Tesla: Cutting Sales Staff Will Cripple Growth Potential

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About: Tesla, Inc. (TSLA)
by: John Engle
Summary

Tesla has started off Q2 with fresh cuts to sales staff. Brick-and-mortar stores already were in peril thanks to a new strategy to move all sales online.

Cuts had been slowed in late March due to a quarter-end deliveries rush. With Q1 finished, the cuts have recommenced.

Physical store personnel are not the only ones facing the ax. Inside sales teams also have seen sweeping cuts.

Tesla appears to be fighting to conserve cash at the expense of future growth and sales. That will hamper the company's hyper-growth narrative going forward.

Tesla (TSLA) claims that its recent efforts to migrate all sales online will allow it to lower prices and increase spending on other aspects of its business.

But it's not merely retail sales staff who are losing their jobs. In fact, Tesla also has been slashing its inside sales teams, further limiting its ability to reach potential buyers. That does not bode well for the company’s aggressive growth narrative.

Retail Sales Staff Reprieve Comes to an End

The sales teams at Tesla’s brick-and-mortar stores have received the brunt of the job cuts, as well as the bulk of the media attention. In February, Tesla abruptly announced a “retail entrenchment strategy” that would involve the elimination of virtually all retail stores. Instead, all sales would be conducted online. Within days of the announcement, dozens of stores were closed.

Then, just as suddenly, Tesla changed course again. With sales of all its vehicle models, including the Model 3 sedan, dropping severely during the first quarter, CEO Elon Musk decided to keep stores open during a quarter-end push.

Apparently, the halt to store closures was merely a temporary reprieve. The International Business Times reported this week that Tesla has begun the second quarter with a raft of sales job cuts and store closures:

“The company’s sales team has again been the victims of the new round of firings at the start of Q2, with several dozen sales team members being dismissed last week in Chicago; Brooklyn, New York; and Tampa, Florida.

“Tesla confirmed the firings but refused to discuss specifics such as the number of personnel let go. The firings are part of Tesla’s “retail retrenchment strategy” announced in February.”

Cutting retail locations makes little sense in light of Tesla’s claimed growth trajectory. Musk has touted that the new strategy makes sense in light of the fact that Tesla made 78% of its sales in 2018 online. But, as we discussed in a recent research note, 78% is still less than 100%, which means that Tesla would likely be foregoing sales even if demand and the profile of buyers remained static.

Cuts Extend Beyond Brick-and-Mortar

The cuts have now extended beyond physical sales staff. Indeed, Bloomberg reports that Tesla began the second quarter by slashing much of its inside sales team:

“The cuts made last week affected teams known internally as ‘inside sales,’ which were tasked with reaching out to potential customers and inviting them to test drive cars.”

This is a far stranger move than cutting physical store staff since it seems to contradict Tesla’s own stated aim of moving sales online. Without retail locations, walk-ins are impossible. That makes outreach and other inside sales functions all the more important. Making deep cuts to this team will only serve to weaken Tesla’s ability to make sales and reach potential customers.

This brings us once again to Musk’s claim about 78% of sales happening online. While fairly impressive on its face, this is a misleading statement. Many of these buyers were plugged-in early adopters. The run-of-the-mill buyer is much less likely to buy online, site unseen. Indeed, as Erik Gordon of the University of Michigan has pointed out, the idea that the migration to online-only will somehow improve sales numbers is “a logical impossibility.” It's even more unbelievable in light of these recent cuts to inside sales personnel.

Investor's Eye View

Tesla appears to be in a desperate cash preservation mode. The company is clearly struggling to cope with falling demand, even as it brings the Model 3 to international markets. Cutting its brick-and-mortar footprint may help to alleviate some of its cash burn, but it will do little to change the long-term trajectory of the company. Indeed, it's likely to exacerbate and accelerate demand deterioration.

Tesla is foregoing future sales and growth potential for the sake of temporary financial survival. That's not a growth story any sensible investor could believe in.

As the second quarter plays out, we will learn whether Tesla can arrest falling demand. We do not see how it can do so, even without the recent cuts to both its physical and inside sales teams. Investors should prepare themselves for an ugly second quarter. Indeed, it may very likely be worse than the already disappointing first quarter.

Disclosure: I am/we are short TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.