Steve Greenfield is a long-time executive at automotive marketplaces, and a new contributor to 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.
Will auto marketplaces consolidate in the U.S., where there are now eight companies of significant size and scale? That’s a safe bet. It’s just a question of who, how and when.
Ten years ago, the U.S. auto classified space was dominated by two companies, AutoTrader.com and Cars.com.
Fast forward and now eight auto sites receive at least 2 million visits each month: CarGurus, 53 million; Carfax, 25 million; Autotrader.com, 20 million; Cars.com, 20 million; Edmunds, 16 million; Kelley Blue Book, co-owned with Autotrader.com, 15 million; TrueCar, 11 million and Autoweb, 2 million. (SimilarWeb, March 2020.)
Globally, most mature markets have just one or two dominant auto marketplaces — for example AutoTrader.co.uk in the U.K.; AutoTrader.ca in Canada (no relation to the U.K. Auto Trader); Carsales.com.au, Australia; WebMotors and ICarros, Brazil.
What makes the U.S. automotive market so different that it can support so many players of significant scale? In other marketplace categories in the U.S., the opposite is true: co- owned Zillow and Trulia now dominate U.S. real estate marketplaces; in recruitment, it’s Indeed, which long ago overtook Monster.com and CareerBuilder.com, and in horizontals, Craigslist is still the overwhelming leader.
Why has the U.S. automotive marketplace category gotten more crowded over time, and how can it support so many companies? How long will that last? Is a shakeout coming? (Yes.)
Several factors contribute to the hyper- competitive environment in the U.S. that’s unique to automotive:
1. Dealership locations are overbuilt; competition is fierce. A vestige of the pre- internet era, a well-built-out dealer footprint was critical to ensure consumers driving down the road would see dealership frontage. That’s no longer necessary; online shoppers can now pinpoint a dealership with their exact vehicle in stock, reducing the need for physical dealership locations. Too much competition drives larger advertising budgets and aggressive marketing to compete with neighboring dealers.
2. Large dealerships, lots of in-stock inventory. U.S. consumers love choice and want their cars now. Relatively cheap land in the U.S. and consumers conditioned to demand comprehensive selection makes dealers support large physical footprints, with high inventory and the scale to support large advertising budgets. The National Automobile Dealer Association reports an average new-car dealer spends almost $47,000, or more than $550,000 per year, in advertising. Many spend twice that, or even more.
3. Automaker overproduction, huge incentive budgets. Auto manufacturing capacity in the U.S. far exceeds market demand. Because of their high fixed-cost structures — long and costly vehicle design and development, expensive factories, scale efficiencies of greater output — OEMs want to keep factories running at full capacity. So they fuel demand with billions of dollars of consumer- and dealer-facing incentives and rebates.
Those factors and more led to a market that supports large, competitive ad budgets and multiple third-party advertising marketplaces.
Since the space is so crowded, is there a compelling case for consolidation?
One could argue, and I often do, that there are too many players in the U.S. market. Some merger-and-acquisition activity would be healthy. Having said that, what would be the “investment thesis” for existing players to make an economic case for consolidation?
Consolidation would allow elimination of redundant costs, which might alone be enough to encourage some m-and-a activity if driven by “strategic” marketplace companies themselves.
Could private equity companies be an even more aggressive catalyst for consolidation? Fortune magazine said private equity players entered this year with a record $1.5 trillion of committed but unallocated capital, often called “dry powder.” They don’t make money unless they invest it somewhere (and those investments work out well). (Some investments do, some don’t. Overall track record is what counts.)
If PE is to get excited about consolidating two (or more) automotive marketplaces, those investors will have to believe in a growth thesis beyond simple expense reduction. The bigger (and more important) question is: “What is the story to get this category back to growth?”
The answer isn’t as clear as it might be.
The truth is that as automotive advertising has migrated from print and broadcast media to digital during the past 20 years, Google and Facebook have been the main beneficiaries, not the third-party marketplaces. Even the recent darling of the category, CarGurus, whose brilliantly executed playbook successfully grabbed market share from the incumbents, has seen revenue growth decelerate, starting before Covid-19 hit.
Compounded by the pandemic, it’s going to be a tough year for the entire industry, including CarGurus, which shut down most of its international efforts.
Another challenge for auto sites is the fact that automakers, historically big spenders with companies like Cox Automotive Group and Cars.com, think they have found more cost-effective ways to reach the same consumer audiences elsewhere. As you might expect, that’s often on properties owned by Google and Facebook.
Another potential factor threatening growth of auto marketplaces is that unlike other advertising categories, Amazon hasn’t yet figured out how to capture ad spending from automakers and dealers. That day is inevitably coming. (Amazon has conducted some small-scale tests of auto sales in Italy and France, but hasn’t penetrated the category. Yet.)
There’s also the fact that U.S. dealers are working hard to reduce their use of third- party lead sources altogether.
How does this play out?
Some third-party marketplace players may merge or consolidate by doing all-stock deals, without a financial sponsor. In those, cost reduction will be the primary rationale.
To get private equity interested, we’ll need a compelling growth thesis beyond cost- cutting. And that thesis must address the fact that existing marketplaces still do very little to alleviate the major consumer pain points, which occur at the physical dealership. To give PE investors the confidence to get involved to catalyze consolidation, we’ll need a new, differentiated, compelling consumer buying experience from a third-party marketplace.