- Jun 27 2016
- Arlena Sawyers
- Automotive News
Startups enable consumers to bypass dealerships
Will consumers buy used vehicles sight unseen from people they don't know?
They will if the deal goes through a third party they trust, and if the vehicle is inspected and comes with a no-questions-asked, 10-day money-back guarantee, said Owen Savir.
Savir is a co-founder of Beepi, a Silicon Valley startup that is tapping technology to challenge used-vehicle retailing's status quo.
Beepi is one of a growing list of companies including Shift, Carvana and Vroom.
Don't let the clever, one-word names fool you. These companies aim to take a bite out of the used-vehicle retail industry's lunch. Their business models vary, but all operate online marketplaces that promise vehicles that are inspected, reconditioned, financed and delivered -- often to customers' driveways -- with money-back guarantees.
Most don't disclose sales numbers, and most are still regional operations. But they allow consumers to bypass dealerships when buying or selling a used car or truck.
"Like Amazon took the Internet and applied it to the retail space, we and a bunch of other companies are taking technology and looking to apply it to the largest retail space in the world, the U.S. auto market."
Savir admits that buying a vehicle the Beepi way wouldn't have worked 10 years ago. He and others say Amazon and other disrupter online retailers paved the way.
"Companies like Amazon and Zappos taught us that you can buy a pair of shoes online and if you don't like them, you can just send them back, get your money back and it's easy and it's simple," said Savir, who co-founded Beepi's peer-to-peer marketplace in 2014 with business partner Alejandro Resnik.
"So people now trust, if a company says, "Buy a car online and if you don't like it, return it,' they believe you. Of course, you need to keep your word and be a good company, but the notion is there."
Toby Russell, head of product at Shift, agrees.
"Like Amazon took the Internet and applied it to the retail space, we and a bunch of other companies are taking technology and looking to apply it to the largest retail space in the world, the U.S. auto market," he said.
Shift operates as a conduit for consumers buying and selling used cars and trucks, mainly in San Francisco, Los Angeles and Washington, D.C., Russell said.
Shift's document operations team helps consumers transfer a title and register with the department of motor vehicles. The company arranges financing and vehicle service contracts with partner companies, and launched its own captive, Shift Finance, this spring. The company has lending licenses in states in which it does business.
"The thinking behind that is we're really passionate about getting people in the right car at a low price," Russell said.
HQ: Los Altos, Calif.
Main markets: California, Texas, Arizona, New York City, Washington, D.C.
Business model: Beepi facilitates the seller-buyer transaction. Beepi inspects the vehicle and discloses findings online. Seller keeps the vehicle until it is sold; buyer doesn't get to drive it until purchasing it. Beepi inspects the vehicle again just before delivery, guarantees it and delivers it.
Return policy: 10-day/1,000-mile, money back
HQ: New York
Main markets: U.S., excluding Alaska, Hawaii
Business model: Vroom owns the vehicles it offers for sale, reconditions them and houses them in two retail centers: Dallas and Houston. A third center is scheduled for Indianapolis this year. Buyer doesn't get to see or test drive the vehicle until taking delivery — unless the purchaser is in Dallas or Houston.
Return policy:7-day/250-mile, money back
HQ: San Francisco
Main markets: Los Angeles, San Francisco, Washington, D.C.
Business model: Shift takes possession of a seller's vehicle and offers it for sale on the seller's behalf. An online shopper may click to have a vehicle delivered by a “car enthusiast” who accompanies the shopper on a test drive, answers questions about the vehicle and handles the transaction if the shopper buys.
Return policy: 7-day/250-mile, money back
Main markets: Several, including Nashville, Atlanta, Dallas, Houston
Business model: Carvana is known for its coin-operated vending machines that deliver vehicles in Nashville and Atlanta. A buyer may pick up a vehicle or have it delivered. Carvana owns the vehicles its offers for sale and spends an average of $1,000 on each for parts, labor and reconditioning.
Return policy: 7-day/400-mile, money back
Carvana, of Phoenix, is known for its vending-machine approach to delivering vehicles. Its most recent vending machine opened in Nashville in late 2015. The glass structure is five stories high and delivers vehicles to customers who insert a special coin from the retailer.
The company also delivers vehicles to consumers' doorsteps. Either way, the vehicle comes with a seven-day return policy.
Carvana CEO Ernie Garcia said 25 percent of his consumers handle the purchase online, including financing and signing documents digitally, in 20 minutes or less. Others may take a week.
"The point of our technology is to put the customer in control," said Garcia, whose father, Ernest Garcia II, owns DriveTime Automotive Group, a large used-vehicle operation headquartered in Tempe, Ariz. Customers complete the purchase "at the pace and way they want to do it."
Scott Chesrown, chief revenue officer at Vroom, also grew up in an auto-retailing family. His father, Marshall Chesrown, was among the first dealers to sell his multifranchise group -- Chesrown Group in Denver -- to publicly traded Republic Industries, which is now AutoNation Inc. Marshall Chesrown also is a Vroom co-founder.
Vroom owns the vehicles that it offers for sale. It buys from multiple sources including consumers. Vroom resonates with consumers because they want simplicity and transparency, Scott Chesrown said. Vroom provides consumers with clear information about price, taxes and registration fees. Vroom also buys vehicles and accepts trade-ins, all from an app sent to the consumer.
To sell a vehicle, a consumer scans its vehicle identification number, takes photos, answers questions about its condition and submits the information to Vroom. Within minutes, Vroom emails a cash offer that is good for seven days and is not contingent on a physical inspection of the vehicle.
Vroom has bought or sold 170,000 vehicles since the company started.
Chesrown said 98 percent of the sellers are more critical of their cars than Vroom would have been if it had inspected the vehicles. He said the company has chosen to build its business around that overwhelming majority of honest people.
"It's a shift in mentality," Chesrown said. "If they are going to trust us as a dealer, then obviously we need to trust the consumer in the transaction."
Hit to dealers?
One Wall Street investor, speaking on condition that he not be named, questioned whether these startups could eat into the profitable used-car business of franchised dealerships, ultimately hurting dealership valuations.
But Alan Haig, head of buy-sell advisory firm Haig Partners in Fort Lauderdale, Fla., said these companies don't represent a significant threat to the profit margins of traditional franchised new-car dealers -- at least not yet.
He said franchised dealers are successful because of their revenue and profit balance across new vehicles, used vehicles, parts and service and finance and insurance.
In 2015, the average franchised new-car dealership posted net profits of $363,308 from its service and parts department, $71,265 from its used-car department and $41,268 from its new-car department, according to the National Automobile Dealers Association.
"Parts and service is critical for profitability," Haig said. "These used-car operations, to my knowledge, don't have any fixed operations.
"They are making a living on used cars. That is a relatively low margin business when you apply the cost of acquiring the car, transferring the car, cleaning the car up, advertising. It's not a lot of money per unit."