I have commented before on the auto industry strategy of continually pursuing ever higher ATP and GP, even at the expense of volume. On the old Disney board, I expressed my unease with the company’s strategy of raising park prices whenever it wanted to juice profits.
Seems I am not the only one questioning Disney.
A fundamental question in raising prices is will competition follow? Or will they delay to gain market share?
Or do you have so much market clout that it doesn’t matter.
Legacy auto OEMs are going to get some strong medicine from Tesla. Musk stated that his aim was to push volume to take market share even at a loss provided the cash flow is adequate. Tesla has been very good at strategic pricing, up during the supply chain crisis and now down to meet recession demand (and to get the IRA tax rebate).
The Captain
Disney is in an unusual position. Little kids don’t understand money. All they know is they want some mouse. So, the parents have to say “no”, or do without something else, to be able to afford Disney’s prices.
Others, like automakers, don’t seem to care about market share anymore. They drop their lower priced models, then, as volume falls, close plants and lay off people. We old phartz remember when GM’s market share was over 50%, Ford had some 25% and Chrysler about 18%. For 2022, GM had 17.09%, Ford 13.92% and Chrysler 11.66% Chrysler parent Stellantis is closing Belvidere Assembly next month, with no apparent plans to move or replace the model that was built there. Instead, they increased the price of the next smaller model to occupy the price range previously occupied by the larger model that is going out of production.
Steve
Two examples: Disney bum rushed the CEO who pushed pricing over experience, the new (old) guy has already started hacking away at some of that. But in the case of a theme park it’s a vastly expensive proposition to get into the games, particularly if you’re geographically close, so “competition” is different. (Yes, people can choose Branson over DisneyWorld, so there’s still some consumer choice, but the experiences are vastly different. Likewise Universal, although that’s closer.)
I notice Tesla lowering prices not just in China but also in Germany and in the US, also in the Middle East and in Africa - even though those geographies are facing quite different levels of competition from different manufacturers. That indicates to me that Tesla is beginning to feel the heat, and the exclusivity/monopoly they once had is on the way out. There are now dozens and dozens of competitors, some good, some not, but it’s very different from just a year or two ago.
Investors have noticed, too,
Indeed, and it is also an unusual time. Income from the parks went to zero during the pandemic and many expenses continued. We are still in the ‘recovery’ phase after long lockdowns and little traveling. The traveling I’ve done in the past six months shows lots of demand, and Disney is capitalizing on this pent-up demand. Higher prices makes sense to me at this point, even ignoring inflation.
DB2
This is yet another advantage of not having 3rd party dealers between you and your customers!
Yep. They’re either feeling the heat, or turning up the heat, or a combination of both (latter is most likely). In this case, certainly for Jan - Mar '23, it is a very clever action. In one fell swoop, they dropped prices such that most vehicles (3/Y) are eligible for the $7500 tax credit AND have made it harder for Ford to sell their Mustang mach-E that directly competes with the model Y (which has the largest price decrease).
That said, gross margin has to come down after such large price decreases. But you can do that when your gross margins are 30%.
I dunno. Generally you slash prices to try to drive the other guys out of the game. I don’t think the other guys are likely to drop out, at least at this early stage. There might be some already marginal players who dump, but it’s hard to imagine BYD, VW, GM or the other bigger players doing anything but sucking it up. If, after all, EVs are the future then they have no choice do they? I’m not understanding this move, unless the answer is the other side: demand slackening and Tesla needs to move inventory lest it stack up.
In most businesses, you slash prices to move product because you have too much inventory and it is too expensive to stop the manufacturing plant for long.
I’m also pretty sure that Tesla knows the big auto companies aren’t going to be driven out of business (unless they make a grave error). Only the smaller undercapitalized ones will fail.
Tesla price cuts methinks are a result of 2 events.
1-an increase of lower price EVs arriving to EU & US marketplace.
2-a recession in 2023.
3 - making far more of them eligible for the new tax credit (USA).
If you could look back on the old Disney board, you would see me expressing unease with their price escalation well before the plague. Disney management says, with satisfaction, that they see no decrease in park attendance, in spite of the price increases, so they intend to keep raising prices until they do see a drop in attendance. As Peltz is saying, Disney is using it’s market power to gouge the living daylights out of people. Yes, it looks good on the bottom line, but it doesn’t exactly burnish their image as a “family friendly” company.
Steve
It helps to be the low cost producer. Tesla’s large efficient plants should give them more margin. So can make a profit while driving competitors into bankruptcy. Little players need premium pricing and niche markets to survive.
When considering about Disney prices, one has to consider that their customer base is irrational. My accountant continues to bring his grandkids to Disneyworld annually despite my pointing out that it would be cheaper to take them to Paris and Rome than to Epcot (and he could get his first trip out of the country). In the same vein, people chose their auto model, not on its efficacy and cost effectiveness, but rather how they subconsciously stroke their self-image.
Jeff
That is about what I said, little kids don’t understand money, they just want some mouse.
I quit going to the air show put on each year near my home, because the prices have become exorbitant. Under their pre-plague pricing: parking was $20. general admission was $40/person, but you couldn’t see much, because the tents for the premium seating areas blocked most of the view. Now, they have gone to a drive-in format: $99/carload, for a 2 hour show. To put those prices in perspective, Battle Creek puts on a very good aerobatic show each year: 5+ hours. Parking and admission, combined are less than $20. I can burn $20 worth of gas driving to BC and back, plus costs of attending the show, and it costs me less than half what the gougers close to home charge.
Steve
Yes, they could be doing that…or some of that. They could also want to accelerate the ramp up of the Texas and Germany plants because higher throughput (if they can get all the parts) means lower cost for those plants per car.
And they could also be thinking that lower prices may delay some competitors from moving into some markets, at least for a while. A good example would be delaying plans of companies like BYD moving into the US markets.
So, probably multiple reasons. And a primary one, IMO, is to get more cars qualified for the $7500 rebate even if it is just as a talking point
Mike
A function called price (in)elasticity, not gouging (whatever that is).
DB2
I am not sure about that. I get the growth target was not fully hit.
Musk has other plans. He is not interested in playing the endless quarterly game.
Musk wants to bring down the average cost of an EV. It is not just BYD he is keeping off. He really wants to offer more than BYD at the same price. He wants that growth. Not every quarter not necessarily every year but high high growth no matter what.
The test is in Tesla’s profit margins as the average price comes down.
I do get the paradigm can get turned around to competition etc…but Musk carries a duality of competing and Christ complex.
Maybe not germane, but price wars between gas stations on opposite corners are an attempt to make the other guy cry uncle, not because they have too much inventory. Same upstream - with the oil companies themselves. On a macro-scale, that’s what the Saudi’s did/do by pricing so as to try to destroy the fracking business in the US, and with some amount of success at least for a while.
But, slipping to another thought, it occurs to me the most simple and logical explanation for the price cut is the rebate situation; I believe the top end Tesla was just over the price limit which allowed for the rebates. If they cut the price on that one (so it qualifies for the $7500 kickback) then it gets too close to their lower priced model, so that has to be reduced to. Etc. And Tesla has the margins to be able to do that, especially in the hopes of driving volume with more production coming on line over time.
Just a theory. Tea leaves, and all.