Steve Greenfield is a long-time automotive marketplace executive and a new contributor to the AIM Group Marketplaces Report. He’s founder and CEO of Automotive Ventures, LLC, which advises automotive technology companies looking to raise money, sell their businesses or energize growth. Previously, he was an executive at TrueCar and Cox Automotive Group, and has overseen more than $1 billion in automotive technology acquisitions.
What a difference a month makes.
On March 5, I received an email with the “black swan memo” from Sequoia Capital, one of the leading venture capital companies. It went to Sequoia portfolio company founders and CEOs, providing guidance to ensure the health of their businesses while dealing with potential consequences of the coronavirus.
It was stark.
“Having weathered every business downturn for nearly fifty years, we’ve learned an important lesson — nobody ever regrets making fast and decisive adjustments to changing circumstances,” the memo said.
“In downturns, revenue and cash levels always fall faster than expenses. In some ways, business mirrors biology. As Darwin surmised, those who survive ‘are not the strongest or the most intelligent, but the most adaptable to change.’”
Frankly, the memo seemed a bit out of place, even draconian. Remember — at the start of March, there were only 221 confirmed cases of Covid-19 in the U.S., the Dow Jones Industrial Average was at 26,000, and it was “life as usual” for most of America.
In hindsight, it makes sense that a large VC firm like Sequoia would have a global perspective on the potential impact of the pandemic on its portfolio companies. It’s made more than 250 investments since 1972 in companies like Apple, Google, PayPal, LinkedIn, Stripe, YouTube, Yahoo and WhatsApp.
Fast forward a month.
Here we are with more than 1.3 million cases of Covid-19 and 73,000 deaths reported globally. Dozens of countries are on lockdowns of varying degrees. Marketplace listing volumes and revenues have plummeted worldwide (although, interestingly, many report traffic is flat or even up).
In response, many marketplaces have discounted rates or otherwise provided relief to their advertisers.
So the question is: When we get through this and what will the “new normal” look like? Phrased a different way, will consumer shopping behavior change dramatically?
It’s worthwhile to look back at two recent global crises to evaluate potential consumer behavior after the pandemic.
After the 9/11 terror attacks, airports implemented strict security measures, airlines rushed to reinforce cockpit doors, governments created no-fly lists and countries everywhere worked to close security gaps. But afterward, the world was ready to get back to flying. While airline passenger trips declined in 2009, volume has increased every year since.
The 2008 global financial crisis was the most serious since the Great Depression. Consumer wealth declined by trillions of dollars, companies declared bankruptcy in staggering numbers and many financial institutions collapsed or were deemed “too big to fail” and received government bailouts. After the Great Recession, it took more than five years for the Dow Jones Industrial Average to return to its pre-crash peak of 14,000. But subsequently, Wall Street entered an unprecedented bull market and the Dow more than doubled over the next seven years.
These two instances show just how short consumers’s memories are — even after great trauma. They indicate that consumers will likely return to “life as normal” after we emerge from the pandemic.
Since my expertise is in autos, I’ll tackle the question: What’s the likely impact on the autos industry? Will this crisis drive consumers toward “touchless,” remote car buying?
Car shopping hasn’t changed fundamentally in almost 100 years, save the introduction of the internet which greatly changed auto advertising, moving spending from traditional marketing to online. However, more than 20 years into the transition online, most marketplaces are still selling impressions, clicks and lead forms just like before.
We can be confident about this:
- Manufacturers: Automakers won’t be able to leverage this crisis into a sell-direct model. They’ll have significant financial issues and will have to pause or outright cancel investments in electric vehicles, autonomous vehicles and ridesharing — areas where they have recently spent billions of dollars. These just won’t be critical in the new era focused on survival and cash flow.
- Online buying: Digital retailing has been a buzzword for auto dealer software for more than six years. Digital retail initially promised consumers the ability to complete a car purchase online, and to ultimately transform the in-store dealership experience. But these promises never played out due to a host of factors, including an inability to calculate accurate payments and consumer reluctance to buy vehicles sight unseen. The landscape of digital retailing providers is cluttered, and has largely evolved to provide dealers with “super leads.” The primary exception in the U.S. is Carvana, which is has had success with its driveway delivery service, due to a hyper-transparent process and buyers’ trust in the company’s hassle-free returns. But Carvana is, in fact, a fully integrated auto dealership, not an online marketplace. It owns the inventory and, in some cases, works closely with financing sources to calculate monthly payments and offer financing; in other cases, especially “sub-prime” customers, it provides financing directly.
- Importance of the automotive industry: The automotive segment will remain a vital part of both the U.S. and global economies, will be too big to fail, and car dealers will continue to play a pivotal role in retailing cars to consumers.
Having said that, the next 12 months will be a pressure test for the industry and its technology ecosystem. Weak automakers may need bailouts, financially troubled or overextended dealerships will be sold or closed, and software companies and marketplaces that carried too much debt will be forced to make very hard decisions.
Having a strong balance sheet (i.e. lots of cash and little to no debt ) will help any company weather this economic storm. The weakest players will be forced to renegotiate with lenders, restructure or consolidate. Over the next year, I expect a lot of merger and acquisition activity — much of that focused on distressed assets or companies in bankruptcy or extreme financial problems.
Will this pandemic fundamentally change the ways consumers buy or service their vehicles? I don’t think so. It’s very likely that in one or two years, life will be back to more or less normal, albeit with fewer weak players and potentially some unexpected innovations emerging as a result.
Even so, the fact that we’ll return to normal doesn’t negate the pain individuals, the global economy and marketplaces will have to weather in the near and mid-term.
Like the Sequoia Memo presciently signaled a month back, it’s time for us all to batten down the hatches.