Digital dealerships: Is the online car sales revolution running out of steam? | Shopping online
Aston Villa v Everton isn’t generally regarded as one of the Premier League’s greatest games, but it probably would have seemed like a big deal for Alex Chesterman: Both teams’ shirts were sported by Cazoo, the retailer in used car line founded by entrepreneur series.
The Cazoo derbies, both won by Villa this season, were the product of a marketing blitz, as the new company and its rivals raced to disrupt the used-car market. Still, workers at Cazoo might think the money would have been better spent elsewhere: the company cut 750 jobs on Thursday as it warned a recession could delay its first profits.
The company’s troubles are part of a wider stock market rout, but Cazoo isn’t the only struggling online used-car dealership. A steady stream of bad news has raised questions about whether the coronavirus pandemic-induced boom in online car sales can last.
In the US, Carvana laid off 2,500 workers last month and its market value fell from $64bn (£52bn) in August 2021 to less than $5bn, a 92% decline. The market value of smaller US rival Vroom is down 98% from September 2020. In the UK, Peter Waddell, the founder of Carzam, blamed rival Cazoo’s problems for its inability to raise more investment , forcing it to put the startup into receivership last week. . Cazoo’s value plummeted $7 billion last year when it listed its shares in New York via a merger with a $900 million cash shell.
Rising interest rates, which tend to cause investors to focus on short-term survival rather than longer-term growth potential, explained part of the stock rout in digital companies, ranging from online car dealerships to prominent pandemic winners such as exercise bike maker Peloton and grocer Ocado.
However, analysts are increasingly wondering if the online revolution can disrupt the used car industry in the same way as other forms of retail. Data from Dealogic shows M&A activity in auto retail fell from $10.6 billion in 2021 to $1.8 billion in the first half of 2022, putting the industry on the right track. track for its slowest participation rate since 2017.
“The gap between the digital model and old-school retailers has closed so quickly,” said Ian McMahon, partner at accounting firm UHY Hacker Young. Traditional car dealerships had a torrid time during the shutdowns, but they have now spent upgrading their systems and can offer the same services.
One of the main attractions of online retail is the lower expense, compared to running a large and expensive network of stores. But you only have to look at the sport again to see how any cost savings can quickly be spent elsewhere, McMahon said. There are potential Cazoo football derbies in France and Spain – not to mention sponsored darts, rugby league, cricket, snooker, horse racing, golf and even fishing, although Everton sponsorship de Cazoo is now complete, replaced last week by the casino and sports betting platform Stake.com.
British rival Cinch, part of Europe’s biggest used-car seller Constellation Automotive, has English cricket, Scottish football and Northampton Saints rugby. Carvana has a Nascar driver and even a pickleball tournament – as well as an advertising slot at the American football Superbowl, a rite of passage for companies who want to show that they have arrived in the big moment.
Online retailers need many more potential buyers to make the same number of sales. The proportion of visitors converted into online buyers would be around 1%, compared to 30% for physical merchants. Cazoo spent £65m on marketing in the 2021 financial year, or more than £1,300 per vehicle sold. He made a profit on each car of just £124, less than a tenth of what traditional dealerships can make, according to an industry veteran.
Combining their store networks with more efficient online operations could give traditional dealers an added advantage, said Olaf Sakkers, co-founder of transportation-focused venture capitalist RedBlue. Used car sales are particularly difficult to sell entirely online due to the bewildering combination of possible options for a single model, and also some of the digital habits formed out of necessity during the shutdowns have not endured, a- he added.
“The pendulum never really swung,” said Robert Forrester of Vertu Motors, Britain’s fifth-largest dealership selling new and used cars.
“Pure online used car retailing has not been embraced by the vast majority of Britons,” he said. “Pure online retailers cannot test drive. I believe this is a fundamental flaw.
Vertu offers customers the option of physical, online or a hybrid of the two. Of the 89,000 used car sales at Vertu last year, only 900 were made without a visit to a showroom at some point. “Bricks and clicks is the way to go,” Forrester said. “Full stop. End of.”
Cars are the most important purchases most people make after a house. This means that the classic internet model of shipping from a remote warehouse is not viable. Online retailers have quietly acknowledged this by buying up physical dealerships to serve as collection points.
Mike Allen, head of research at Zeus Capital, an investment bank, said having a salesperson to guide people could be particularly useful for electric cars, which will be unfamiliar to the vast majority of buyers.
Tom Leathes, Motorway’s chief executive, is still hiring on his online car auction platform, which allows people to auction their cars to professional dealerships. His company doesn’t face the financial risks associated with finding and owning stocks that could depreciate, but he said the tide has turned for other start-ups looking to fund growth models at asset intensive. “We’ve seen a change in that mood, that’s for sure,” he said. “Nobody wants to do fundraising right now.”
Still, Leathes added that he believed the disruption of the used-car industry by online sales would be long-lasting.
“The automotive industry has long lagged almost every major consumer sector,” Leathes said. “We are only at the beginning of the transition to the online economy.”