• Digital dealers like Carvana offer a substantially better consumer experience
  • Marketplaces are building similar offerings without holding inventory
  • Auto classifieds may avoid disruption by marrying their existing business with consumer experience of the digital dealers

It’s rare that a leading classified marketplace is overtaken by a challenger, unless the challenger is doing something truly disruptive. Now, it looks as if quality used-car transactional marketplaces might be the next big disruptor of automotive classified marketplaces.

Digital dealers like Carvana, Cazoo,  Clicars and Spinny buy cars, recondition them and sell them online to consumers complete with warranties and money-back guarantees, in what Malcolm Myers, the founder and CEO of European Internet Ventures, calls “a dramatically better proposition than anything we’ve seen before.”

Some of these digital dealers may evolve into quality transactional marketplaces, extending to selling dealer cars too. Other contenders are also emerging to build transactional marketplaces.

Transactional marketplaces challenging incumbent classifieds

In addition to digital dealers, there are two types of auto business moving to become quality transactional used-car marketplaces:

  • C-to-b and b-to-b auto auction / trading platform operators. These include Auto1, BCA-backed Cinch, and Carsome
  • New quality-oriented hybrid classified / transactional businesses, such as HeyCar, backed by Daimler and VW

All these services aim to deliver a value proposition at the quality level being achieved by digital dealers. Each is pursuing a slightly different approach to inventory sourcing.

Carsome, a Malaysia-based startup, began as a c-to-b auction platform, inspecting and auctioning consumer vehicles to used-car dealers. This year, it launched its own transactional marketplace, where it sells some of its own inventory alongside dealer autos. Consumers can purchase a car online – complete with warranties, finance, insurance – and have it delivered to their door, with a money-back guarantee. As the dealers’ cars have been inspected on their way through Carsome’s c-to-b auction process, they are all “Carsome Certified.”

BCA, in the U.K., has just shifted the direction of its used-car marketplace Cinch. Launched in 2019 as an alternative classifieds site to AutoTrader U.K., BCA has pivoted the business to offer digital transactions, selling both its own and dealer inventory (as yet, primarily its own). All the vehicles have undergone a 225-point inspection, are under seven years old, have fewer than 70,000 miles, and have been serviced recently. When a consumer buys a car, it comes with a 90-day warranty, 14-day money-back guarantee, free 3-day temporary insurance and free home delivery within 72 hours. Buyers can also arrange to exchange their existing vehicle.

HeyCar, launched in Germany in 2017 as a quality used-car classifieds service, and owned by VW and Daimler, has the goal of displacing incumbent marketplace leaders Mobile.de and AutoScout24. Automakers and dealers have not historically been successful at creating truly competitive automotive marketplaces, but perhaps by focusing on transactions and quality used cars that might change.

HeyCar lists inventory that is no more than eight years old, has a maximum of 150,000 kilometers on the clock, and comes with a guarantee, in addition to the statutory used-car warranty. It lists cars from any brand, from dealers of all types (not just the franchise dealers of its automaker owners). To date, its traffic has been fairly flat, and its inventory is but a fraction of its rivals, despite VW and Daimler commanding a combined 42% of the German auto market, making them the two-largest automakers in the country. It charges for leads rather than listings.

This year, HeyCar turned on digital transactions in Germany. Currently, just a sliver of its inventory can be purchased online – 100 cars at the time of writing. But the online experience is sophisticated. Buyers can pay by bank transfer or apply for finance online, transfer the title and arrange delivery. Cars are delivered within 10 days. Recently, it’s started offering an exclusive “only from HeyCar” inventory that offers national delivery to the buyer’s local dealer, a 12-month unlimited warranty and 12-months roadside assistance – a powerful customer proposition.  This inventory seems to come from exclusive access to cars released from its owners’ fleet operations at the end of their fleet lives.

While transactions may establish a point of difference from Mobile.de and AutoScout24 – although AutoScout24 has also turned on transactions, not as slickly executed – the quality proposition and exclusive inventory (regulators permitting) are the real differentiation. If it brings other automakers into the fray as a joint owner with Daimler and VW – such as BMW, the third largest automaker in Germany – it will have an even better chance of becoming a leading transactional auto marketplace.

Transactional marketplaces should be high yield

The financial return from quality used-car marketplaces is potentially much higher than from classified marketplaces.

While quality used cars, under most definitions, account for less than 50% of used-car sales volume, they will typically be 75% or more of sales value. (And of used-car finance value.) Furthermore, the value of a transaction is much higher than a classified ad.

“It’s unlikely [that digital dealers will] ever become the platforms with the most visits or the most inventory, but over time there’s clearly more EBITDA [earnings before interest, taxes, depreciation and amortization] per car to getting the transaction done on the platform,” Myers told the AIM Group. The same is true for transactional marketplaces, except that they also have the potential to compete for a top position in traffic and inventory.

