Emily Hurwitz, an advertising supervisor who lives in San Francisco, doesn’t like buying cars from traditional dealerships. In fact, she recently bought a 2012 Volkswagen Tiguan through Shift, a start-up that arranges online sales of used cars.
She is happy with her car, which the company brought directly to her apartment to try out. Shift financed the $18,000 vehicle.
Speaking of conventional car dealerships, Hurwitz, 28, said: “I always think they’re going to swindle you. You’re talking to a guy who’s sizing you up. It’s a very overwhelming situation, and you feel like you have to be on top of things and on guard.”
A handful of nascent online used-car companies, including Shift, are capitalising on sentiments like these. Although most online sites merely refer consumers to dealers, these companies are aiming to disrupt the industry by skirting dealer markups and promoting what they see as a better buying and selling experience. As with most of the start-ups, Shift appraises cars and sets a price.
For buyers, that means no negotiation. That’s fine for consumers like Hurwitz, who had already done cost comparisons online. Partly because the prices are set, the process is much quicker, said George Arison, founder and chief executive of Shift, which is based in San Francisco.
“It’s four hours at the dealership. With us, it’s 45 minutes start to finish.”
In the last three years, online used-car start-ups have grown rapidly, accruing more than $2 billion in funding, according to ABI Research. Still, some say these companies underestimate the complexity of automotive retail and that upending a century-old business model may prove difficult.
“History is littered with the corpses of companies that thought they could do better,” said Cliff Banks, president and founder of the Banks Report, which analyses the automotive retail industry. “None have succeeded yet.”
By 2015, the year after it was founded, Shift had raised nearly $75 million in capital from Goldman Sachs, DFJ and Highland Capital Partners. Beyond that, it would not discuss its financials.
The used-car marketplace Beepi started operating in April 2014 with the backing of tens of millions of dollars from the tech industry and other investors. But it ran out of cash and closed this year. Banks said Beepi, which eschewed conventional test drives for 10-day money-back guarantees, failed to appraise cars accurately and was too capital-intensive. (Beepi co-founder Alejandro Resnik did not respond to an interview request.)
Banks said internet-based car companies face the costs associated with advertising, product depreciation, repair, detailing, transportation and delivery. “It’s very difficult to balance supply and demand with a marketplace business model,” he said.
In addition to not offering traditional test drives, Beepi also tried to grow too quickly, Arison said. “They quickly pushed to go national,” he said. “We believed then and still that the car market is a local market. There is no national market.”
Most of these fledgling e-commerce companies must contend with local and state licensing and regulations, particularly during expansions. Shift, for example, recently had to discontinue sales in the Washington area until it received dealer licensing, Arison said.
In a test for the used-car industry, Carvana, which lost $93 million last year, recently filed to go public. Bolstered by fast-growing sales, Carvana, a 5-year-old Phoenix-based company, which is not yet profitable, is expanding to 21 markets.
The trend toward online sales isn’t going away anytime soon, especially among the set that came of age with smartphones. More than 55 per cent of Shift’s customers are under 35.
“The market is heavily skewed toward the younger-generation shopper,” Arison said. “Most young people do everything online.”
Rachel Lutz, who owns the Peacock Room clothing boutique in Detroit, said she would not have known how relatively roomy the new Mini Cooper Clubman was had she shopped exclusively online, since the model didn’t show up in searches. She ended up buying one from a veteran salesman, she said.
“Millennials want experiences; they don’t want purchases,” said Lutz, 37. “Sometimes they don’t know what they’re missing with the brick-and-mortar experience because it’s been lacking for so long. When you give them service like that, it’s new and exciting for them.”
Overall, traditional dealers have missed opportunities to attract and better serve customers, said Paul Hennessy, chief executive of the online car retailer Vroom. “There’s already an appetite for doing research online; now, the next step is actually quite small,” said Hennessy, the former chief executive of Priceline.com.
The industry is big business; more than 38.5 million used cars were sold last year at an average retail price of $19,189, according to an Edmunds report. By contrast, 17.2 million new vehicles are forecast to be sold this year. Although similar predictions were made for last year, used-car prices are still widely expected to soften.
“This is something we’ve not seen in many years, and it’s going to cause some disruption and hurt margins, especially if they have inventory on hand,” said Dave Sullivan, manager of product analysis for AutoPacific Inc. “The next three years will weed out the weak ones.”
Jonathan Collegio, senior vice-president for public affairs of the National Automobile Dealers Association, said that while consumers had benefited from the competitive used-car market, new companies could encounter tough times.
“New entrants are always moving in,” he said, “but under the assumption that they can better figure out how to crack the nut than the thousands of other entrepreneurs who have been at it for decades.”
Still, Sullivan said it would be folly to discount what would probably be a swelling number of e-commerce car businesses. “This should be a wake-up call for dealerships that there’s a business model that some consumers prefer,” he said. “Consumers don’t want to be told how they’ll buy something. For some, the traditional model works. For others, they’re ready to try something new.”
— New York Times News Service
