Bait-and-Switch

In retail sales, as defined by Wikipedia, first, customers are “baited” by merchants advertising products or services at a low price, but when customers visit the store, they discover that the advertised goods are either not available or are not as good as expected, or the customers are pressured by sales people to consider similar, but higher priced items (“switching”).

Some time ago, in connection with the announcement of plans to build the Model 3, Tesla offered prospective customers the opportunity to gain a position in line for the new vehicle by making a refundable deposit of $1,000.  The Model 3 was initially proposed as an electric vehicle with a base price of $35,000, before a tax benefit of $7,500.

Apparently, this offer was well received and, constantly cash strapped Tesla, garnered approximately 500,000 reservations, providing an interest-free loan of $500 million.

Tesla has had a great deal of difficulty in building the Model 3, and the few deliveries that have actually occurred, have been an upgraded version selling for closer to $50-55,000 than $35,000.

Recently, the company announced a new version of the Model 3, with additional performance features and a suggested selling price of $78,000.  Management indicated that for now, production schedules will emphasize the new version as, at present, it was not possible to produce Model 3s, at a profit, for $35,000.

It appears that the first delivery date for the $35,000 model 3 will be “the twelfth of never”.

Investors, and prospective customers, should be very careful when relying on management guidance and/or projections.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA