Costco’s business strategy and Tesla’s Supercharger network
No, Tesla isn’t installing Superchargers in Costco parking lots. However there is an interesting connection between Costco and Tesla, and it will explain why Tesla will be the dominant player in electric vehicle charging infrastructure going forward.
The conventional wisdom in the automotive industry is that as the manufacturers slowly and reluctantly add electric vehicles to their lineup the charging infrastructure needed to provide long distance travel will just show up because that’s the model for gasoline cars today. Car companies don’t build gas stations. There are two open standards for fast charging CHAdeMO and CCS that exist and are used by most electric vehicle manufacturers, but Tesla chooses to use a proprietary interface. I believe Tesla’s proprietary interface is a critical aspect to their strategy. It lets them control the business strategy that will get the massive charging infrastructure that needs to be built accomplished. GM recently launched the Bolt electric car, but they have done almost nothing to build out a charging network. They don’t see it as their problem. As well they have made a tradeoff in the engineering of the Bolt such that it can’t charge as fast as a Tesla even though it has large battery that provides great range on a charge. The industry is struck in a chicken and egg situation: why install fast chargers when the cars available can’t use it? Why build a car that can take a fast charge when the fast charging network doesn’t exist. Tesla can control the experience with a proprietary interface and they can align their business model to match their mission or purpose. Tesla definitely doesn’t want a slow charging car using up one of their charging spots. Imagine if there was a car that could only accept gasoline from a gas station at a trickle, you wouldn’t want that customer at a gas station during busy times.
A Clear Purpose
GM’s purpose is to return value to shareholders, the same as many companies. The problem is when you build values and processes in your company around this as a purpose you create short term thinking. Short term thinking with a focus on profit or market share can work when the industry moves along at a predictable rate but it puts you in a vulnerable position when things change and things in the automotive industry are about to start changing rapidly. A company’s purpose needs to be clear and needs to align with their business strategy, everyone in the company needs to understand it and allow it to guide their decisions. Tesla’s purpose is to accelerate the world’s transition to sustainable energy, this effects everything they do and makes their investments into solar, battery manufacturing, and charging infrastructure make perfect sense. They don’t view themselves narrowly as a car company and they can operate with a long term strategic focus (confounding many financial analysts).
At first glance Costco doesn’t seem to have anything to do with Tesla, but Costco’s business strategy is closely aligned to a clear purpose. This gives them a long term focus and insulates them somewhat from the challenges that all of their retail competitors are facing in the shift to e-commerce and the emergence of Amazon as a giant. Tesla is taking a page out of Costco’s business strategy to build the infrastructure to replace and eliminate gas stations and accelerate the shift to electric vehicles.
Costco’s Business Strategy
Costco is a warehouse club retailer with over 700 locations. Their clear purpose is to continually provide their members with quality goods and services at the lowest possible price. So how can a for profit business design their strategy to give it’s customers the lowest possible price? First, they do everything they can to lower their overhead. They don’t do traditional advertising, they have limited SKU’s with the goods presented on skids, they even install skylights to save money on electricity. They have everyone motivated to drive sales volume so that they can reduce the cost of the products they sell. The really unique thing though is they target their markup at a rate where they effectively breakeven on operations. They make their profit by requiring their customers to buy a yearly membership. For growth they build new locations. This allows everyone in the organization to align to their clear purpose. Membership renewal rates are critical to the business so creating a good experience for their members while keeping overhead as low as possible is critical. If you look at their financial data below for the last 10 years you can see that their membership fees account for the majority of their operating income and their membership fees are always more then their net income.
They’ve created a model with nice stable growth and profit while leaving no window for a competitor to enter their space. As Amazon comes in and wreaks havoc on many faces of retail, you don’t see an effect on Costco.
Tesla’s Supercharger Strategy
Tesla’s supercharger strategy is just coming into view. Their network has been free for Tesla owners as they’ve built out the network in North America, Europe and Asia. The purpose of the supercharger network up to now is to allow Tesla vehicles freedom to go on trips and reshape peoples view that electric cars only make sense as short trip cars that are tethered with a range limit to your house. When the Tesla model 3 is released later this year the number of Teslas on the road will increase rapidly and the plan is to continue to grow the supercharger network rapidly. The main strategy of the supercharger network will change primarily to deal with the volume of cars and convenience and this is where Tesla has adopted Costco’s strategy and why it fits their clear purpose to accelerate the transition to sustainable energy.
Tesla’s focus on the supercharger network is on low overhead costs, very low in comparison to gas stations. Gas stations don’t actually add a lot of markup directly to the price of gasoline because consumers are very aware of the competitive pricing between gas stations. Gas stations make up the money on the other products they sell such as the convenience goods in the store. This is similar to how a grocery store does not make money on milk because it is one of the products where consumers are aware of pricing, but they obviously can’t stop selling milk because people will go somewhere else. A Tesla supercharger does not have employees, does not have land that has to be owned or rented, does not use advertising to generate traffic, does not have to accomodate a financial transaction at the location and does not need to make any money on the energy transaction. Restaurants, hotels and shopping areas want Superchargers located on their property to attract customers. These amenities provide a much better experience to users then an overpriced convenience store. Tesla will charge users in the future for the energy costs associated with charging, but they will do that with a model that targets breakeven and a goal to reduce costs where possible. Solar power generation and battery storage will be used in areas where it can effectively reduce the energy costs for the user. The rapid expansion of the Supercharger network is funded by money from the sales of cars that can use the network (like Costco membership fees but used for rapid expansion instead of profit). Tesla is completely open to other vehicles using their network by contributing their share to the network expansion costs.
Why it is the winning strategy
Cars mean freedom to go where you want even if most of your driving is close to home and people are sensitive to fueling costs even if in the case of electric cars most of your charging is at home. Electricity as a fuel is fundamentally cheaper and cleaner than gasoline and once electric cars are more reasonably priced while delivering on the promises of freedom and cheaper fuel the transition to electric will happen quickly. Tesla’s Supercharger strategy completely aligns to their clear purpose because the strategy will directly influence the transition to sustainable energy. Below is a composite image that I put together from Tesla’s website. On the left is the North American Supercharger map today with 6–8 chargers at most sites and some newer ones having upward of 20. On the right is the plan for a year from now.
With this growth rate in mind and with no competitive network or vehicle in sight over the next year there is no opening for a competitor. Down the road a competitor with a compelling electric vehicle will discover they are much better off buying into Tesla’s network than from starting from scratch or else they will be trapped trying to sell a vehicle that isn’t compelling. Standards and partnerships won’t magically help a competing network when the profit incentive isn’t there to get it built.
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