- Pandemic gives rise to two IPOs for online car dealerships
- With revenue down and staffs reduced, 2020 is a reset year for marketplaces
- Huge interest in marketplaces’ digital retail offerings is a bright spot
Thanks in part to a government relief program, the U.S. auto industry and auto marketplaces are doing much better now than when the economy was paralyzed in the early months of the Coronavirus pandemic.
But the crisis will leave marks on the industry.
One of those? A major step forward in digital transactions.
This is true of marketplaces, with all the major companies putting a greater emphasis on digital retail offerings that were formerly an ancillary part of business.
It’s had an even more dramatic effect on pure online dealers such as Carvana. If they ultimately do to cars what Amazon has done with consumer goods, 2020 will go down as a pivotal year.
Big investments in online retailers
Although its sales suffered in the early months of Covid-19, Carvana, the leading online auto dealer in the U.S. was the first car seller to post reinvigorated sales following the March slump. And its temporary freeze on business expansion has proven short-lived.
In August, the Arizona-based juggernaut revealed in two unrelated announcements that it’s back to growing business at a rapid pace.
The first was an invitation to a hiring event near Phoenix, Ariz., where Carvana plans to add 100 staff – including mechanics and body shop workers – at an existing inspection and reconditioning center. The shop, opened in 2017, serves markets on the West Coast, which is Carvana’s weakest region.
The second was the news that Carvana received government incentives to build a new inspection and reconditioning center near Cleveland, Ohio. The planned $23 million investment would build on Carvana’s existing network of nine such centers. Because it would create 400 new jobs in Ohio, it received a state tax credit for seven years.
Launched in 2013, Carvana is the oldest online-only used-car dealership in the U.S. With 2019 sales of $3.9 billion and a massive market cap of $29.3 billion (even though it’s still losing money), it’s easily the biggest company of its kind. Until the pandemic hit, it was also the only publicly traded one.
That changed in June, when competitor Vroom, a New York City-based company that was also founded in 2013, started trading on Nasdaq. Though IPOs had dried up in the pandemic, Vroom’s initial offering of 21.2 million shares raised $468 million, well above its target of $356 million. By mid-September, Vroom’s share price was up about 18% from the IPO price.
Vroom’s market cap in mid-September was just over $6 billion, about one-fifth of Carvana’s. But Vroom says it can compete with its more flexible business model. Where Carvana has invested millions of dollars in its own reconditioning plants and logistics network, Vroom outsources almost all of these services.
Vroom has a huge car lot and processing center in Houston, but most of its reconditioning work is done by third parties at 17 locations around the country (compared to Carvana’s nine owned facilities). Most Vroom car deliveries are handled by contract transporters – including transfer of acquired inventory to refurbishing plants, and home delivery of vehicles to buyers.
Vroom says its model was vindicated during the pandemic as it avoided losses that would have accrued with greater fixed costs in debt service and operations. It’s also managed to scale up its reconditioning plants quickly, bringing the total from six to 17 from January 2019 through August this year.
Vroom has built a broader reconditioning network than Carvana, especially in the West, where it has locations in Colorado, Arizona and Nevada and three in California. Carvana’s centers offer the advantage of serving no master other than Carvana. But its network is smaller, primarily on the Eastern seaboard, in the industrial Midwest and Texas. The only center serving the West is the four-year-old plant near Phoenix, in Tolleson, Ariz.
A third online-only retailer, San Francisco- based Shift, recently announced plans to go public by the end of Q3. Shift, which has raised $293 million in investment, would accomplish this through a merger with a blank-check company called Insurance Acquisition Corp.
If the deal goes through, Shift would be the runt of the publicly-traded online auto dealers. The company says it has taken strong positions in its existing markets, including a 4% market share in a city in the San Francisco Bay area that it would not specify. (By comparison, Carvana claims market share of about 3% in its oldest market of Atlanta.) Shift operates in several markets – California and Portland, Ore.
In addition to the high flyers, a couple of fledgling online retailers have grabbed headlines recently. One, GettaCar, grew out of a brick-and-mortar car dealership in Philadelphia and has expanded to other markets in Pennsylvania, New Jersey, New York, Delaware and Maryland. This summer it opened for business in Washington, D.C.
With just 130 employees and an inventory of 700-plus cars (as of early July), Gettacar is a distant competitor to Carvana. However GettaCar’s youthful president Yossi Levi hopes to gain market share by appealing to a younger generation of shoppers.
Clutch, based in Halifax, Nova Scotia, is another digital seller gaining traction this year. It claims to be the first company of its kind in Canada, and raised CAD$7 million ($5.2 million U.S.) in seed funding this summer. The lead investor was Real Ventures, led by Kijiji founder Janet Bannister. (Clutch is unrelated to the Clutch Technologies owned by Cox Automotive Group.)
Clutch said it would use the money to grow its team and scale its business in its existing urban markets in Eastern Canada.
Marketplaces lose revenue
Just as pure-digital dealers have bounced back (somewhat), listing sites in the U.S. have also bounced back somewhat. But they all took huge revenue hits at the start of the pandemic and don’t seem to have fully recovered.
CarGurus, Cars.com and TrueCar all reported heavy year-over-year sales losses in Q2. All three companies cut their rates for dealership customers from March through May (or longer) as did Autotrader.com (which doesn’t report revenue publicly). Top- line impacts were a 35% revenue reduction at CarGurus, 31% at Cars.com and 29% at TrueCar.
In addition, automotive marketplaces downsized.