How should auto classifieds respond?

For automotive classifieds, the urgent question is whether they can marry their existing business model with the customer experience of the digital dealers and used-car marketplaces. “All the [automotive sites] in the U.S. want to build the Carvana for dealers,” Steve Greenfield, the former automotive marketplace executive and CEO of Automotive Ventures, told the AIM Group.

“From a strategy standpoint, that’s what they are trying to figure out. This is a better consumer experience, so they’re saying, ‘we have to give dealers a way to provide a Carvana-esque experience,’” he added.

There are several pieces the classified marketplaces need to offer consumers in order to meaningfully compete with the digital dealers and quality used-car marketplaces:

  • Quality inventory, with low mileage, up to seven years old
  • Online finance, contracting, insurance
  • Vehicle inspections, warranties, money-back guarantees
  • Car exchange with guaranteed pricing
  • Delivery or convenient pick-up options

The first challenge is getting dealers onboard. They’re (rightfully) sensitive to the fact that when consumers can easily compare finance quotes, insurance and warranties – all of what Greenfield calls the “profit centers” of the car deal – it gives them more leverage to drive prices down. And then, for facilitating an online transaction, the marketplaces also have the leverage to come for a larger slice of the now potentially compressed margin.

However, some automotive marketplaces have found ways to add some of these pieces to their offerings without impinging on the dealers’ profit centers. CarGurus in the U.S. has a finance offering with three lenders, which allows it to receive a marketing fee from the lender, while the dealer keeps the full commission. Carsales in Australia lets dealers show their own finance offers, which it will begin monetizing in 2021; Auto Trader in the U.K. has provided a similar offering since 2018.

“That seems to be a pretty elegant way of giving the consumer more control on the third-party marketplace to configure their car deal, but in a way where dealers aren’t going to push back,” Greenfield said.

However, for the largest marketplaces, this may be an interim solution. Carvana offers an interesting model for finance at scale. It is the lender in its own right, taking much of the lender profit from each transaction as well as the equivalent of dealers’ commission. This kind of arrangement could allow marketplaces to profit substantially from finance while still paying dealers their traditional commission. And, of course, there are already banks operating auto marketplaces, such as Santander in LatAm and Europe, SberBank in Russia. We may see some further interesting marketplace / lender m-and-a going forward.

Building consumer trust will be critical

The element that really convinces a consumer to purchase a car online, sight-unseen, is peace-of-mind. The digital dealers provide this by carrying out inspections, publishing reports and photographs online of every flaw and imperfection, and providing warranties on mechanical faults (usually up to a year), in addition to money-back guarantees if the customer simply changes their mind. (Although companies say this is rare. Clicars, for example, said less than 1% of cars are returned. Carvana is a rare exception in this case, stating that returns are “in the mid- to high-single digits,” though “half of those are swaps.”)

There is the question of whether marketplaces would need to buy the cars in order to provide inspections and warranties. Myers doesn’t think they do. But he does think that the inspections need to be provided by the marketplaces, which are trusted brands in automotive, rather than by the dealers.

“My view is that an inspection that has a brand stuck on it has far more value than one which is done by a small dealership,” he said. “Of course, if you’re going to invest some money in inspecting a car, clearly you need to ensure you have some exclusivity on selling it.”

CapCar in France is an online service that inspects and certifies cars, and then has an eight-week exclusive arrangement to sell them, for which CapCar receives a 5-6% commission on the sale price. CapCar works in the c-to-c market, but its approach could be replicated by automotive marketplaces with dealer inventory. Or they could simply charge the dealer for the inspection, hopefully repaid with a premium on the sale price.

Already, Encar, the South Korea-based vertical owned by Carsales, provides a vehicle inspection service for dealer inventory, which has enabled it to rollout online transactions with home delivery. Dealers bring the vehicles to Encar inspection centers to be “guaranteed,” a small number of which Encar sells online and eventually plans to monetize by taking a percentage of the sale price as a fee. Encar’s guarantees have a fairly narrow bent, which currently suits the South Korean market, but the company said there’s scope to add more in-depth inspections for an additional cost either to the consumer or the dealer.

Other elements that build trust with consumers, such as ratings and reviews, go a long way toward providing consumers with peace-of-mind. Marketplaces could, for example, require dealers to maintain a certain rating level in order to maintain access to digital retailing elements of the marketplace – a practice already common among marketplaces in China.

Greenfield said that fairly soon technology might replace the role of humans in the vehicle inspection process, enabling marketplaces to provide mechanical warranties on vehicles without actually touching them. “One of the most interesting technologies that I’m seeing now plugs into the car and scans it mechanically to say, ‘Has it been abused? Is it going to need any big service soon?’ these kinds of things,” he said. As electric vehicles become more popular, this process becomes even easier.

