Did you know that historically 50% of all new retail businesses go bankrupt within five years? Sinking all of your cash into inventory can be a tough job. And no, it’s not any easier for larger retailers than it is for smaller ones. In fact, in some ways, it’s actually a lot harder.
One of the ways that large retailers get into more trouble than small ones is that they start to expand far too quickly. There can be a lot of pressure to consistently meet growth targets. The sales group will consistently beat the drum that they need to open up new markets. But the sales group is always concerned more with increasing volume, not maintaining margins.
As companies enter into more markets, they increase top-line revenue. But their fixed costs can rise faster than their new sales increases. Expanding into new markets means hiring more people, leasing more square footage, holding more inventory, and more customer service. Each new country brings costs unique to that market. And if there aren’t enough new customers, the new market actually hurts the company.
Economies of scale is achieved only if you expand sales and keep your fixed costs stable. Something many Tesla watchers seem to forget. Opening up new markets can quickly run into the law of diminishing returns. You end up spending more and more money chasing after fewer and fewer unit sales. History is full of retailers who expanded too quickly only to find themselves bleeding cash supporting all of those markets. And this is on top of double-digit year-over-year sales increases.
It seems that the world is surprised that Tesla had a year-over-year sales increase during this current Coronavirus pandemic. Especially compared to the traditional automakers who are down drastically. But it’s no big surprise to me.
First, Tesla has been consistently opening up new markets. So it’s an Apples-to-Oranges comparison to compare Q1 2019 to Q1 2020. If you were to compare the equivalent of “Same store sales”, Tesla would have been down. Most reputable companies that open new markets will give investors some kind of sales metric which gives the sales increase/decrease for the equivalent markets. But not Tesla, this is a company whose financials are built upon smoke and mirrors. Notice that not a single article about Tesla’s deliveries will mention the equivalent of same-store-sales in mature markets.
Of course, expanding into new markets and achieving year-over-year sales increases can be a good thing if it’s real. But you have to be able to tell the difference between healthy growth and desperation. What’s the difference? A company that is increasing both same-store-sales and opening new markets is on the road to critical mass. But a company that is experiencing reduced same-store-sales and offsetting that by opening up into newer markets, is on the road to reduced profitability. Coupled with reduced gross margins and you have the kiss of death. Tesla falls into the latter camp.
I’ve worked as a financial analyst for companies that have tried to outrun their destiny via opening up new markets before so I’ve seen the behind-the-scenes action. Gateway Computers, Cabela’s, and Amway all tried to keep the growth story alive by opening new markets. It worked until they ran out of new markets. By that time, gross margins were down so much that cooler heads ordered an immediate closure of unprofitable product lines or markets.
Meanwhile, Tesla is losing steam in many of their biggest markets like Norway. And Tesla has run out of new markets to open. Which is why 2020 is predicted to be the year that people finally see through the demand façade for Tesla. There are no more big markets left. This is something that unsophisticated investors in Tesla don’t understand. They simply see the flashy headlines from clueless tech sites who slavishly pump Tesla at every turn.
The second reason today’s deliveries announcement shouldn’t be too surprising is that Tesla didn’t shutdown nearly as much as the traditional automakers. They officially kept Tesla manufacturing open a week past the shutdown order until the 23rd. But cars manufactured after the 23rd would have been Q2 sales anyway. Tesla didn’t really suffer any impact from the Coronavirus pandemic in Q1. Elon Musk successfully stiff-armed the authorities until it didn’t harm him financially. Even if it did put the public at risk.
It won’t be long before we all find out how much money Tesla lost trying to beat their previous year’s sales. When you consider their greatly increased fixed costs on top of unfavorable currency exchange headwinds, I’m predicting it’s going to be a doozy of a loser. And the real pandemic financial impact will finally arrive for Tesla in Q2.
As companies enter into more markets, they increase top-line revenue. But their fixed costs can rise faster than their new sales increases. Expanding into new markets means hiring more people, leasing more square footage, holding more inventory, and more customer service. Each new country brings costs unique to that market. And if there aren’t enough new customers, the new market actually hurts the company.
Economies of scale is achieved only if you expand sales and keep your fixed costs stable. Something many Tesla watchers seem to forget. Opening up new markets can quickly run into the law of diminishing returns. You end up spending more and more money chasing after fewer and fewer unit sales. History is full of retailers who expanded too quickly only to find themselves bleeding cash supporting all of those markets. And this is on top of double-digit year-over-year sales increases.
It seems that the world is surprised that Tesla had a year-over-year sales increase during this current Coronavirus pandemic. Especially compared to the traditional automakers who are down drastically. But it’s no big surprise to me.
First, Tesla has been consistently opening up new markets. So it’s an Apples-to-Oranges comparison to compare Q1 2019 to Q1 2020. If you were to compare the equivalent of “Same store sales”, Tesla would have been down. Most reputable companies that open new markets will give investors some kind of sales metric which gives the sales increase/decrease for the equivalent markets. But not Tesla, this is a company whose financials are built upon smoke and mirrors. Notice that not a single article about Tesla’s deliveries will mention the equivalent of same-store-sales in mature markets.
Of course, expanding into new markets and achieving year-over-year sales increases can be a good thing if it’s real. But you have to be able to tell the difference between healthy growth and desperation. What’s the difference? A company that is increasing both same-store-sales and opening new markets is on the road to critical mass. But a company that is experiencing reduced same-store-sales and offsetting that by opening up into newer markets, is on the road to reduced profitability. Coupled with reduced gross margins and you have the kiss of death. Tesla falls into the latter camp.
I’ve worked as a financial analyst for companies that have tried to outrun their destiny via opening up new markets before so I’ve seen the behind-the-scenes action. Gateway Computers, Cabela’s, and Amway all tried to keep the growth story alive by opening new markets. It worked until they ran out of new markets. By that time, gross margins were down so much that cooler heads ordered an immediate closure of unprofitable product lines or markets.
Meanwhile, Tesla is losing steam in many of their biggest markets like Norway. And Tesla has run out of new markets to open. Which is why 2020 is predicted to be the year that people finally see through the demand façade for Tesla. There are no more big markets left. This is something that unsophisticated investors in Tesla don’t understand. They simply see the flashy headlines from clueless tech sites who slavishly pump Tesla at every turn.
The second reason today’s deliveries announcement shouldn’t be too surprising is that Tesla didn’t shutdown nearly as much as the traditional automakers. They officially kept Tesla manufacturing open a week past the shutdown order until the 23rd. But cars manufactured after the 23rd would have been Q2 sales anyway. Tesla didn’t really suffer any impact from the Coronavirus pandemic in Q1. Elon Musk successfully stiff-armed the authorities until it didn’t harm him financially. Even if it did put the public at risk.
It won’t be long before we all find out how much money Tesla lost trying to beat their previous year’s sales. When you consider their greatly increased fixed costs on top of unfavorable currency exchange headwinds, I’m predicting it’s going to be a doozy of a loser. And the real pandemic financial impact will finally arrive for Tesla in Q2.
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