CarGurus cut 150 people, or 13% of global staff, while also closing its operations in continental Europe (Germany, Italy and Spain). Cars.com furloughed 250 people and permanently cut 170 positions, 10% of its total. TrueCar cut 220 staff, or 30%. Autotrader.com parent Cox Automotive furloughed 12,500 workers in May, although many of those were part-timers at the physical Manheim Auction locations.
The severe cuts at TrueCar stemmed from a double whammy: Just as the pandemic hit, TrueCar unexpectedly lost a major trading partner, USAA. The USAA program accounted for roughly 30% of car sales attributed to TrueCar leads. (TrueCar has recently announced a couple of small military-oriented deals in an attempt to make up for the loss of USAA.)
Earnings for Autotrader.com and its sister site KBB.com aren’t publicly reported, but parent company Cox Automotive said early on that revenues would drop 25% for 2020.
Near the end of July, as car sales were rebounding in the U.S., Cox Automotive CEO Sandy Schwartz told the AIM Group that business was back to 85% to 90% of normal, and that the year-end numbers would not be as bad as feared. Even so, Cox Automotive has cut 1,875 staff from its North American operations – amounting to 5% of its global headcount of 34,000.
The pivot to digital retailing
As car dealerships in the U.S. shut down or severely reduced operations early in the pandemic, marketplaces scrambled to help them with online sales.
“Before Covid, we had 500 Autotrader customers using our tools to help sell cars online,” Schwartz told the AIM Group. “Within six weeks, the number was up to 10,000.”
Cox’s flagship digital retail tool, Accelerate, is an add-on for listings on KBB and Autotrader that lets car shoppers calculate deals and monthly payments before going to a dealership. The calculations are based on the shopper’s preferred down payment, financing based on their credit score, and a trade-in value based on a KBB instant offer. A counterpart to Accelerate is available for dealer websites provided by Cox subsidiary Dealers.com, and as a standalone widget for dealer sites.
As the pandemic started, Cox rolled out Home Dealer Services for dealers offering touchless services to advertise them. It includes buttons highlighting a dealer’s ability to provide video walkarounds, home test drives or home delivery of purchased vehicles, and money-back guarantees (which makes online car purchases seem less of a gamble).
According to Cox research, between January 20 and May 20, the number of shoppers who opened vehicle detail pages featuring digital retail tools increased 44% to 13.7 million. Shoppers starting their deals online increased by 99% to 622,000, and shoppers who submitted calculated deals to dealerships increased 108% to 129,000.
Cars.com also responded early to the crisis by rolling out badges that highlight dealers who offer home delivery and virtual appointments with sales staff. The company reported that within weeks of the badges’ introduction in March, 2.1 million vehicles were badged by some 8,000 dealers.
Cars.com also put a new focus on digital retail, with its main product being Online Shopper, similar to Cox’s Accelerate. Dealers subscribing to Online Shopper get it on both their marketplace listings as well as their own websites. According to Cars.com, the number of dealer inquiries about Online Shopper jumped by 250% year-over-year during the first months of the pandemic.
Cars.com subsidiary Dealer Inspire also offers an AI-powered tool, Conversations, available for dealer websites and marketplace listings, to facilitate communication between dealers and customers. Cars also offers “salesperson connect,” acquired through its purchase of DealerRater, which gives car shoppers customer reviews and the ability to book appointments with individual dealership sales staff.
Cars did its own survey of dealers in May to see how its pandemic response was received. It found that by then only 12% of dealers were still doing no form of digital retailing. Dealers said the most important areas of digital retailing were online financing (26%) and home delivery (22%). The biggest perceived obstacles to digital retailing were staff training and education (39%) and technical integrations (25%).
CarGurus has also introduced special badges and filtering for dealerships that offer touchless services during the pandemic.
The big question going forward is what sort of permanent effect these changes will have on marketplaces and their customers.
Joe Chura, president of Dealer Inspire, says the pandemic has defined three categories of dealers. The first, which are mainly independent used-car dealers, have gone all-in on digital retail, even to the point of pivoting away from in-person sales.
“I know one dealer who ixnayed his whole service and fixed-operations business,” Chura said. “This one’s like, ‘I just want to sell cars online. I don’t need this whole dealership anymore.’”
A second category are franchise, new- and used-car dealers who can’t give up a physical presence because they have to service cars and display inventory of the manufacturers they represent. But they’ll improve their online-retail game in order to compete with the independents who provide an excellent online experience.
The final category includes dealers who are not going to change at all. But Chura said this category is already small.
For Dealer Inspire, Chura said, this means providing a comprehensive suite of digital tools that caters to dealers at all points of the spectrum.
Cox Automotive is taking a similar approach, but casting an even wider net, providing not only a marketplace and digital-retail suite, but also automotive research (Kelley Blue Book), wholesale auction services (Manheim) and more.
CEO Schwartz said Cox Automotive’s many pillars put it in good stead whether the future belongs to place-based dealers, digital dealers or some mix of the two.
Asked about the threat of pure online sellers, Schwartz said, “Carvana and Vroom are two of our biggest partner customers. We don’t compete with them. We give them services.”
He explained that Cox provides reconditioning services to both Carvana and Vroom. And since Vroom’s IPO, that company has given even more business to Cox.
“They’re the picture of what the new world is looking like, and what a lot of auto dealers are trying to emulate,” he said. “So they don’t scare us at all. We’re Switzerland out there. We don’t take sides on who’s going to win, we try to develop products to help people sell cars in the best way we can.”