Musk says Tesla's growth hinges on the Gen III car being "the best car in the world at that price range." But industry insiders say that will be irrelevant if the retail model doesn't work.
Tesla insists it will maintain its Apple store sales model, in which cars are marketed through boutiques in shopping malls. But the foot traffic required for a hot startup brand to sell 20,000 cars a year is much different from what's needed to sell 10 times that number after the initial buzz has passed.
The automotive industry has a proven statistical model called the "purchase funnel," in which customers' awareness of a vehicle progresses from consideration to preference and, finally, the purchase. The mathematical formula for each step is exponential, meaning the funnel of actual buyers is much narrower than those who are aware of the product. According to several automotive retailing experts, it takes from five to eight prospects walking into a dealership for each retail sale.
Do the math: In order to sell 250,000 cars a year, based on that model, 1.25 million to 2 million customers would have to walk into a Tesla store. And, arguably, a shopping-mall location combined with the novelty of new technology would draw such a high percentage of looky-loos, as opposed to hard-core shoppers, that the traditional ratio might not hold.
Even if it does, Tesla's current store presence, employee count and capacity for test drives cannot support that sort of customer throughput, executives unanimously agreed. Tesla currently has 49 stores in 23 states.
Many executives believe Tesla cannot hit 250,000 units a year without a franchised dealer network that can manage such scale. Even with 125 retail outlets, that would still be 2,000 new cars per outlet per year. That sort of volume requires real estate. Since Tesla sells mostly in big cities, that's an expensive capital outlay.
"Once you get to 100,000 sales a year, you have the infrastructure to get to 250,000," said an executive who has worked for several Asian brands. "But there is no way to get past 100,000 units with the model he's got. The issues Elon has are biblical in nature."
Industry executives predict Tesla will need to join with an established dealership group that will allow the company to spread its retail and service wings in states that restrict Tesla factory stores.
But Musk says he will not consider such a proposition. Maintaining control of the retail process is key to him. And he says skeptics are overstating the need for a huge dealer network because word-of-mouth plays a larger role for Tesla than for other brands.
Musk says four Model S sedans are sold by word-of-mouth, rather than by conventional marketing, for every one sold as a result of someone walking into a store off the street.
"I don't think we're going to need an enormous amount of stores. We'll have some flagships in major markets," he said. "What will sell cars in the long term will be other customers -- word-of-mouth."