Smallest dealers pressed as online startups reshape used market

With billions in capital raised and valuations in some cases eclipsing those of public dealership groups, online used-vehicle startups appear ready to gobble up market share. Rapid growth by Carvana and other online players has created one of the most-watched situations in auto retailing.

With 40 million used vehicles typically sold annually in the U.S., the highly fragmented market is often portrayed as big enough for newcomers and traditional players to grow. But rivalry and tension among them are real. The upstarts often poke at traditional competitors in their marketing, making dealers bristle. Vroom's Super Bowl ad last week depicting a dealership experience as literal torture is the most recent case in point.

Most vulnerable appear to be the smallest dealers. While large dealership groups have the resources to respond and compete head-on in the digital space, others may need to find more creative solutions — possibly including cooperation with the upstarts — to adapt and survive.

"A lot of smaller independent used retailers, or independent franchise dealers, they are the ones that are likely to suffer the most because they don't have the capital or the relationships or the bandwidth to invest in the move towards digital," said Rajat Gupta, auto retail analyst with J.P. Morgan.

Carvana, Vroom, Shift Technologies and, most recently, CarLotz have raised nearly $4 billion. And while they have yet to report profits as public companies, investors see nothing but daylight for the online used space.

Carvana, the bellwether player that went public in 2017, in particular has dazzled the stock market of late. After trading at about $93 at the start of 2020 and dropping to less than $30 in the early weeks of the coronavirus pandemic, Carvana's shares have since boomed, selling for as high as around $300 in recent weeks. It closed last week with a share price of $296.08 and a market capitalization of $50.86 billion — far outstripping the combined values of the six public dealership groups.

Sensing opportunity, and with the pandemic juicing interest in online vehicle sales, Vroom, Shift and CarLotz all went public within the past nine months.

Carvana Chief Product Officer Dan Gill welcomes the competition.

"Changing consumer behavior is hard to do, and we've been pushing that boulder up the hill for eight years, trying to get consumers comfortable with the idea of buying a car online," Gill told Automotive News. "And the more people that are telling that story and helping consumers get comfortable with that experience, we see it as a great thing."

The pandemic's role in convincing investors and retailers that the future of used-vehicle sales is digital is not to be overlooked.

"What I think COVID did was accelerate that entire process by, like, five years," Shift co-CEO Toby Russell said. "It went from, 'Hey, at some point in five years, I need to be able to sell online' to, 'Wow, CarMax is shut down in the state of California.' "

Used-vehicle sales are moving more quickly in the direction of other retail sectors, said Russell, who estimated the rate of online used-car sales could rival those of shoes and apparel in the next five years.

Michael Bor, CEO of used-vehicle consignment company CarLotz, concurred.

"As more and more consumers start to get accustomed to kind of the Zappos treatment versus the traditional used-car treatment, they're going to be less and less willing to go visit Joe's Used Cars on a dirt lot with an electrified fence around it and no Web presence and no online capabilities," Bor said.

Brick-and-mortar players such as CarMax and the public groups are rolling out or enhancing their own online retailing platforms, some of which was happening before the pandemic.

Still, the industry's online sales are low.

J.P. Morgan analysts predict that 12 percent of all used-vehicle sales will happen online by 2030 vs. less than 1 percent today. They expect Carvana to own the lion's share of them — 35 percent.

At the same time, the used-vehicle market — with annual sales of $841 billion, according to Vroom and CarLotz — is wide open. Market leader CarMax controls just less than 2 percent of sales. Combined sales of Carvana, Vroom, Shift and CarLotz make up less than 1 percent.

While that leaves room for growth for both online specialists and others, the digital companies are poised to take share at a faster rate, J.P. Morgan's Gupta said.

Some traditional dealers remain skeptical of a significant rise in online sales. Ben Keating, owner of 20-store Keating Auto Group in Texas, said he does not expect a major shift anytime soon — even though he acknowledged consumer interest.

"But it's a very small portion of the market," Keating said. "And so even though we are offering it every different way you can imagine, because we want every car deal we can get, I think it is a bad assumption that that's how everybody's going to buy used cars in the future."

Holman Automotive Group, of New Jersey, sells online and in-store, but the 39-store group is "not as bullish" on Internet sales, said CEO Brian Bates.

"It's still low single digits," Bates said of Holman's online penetration. "People just don't want to do it. They want to see [the car], taste it, feel it, drive it."

Online retailers, and many dealers, have sought to combat consumers' wariness of dropping thousands of dollars on a vehicle sight unseen by offering generous return policies.

Online players such as Vroom tout themselves as holding major advantages over traditional retailers.

"It's honestly just not a fair fight," said Vroom CEO Paul Hennessy, pointing to the company's selection and pricing. A local dealer may have a few hundred vehicles to choose from, he said, whereas Vroom has some 16,000.

Online retailers see partnership with traditional dealers as one option.

Hennessy speculated that dealers could list vehicles on Vroom's site, with Vroom processing the transaction and both parties sharing profits.

Shift's Russell said smaller dealerships particularly could benefit from that, though it likely won't happen right away.

"It will be difficult for every dealer to invent their own platform to create a shop online," Russell said, likening it to Amazon's platform for third-party sellers.

Carvana's Gill noted that it would help inventory diversification for the company to source from dealers in addition to auctions and consumers.

"We want to be able to optimize that supply side for the demand that we're seeing at all times," Gill said. "The dealers could be great partners."

Two upstarts already have ties with traditional retailers, though they haven't spoken publicly about sharing inventory. In 2018, Lithia Motors Inc., the third-largest U.S. dealership group, invested $54 million in Shift, and its stake has appreciated to about $140.2 million. AutoNation Inc., the largest U.S. dealership group, invested $50 million in Vroom in 2018 and said last year that the value of its stake approached $290 million as of Sept. 30, 2020.

Such ties don't promise partnerships, though. Lithia CEO Bryan DeBoer, for instance, said this month he could see large dealership groups banding together to squeeze inventory from the online newcomers.

"If we can cut off the stream of used vehicles to the used-car new entrants in the space, and all they can really get is auction cars or late-model cars, the margins that we can make in the over-3-year-old cars are massive," DeBoer said. That could give franchised dealers "a stronghold on the space for decades to come."

One thing clear to everyone: Offering digital retailing options is imperative. It's why dealership groups public and private are developing their own online platforms. Lithia, for example, launched its Driveway platform in July.

Group 1 Automotive Inc., the fourth-largest U.S. dealership group, implemented its AcceleRide platform in 2019, and executives tout it as having all the capabilities of Carvana, Vroom and Shift — and beyond, such as scheduling service appointments.

Daryl Kenningham, Group 1 president of U.S. and Brazil operations, said conversion rates through AcceleRide are higher than for customers coming from other Internet leads.

"What we do know is customers want to do business this way," Kenningham said this month. "And they keep proving it to us over and over again."

Jackie Charniga contributed to this report.