Is Musk Ignoring Important Revenue Streams at the Tesla Superchargers?

• With its Supercharger program, Tesla is spending money to build infrastructure that gives away a commodity it has to pay for: electricity.

 

• The Superchargers violate Benjamin Graham’s first rule of investing: “Don’t lose money!”

 

• Electricity is rising in cost.

 

• Tesla could make money from the Superchargers by selling electricity or turning them into convenience stores.

 

• Tesla could be missing out on lucrative Supercharger partnerships with gigantic retailers such as Costco and Kroger.

If there is one thing that Tesla Motors (NASDQ: TSLA) needs it is streams of revenue. Unfortunately, Elon Musk’s electric car company seems to be ignoring a potential stream of revenue right under its nose and, worse, spending money on infrastructure that does not bring in any additional revenue.

The infrastructure is the Superchargers, Tesla’s filling stations for electric cars. Musk’s current business plan is to use them as a loss leader by letting owners of more expensive Tesla Model S vehicles charge free as long as they own the car. That in itself makes little sense because Musk is giving something that he has to pay for, namely electricity, away.

It makes even less sense when you take a look at Tesla’s financial numbers. Tesla reported a net income of -$202.67 million and a free cash flow of -$312.17 million on Sept. 30, 2014. What’s even more disturbing is that Tesla reported a cash from investing figure of -$707.72 million on the same day. It looks as if Mr. Musk’s electric car dream is floating on a sea of debt and red ink, and the Gigafactory is not even built yet.

Tesla is already losing money, yet it is spending money to build infrastructure that delivers a product that is rising in cost to customers for free. What’s worse is that Tesla will have to pay for that product, and it is riding in cost.

Electricity Costs Are Rising

The average commercial cost of a kilowatt hour (kWh) of electricity in the United States has been rising by around 1.5 cents for the past few years, according to the U.S. Energy Information Agency. The average price of one kWh of electricity for a commercial customer in the U.S. was 12.49¢ in September 2014 and 11.1¢ in September 2013.

 

The Superchargers seem to violate one of the basic rules of business and investment as outlined by Benjamin Graham: Don’t lose money! Graham, as value investors know, once famously said that “don’t lose money” was Rule #1 for investors; Rule #2 was see Rule #1. The Superchargers don’t make money—they cost money—and the disturbing thing is that they could make money.

How the Superchargers Could Make Money for Tesla

There are three possible ways that the Superchargers could make money for Tesla. All those potential streams of revenue are dictated by common sense, something that seems in short supply among Tesla and its investors.

The first and most obvious way that the Superchargers could make money would be to charge users for the electricity. After all, Tesla’s competitors such as Ford (NYSE: F), Toyota (NYSE: TM), Volkswagen (OTC: VLKPY), and Tata Motors (NYSE: TTM) do not provide free gasoline and diesel fuel to their customers; why should Tesla? The vast majority of drivers are used to paying for fuel, so they would probably be willing to pay for electricity.

If Tesla were to charge for electricity, it could also generate some revenue off of other electric cars such as the Nissan Leaf (OTC: NSANY) and the Audi e-tron. It could also sell electricity to the owners of plug in hybrids such as the Prius.

More importantly, electric car owners would not get into the habit of not paying for electricity. The Superchargers create a very bad habit in drivers; why should a Tesla owner plug in his car at home (where he has to pay for the electricity) when he can get charged up for free at the Supercharger? Musk might be able to eat the expense with Model S, but what happens when large numbers of cheaper electrics hit the road? Why not let the electric car drivers pay for the operation of the Superchargers?

The second potential stream of income Musk is ignoring is selling stuff to drivers at the Superchargers. The Superchargers are filling stations after all; why not sell lottery tickets, soda pop, and snacks to the drivers?

Those that laugh at this idea should note that convenience stores in the United States topped $700.3 billion in 2012, according to the National Association for Convenience Stores (NACS). In store sales at convenience stores were $199.3 billion in 2012, so there’s an obvious stream of revenue that Musk is ignoring. Worse, that stream is growing; it grew by around 2.2% a year in 2012.

Superchargers Make Money for Somebody Else

This video from Business Insider reporter Alex Davies shows a visit to a Tesla supercharger in Darien, Connecticut. In the video, the only thing to do at the supercharger is to grab a bite to eat at somebody else’s fast food outlet.

Musk’s Supercharger is a great deal for the owner of the Cheese Boy franchise at that Darien rest stop. It lures in high income drivers with American Express cards in their wallets. The Supercharger is making money for somebody else, not for Tesla, as you can see from the video.

If Musk had any business sense, he would build his own convenience store or fast food outlet at the Superchargers. Or he could simply sell or lease the land next to them to a McDonalds (NYSE: MCD), Starbucks (NASDAQ: SBUX), or Chipotle (NYSE: CMG) franchisee, or even a 7-Eleven franchisee. That might not fit in with Tesla’s elegant image but at least it would make some money.

This brings us to yet another way, Musk could make money from the Superchargers or at least get somebody else to underwrite the cost of building them. He could form a partnership with major retailers to put Superchargers in their parking lots.

Why Not Put Superchargers at the Grocery Store or Costco?

Companies like Kroger (NYSE: KR) and Costco Wholesale (NASDAQ: COST) already use gasoline as a loss leader by operating filling stations in their parking lots. Kroger is now the nation’s third largest operator of filling stations with over 2,000 fueling centers and convenience centers. Adding a Supercharger would be the next logical step.

It takes around a half hour to charge a Tesla Model S, or about the same amount of time as the average trip through the grocery store or Costco. The soccer mom could charge her car and get her groceries and pick up the prescriptions at the same time. Costco or Kroger could also give electricity away to cardholders as a perk of membership. Has Musk or anybody at Tesla approached any major retailers with this idea?

After all, they have money to spend; Kroger reported a TTM revenue of $106.36 billion on Oct. 31, 2014, and Costco reported a TTM revenue of $114.49 billion on Nov. 31, 2014. Why not reach out to larger organizations with far greater resources to see if they would be willing to help promote green cars and attract some affluent customers by offering Superchargers. The good publicity alone might be enough to attract a major retailer to offer electric car charging.

One has to wonder how a company that invests in infrastructure it does not make money from is a good investment. It looks as if instead of being a genius, Elon Musk is a lousy businessman and a very bad investor.

Disclosure: the author is long on Kroger.