Shift Technologies' appraisal algorithms and consumer-controlled online platform helped it quickly become one of the largest used-car retailers around Silicon Valley. So Lithia Motors Inc. CEO Bryan DeBoer posed this question in a meeting with Shift's senior leadership: Why haven't you scaled up that model at a faster pace?
"They said they didn't have the capacity of storage, reconditioning facilities and access to capital," DeBoer told Automotive News. "Three items Lithia has easy access to."
The Medford, Ore., dealership group has committed $54 million as part of a strategic partnership between the companies that will provide the capital Shift needs to expand beyond California and across the country. Lithia, which ranks No. 4 on the Automotive News list of the top 150 dealership groups based in the U.S., will become Shift's largest shareholder and get a seat on the company's board of directors.
The partnership aims to leverage Lithia's physical infrastructure to supplement Shift's existing storage facilities.
"We'll continue to expand Shift's footprint," Shift Co-CEO Toby Russell said. "We'll expand into Lithia's footprint and into a brand new space where neither Lithia nor Shift exist."
The plan is to keep the businesses separate for now and not share inventory across the two platforms, but down the line Shift's platform and valuation algorithms could benefit Lithia in ways the retailer hasn't yet imagined. DeBoer sees potential in Shift's success with used-vehicle sales.
DeBoer imagines Shift's technology could function in Lithia dealerships in multiple formats, as they adopt it for their own purposes. Meanwhile, Shift would benefit from Lithia's stores for service, reconditioning and inventory storage.
Jefferies analysts said pairing physical dealerships with an online retailer provides significant benefits in inventory access and service. Lithia's access to floorplan and consumer-finance offerings should bolster Shift returns, they said, while Shift's artificial-intelligence vehicle-procurement systems could prove valuable for Lithia over time.
"What we know they have is a direct-to-consumer procurement model, as well as pricing models that make it easier to dispose of that inventory, or procure that inventory, which is half of our battle," DeBoer said.
Combining Shift's business model with Lithia's reach could expand both networks, DeBoer said.
While there are no immediate plans for Shift to expand into a third-party vendor for dealerships at this time, Russell said the company would not rule it out.
"Our stores make their own decisions, but we're just OK at pricing and valuations of vehicles," DeBoer said. "I think it could help our stores if they so choose to be more effective on that, to be more responsive on market conditions."
Deploying Shift's technologies through a brick-and-mortar retail network as large as Lithia's would give the San Francisco startup access to significantly more transaction data than it currently has. Lithia has data from 12 million vehicle transaction records, and Shift has the technology to make use of the data in ways Lithia can't.
Lithia has more than 75,000 new and used vehicles available online, according to DeBoer, and Lithia reported new-vehicle retail sales of 167,146 in 2017.
"We've all put our fingers on a lot of potential synergies," DeBoer said, "but we need to leave to the imagination of our investors and customers the additional ways we can achieve a dominant share of the $1 trillion annual vehicle sales market in the United States."