Greenfield said the “complexity” in executing on transactions “is almost overwhelming.” But he added that marketplaces need to figure a way to bridge the gap or else it’ll leave them “sitting ducks for the Carvanas.”

How will classified marketplace monetize subscriptions?

Monetizing transactions adds another layer of complexity. “I think the classifieds guys will evolve into enablers with nice SaaS revenue streams and potentially take a small percentage of the sale price as a fee,” Myers said.

The most straightforward way would be to develop tiered subscriptions, where some dealers will take up more services than others. Those subscriptions should bring together all the elements required to execute a digital transaction — finance, insurance, contracting.

Can marketplaces start buying inventory and selling it themselves? Both Greenfield and Myers agree this is unlikely. “At that point, dealers are really going to ask, ‘are these guys a friend or foe?’” Greenfield said.

However, offering an exchange service is critical. Most automotive classified sites offer some kind of ‘instant offers’ product, but the price is usually variable and can be reduced once the vehicle is brought to the dealer. A better experience for the consumer is to offer a fixed price. Some classifieds marketplaces are already doing that.

In the U.K., AutoTrader now offers an exchange product, in which it guarantees the price for the consumer. To reduce the risk to dealers, the price is underwritten by Manheim and allows the dealer dispose of the vehicle if it doesn’t meet its stock requirements. The product works similarly to Kelley Blue Book, which purchases consumer cars immediately.

Meanwhile, Covid-19 has propelled Carvana to within an inch of profitability, and there’s no reason to expect that trend won’t continue. Its success has inspired a new breed of quality used-car marketplaces to emerge, albeit with different approaches to growing inventory, but ultimately the same value proposition for consumers.

Together, they too present a genuine threat to dealers, who should now be willing to come onboard to digital retailing via classified marketplaces. With the right products and execution, classified marketplaces are well placed to become the partner of choice for dealers in digital retailing, and in time to enjoy the uplift in revenue and earnings that comes from sharing in more of the transaction.

There’s an urgent need for automotive classifieds marketplaces to accelerate their plans to move into the transaction and provide dealers with digital retailing capabilities – whether it’s entirely online transactions with delivery, or an omni-channel approach, or both. A rapid response here could ultimately be the difference between maintaining and strengthening a leadership position, or being outmanoeuvred by the incoming disruptors.

Carvana nears profitability and mulls marketplace territory

As Carvana makes increasing strides toward profitability, it’s clear that neither it, nor the model, is going away. In the third quarter of fiscal 2020, revenue grew 41% year-over-year to $1.5 billion, with a net loss of just $18 million – that’s compared with a loss of $92 million the year prior. Buoyed by Covid-19, Carvana was just 1.1% shy of profitability in the quarter and already in the black in terms of EBITDA.

More recently, Carvana has been working with a select number of U.S. dealers to bring their inventory into the fold. Carvana won’t talk about how this arrangement works – whether it takes a percentage of the sale price from the vehicles or if it gets to sell the ancillary services (such as finance, extended warranties, and so on).

But the company looks certain to be entering marketplace territory. In an earnings call, the firm acknowledged it was conducting pilots with dealer inventory, but that it was still trying to determine what the pilots mean from a customer experience, scalability and economic perspective.

“When we feel like we’ve run those tests and got them to a place where we feel really good about the outcome through those three lenses, then we’ll likely pour resources on them and we’ll talk about them a lot more, and we’ll seek to grow them out in the same way that we’ve grown buying cars from customers. But I don’t think we have any projects that have yet risen to that level of discussion,” Ernie Garcia III, CEO and chairman of Carvana, said.

Carvana may be able to charge for the transaction itself on the basis that it’s accelerating stock turnover for the dealers, bringing them extra sales from outside their normal catchment, or just making sales more efficient, including potentially reducing marketing costs.

Carvana also runs its own loan book. If Carvana is willing to give dealers a commission on loans, that will also sweeten the pie for dealers on joining its marketplace. Additionally, by extending the Carvana logistics network to dealer vehicles, any ordinary regional dealership suddenly becomes a national one. That’s exceptionally compelling to a dealer. There’s also scope for Carvana to charge the dealers for a certified inspection and bring them quality trade vehicles through Carvana’s exchange service.

If the exercise is successful and Carvana can get more dealer inventory and then, possibly, also gets new-car inventory, it has the potential to be enormously disruptive. Greenfield even thinks it might become an acquisition target. “Once they have the dealer inventory – and they don’t need a lot, but they have to prove that it works and it works for dealers – then I think that’s the day Amazon buys them,” he said.

Even if Carvana isn’t acquired, as the leading, profitable digital dealer, operating at scale with a dealer marketplace of quality used-car inventory, it really doesn’t leave automotive classifieds much option but to compete – but by then, it might already be too late.

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