hope, will facilitate the production of a cheaper and more accessible model of car for consumers.

Musk’s promise to introduce a more ‘accessible’ model to the green car market comes in the form of the Model 3, which, despite having first been announced in 2016, still retails for over $50,000, (£37,783+).

Nearly half a million customers signed up for the Model 3 when it was first announced. However, costly production issues caused delays following its launch.

“The publicised reason for this change, according to Tesla, is to make the prospect of purchasing electric cars mainstream via greater affordability.”

Over the last year, however, Tesla has put some effort into economising the motor by shrinking its battery and cutting costs within its manufacturing process while still protecting its profit margins.

Musk’s plans to scale back on the brand’s abundance of physical stores should allow the firm to cut its production costs by up to 5%. This, he hopes will in the long term reduce retail prices across its entire range of vehicles.

Why is the Model 3 being ramped up now after so many delays?

Tesla has been facing years of losses and has been cutting employment numbers since June 2018 to counteract the general economic decline the brand has been experiencing.

“If you’ve ever wondered how those enormous Tesla stores in fancy shopping centres make money, well, they don’t. At least, they don’t make enough money for Tesla to keep them all open if it also wants to be able to afford to produce a $35,000 car.” – Dave Lee, Technology Correspondent, BBC

The final two quarters of 2018 saw Tesla scrape through with meagre profits, but things have got worse this year, and Musk is expected to declare losses for the first three months of 2019.

Thus, the introduction of an ‘affordable’ model with more widespread consumer appeal could be the saving grace for the company, but how will they manage to do this?

Is the love affair for luxury goods and services waning?

According to the BBC, Tesla is ahead of the curve when it comes to taking car sales online, as it already has a much less store based presence in the US than other major car companies.

– But is this also proof of another change in commerce culture?

There is evidence to suggest that the pulling power of luxury travel, whether by plane or by car, is waning. Just look at how Airbus has discontinued its double-decker A380, an aircraft that boasted luxe-amenities such as showers and cocktail bars.

Why? Because consumers are looking for easy availability and economy with their services, whether that’s an abundance of cheap and direct flights, discounted online retail goods, or more affordable cars that are also environmentally friendly.

You can see how this is happening with Tesla, who is currently toning down the brand’s luxury culture through their affordability campaign.

Whatever they are shopping around for, customers have been empowered by the online transition. They have been empowered by limitless choice and competitive prices. It’s such a powerful change that even the likes of Tesla, a global luxury electric car provider, are becoming more nimble to service this new demand.

– And, let’s face it, going to a car showroom where customers are plagued and pressured by sales representatives on commission was never that appealing or enjoyable an experience to begin with.

What SMEs can learn

The Tesla example should teach SMEs that, no matter what goods or services they offer, just how important it is to listen to the market, and to consumers in particular.

If evidence shows that they are looking for economy, (evidenced through Tesla’s declining sales), or easy availability of goods, (evidenced through the growth of Amazon compared to the stagnation of the high-street), then listen and respond to it in whatever way you’re able to.

Only businesses who adopt a nimble and reactive approach to consumer demand will manage this massive transition of consumer culture well. If even Elon Musk is doing it, then all business owners should.

Since this article’s publication, Tesla has made a partial U-turn in its policy, and according to the BBC, is re-opening a number of stores in “high visibility locations” with smaller numbers of staff and is continuing to raise prices for its range of models.