Digital dealerships: is the online car sales revolution coming to an end? | Shopping online
Aston Villa vs Everton isn’t normally considered one of the Premier League’s biggest games, but it probably would have felt like a big deal to Alex Chesterman: Both teams’ shirts were bought by Cazoo, the online used car retailer founded by the series. decked entrepreneurs.
The Cazoo derbies, both won by Villa this season, were the result of a marketing blitz as the new company and its rivals rushed to disrupt the used car market. However, 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 struggles are part of a broader stock market crisis, but Cazoo isn’t the only online used car dealership in trouble. A steady stream of bad news has raised questions about whether the boom in online car sales caused by the coronavirus pandemic can continue.
In the US, Carvana laid off 2,500 workers last month and its market value has plummeted to less than $5 billion from $64 billion (£52 billion) in August 2021, down 92%. Smaller U.S. rival Vroom’s market value is down 98% since September 2020. In the UK, Peter Waddell, the founder of Carzam, blamed rival Cazoo’s troubles on its inability to raise more investment, forcing it to place the start-up under receivership last week. Cazoo’s value has plummeted to $900 million from $7 billion last year when it listed its shares in New York via a cash-covered merger.
Rising interest rates, leading investors to focus on short-term survival rather than longer-term growth potential, have explained some of the stock prices in digital companies ranging from online car dealerships to prominent winners from the pandemic like exercise bike maker Peloton and grocery retailers ocado.
But analysts are increasingly wondering if the online revolution can disrupt the used car industry like other forms of retail. Data from Dealogic shows that auto retail mergers and acquisitions activity is dominated by $10.6 billion worth of deals.
“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 dealers had a tough time during lockdown, but now they’ve upgraded their systems and can offer the same services.
One of the main attractions of online retail is lower expenses compared to running an extensive and expensive store network. But you only have to look back at the sport to see how any cost savings can be quickly 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 Cazoo’s Everton sponsorship has now ended and last week through casino and sports betting platform Stake was replaced by .com.
British rival Cinch, part of Europe’s largest used car dealer Constellation Automotive, has England Cricket, Scottish Football and Northampton Saints Rugby. Carvana has a Nascar driver and even a pickleball tournament – as well as a ad space at American Football’s Superbowl, an initiation rite for companies wanting to show they’ve arrived in the heyday.
Online retailers need many more potential buyers to make the same number of sales. The proportion of visitors who convert to online purchases is estimated at around 1%, compared to 30% at physical retailers. Cazoo spent £65m on marketing in FY2021 – or more than £1,300 per vehicle sold. It made just £124 profit on each car, less than a tenth of what traditional dealers can make, according to an industry veteran.
Combining their branch networks with leaner online operations could give traditional retailers a greater advantage, said Olaf Sakkers, co-founder of transportation-focused venture capital investor RedBlue. Used car sales are particularly difficult to sell fully online due to the bewildering mix of options possible for each individual model, and some of the digital habits that have inevitably formed during lockdown are also not enduring, he added.
“The pendulum never really swung,” said Robert Forrester of Vertu Motors, Britain’s fifth largest dealership, which sells new and used cars.
“Only online used car trading has not been adopted by the vast majority of people in the UK,” he said. “Pure online dealers cannot do a test drive. I think that’s a fundamental mistake.”
Vertu offers customers the option of physical, online or a mix of both. Of 89,000 Vertu used car sales last year, only 900 were made without a visit to a showroom at any time. “Bricks and clicks is the way forward,” Forrester said. “Period. End of.”
Cars are the biggest purchases most people make after a house. This means that the classic Internet model of shipping from a remote warehouse is not practical. Online retailers have tacitly 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 when it comes to electric cars, which will be unfamiliar to the vast majority of buyers.
Motorway CEO Tom Leathes is still hiring on his online car sales platform, which allows people to auction off their cars to professional dealers. His company doesn’t face the financial risks associated with finding and owning stocks that can go down in value, but he said the tide has turned for other startups looking to fund asset-intensive growth models. “We’ve certainly seen a shift in that sentiment,” he said. “No one wants to fundraise now.”
However, Leathes added that he believes the disruption to the used car industry from online sales will be permanent.
“The auto industry has long lagged almost every major consumer industry,” Leathes said. “We are still at the beginning of the transition to the online economy.”
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