#Financing

Disruptors in used automotive retailing in Europe

May 27, 2022 - 5 min read
Also Available in : Français
Ravi Naicker, Global Commercial Director (Specialized Finance) at Sopra Banking Software

Over the last ten years, there have been multiple references to the potential for disruption in motor retailing. Behind the many events, white papers and articles championing the potential for change has primarily been the trend to digitization. In turn, this has been joined by the potential for subscription models and the emergence of dimensions of mobility: autonomous driving, connectivity, electrification and shared mobility (ACES).

As with all forms of disruption, success centers upon delivering products, services or processes that solve issues that exist in established procedures, making life easier for potential customers, or by taking cost or friction out of established methods.

On the face of it, automotive retailing looked ripe for disruption, but it has yet to happen on any scale to a large degree.

Despite millions of dollars invested in startups and OEMs, the jury is still out on their future. Several OEMs have exited the sector, although others hope to be back as electric vehicle (EV) volumes grow.

OEMs apart, many of the brands once heralded as the future have disappeared.

J.D. Power summarized the subscription challenge succinctly:

  • Unclear value proposition – they look expensive
  • Personal vehicles may not be a good fit for the subscription model
  • Generational assumptions about vehicle ownership are not playing out
  • Subscriptions undermine the intimate relationship between people and their vehicles

Carvana: The Amazon of car retailing?

It should come as no surprise that online car sales present an obvious opportunity. Launched in 2012 in the USA, Carvana is arguably the most recognized online used car retailer. In August 2021, it announced its first-ever profit.

However, as investor service the Motley Fool observed, “Carvana just crushed earnings, but investors should be careful.” Their observation was that while there was an unprecedented increase in used car values seen last year, these values could well fall again, leaving the business exposed to inventory value losses.

Carvana is a long-term investment play, much like Amazon was, but can Amazon’s success be replicated by others in used car retailing?

The impact of lockdowns on online retailers

Looking to Europe, potentially, the most extensive online news has come from Cazoo. Founded in the UK in 2018, Cazoo’s stated mission was “to transform the car buying and selling experience across the UK & Europe by providing better selection, value, transparency, convenience and peace of mind. Our aim is to make buying or selling a car no different to ordering any other product online, where consumers can simply and seamlessly buy, sell, finance or subscribe to a car entirely online for delivery or collection in as little as 72 hours.”

With an eye-watering marketing budget, its brand is everywhere, especially on TV with numerous high-profile sports sponsorship commitments. It has also been very acquisitive:

  • July 2020 – acquired Imperial Car Supermarkets in the UK, a very early pivot from its online-only model
  • December 2020 – acquired car subscription platform Drover in the UK
  • February 2021 – acquired car subscription platform Cluno in Germany
  • September 2021 – acquires automotive data insights platform Cazana
  • November 2021 – acquires Spanish digital car subscription marketplace Swipcar
  • October 2021 – acquires Van365 in the UK
  • September 2021 – acquires reconditioning, logistics and storage business SMH Fleet Solutions in the UK
  • January 2022 – acquires Italian online car retailer brumbrum

The acquisitions reflect a consolidation of startups and some more interesting data and logistics businesses. Cazoo has not been short of brand exposure or investment support with the company going public in New York in August 2021, with a launch price valuing the group at $8 billion.

At the time of writing, Cazoo’s share price has slumped and is trading under $1.47. The business that total sales now exceed 50,000, a figure dwarfed by the UK’s larger used car retailers.

The challenge facing online retailers such as Cazoo is that successive lockdowns disrupted their core online differentiator and stated mission to a large extent. With their premises shut, brick & mortar motor retailers showed their age-old agility and embraced online and distance selling. They are potentially disrupting the disruptors. Now, re-opened, they do so as genuine omnichannel retailers meeting customers’ car buying needs online and offline.

Another hurdle has been buying stock. As any successful retailer will tell you, to sell right, you must buy right. Buying used stock over the last year with prices rising in the UK alone by 28% has been challenging. Again, established retailers often have more scale, expertise, and good old-fashioned connections.

Improves per unit, but plenty more to do

Finally, the prevailing economic climate has seen investors pay more attention to profit than pitch. They are applying a more realistic valuation to businesses that are burning through investor cash but are yet to turn a profit.

Gross profit per unit of 450 GBP in 2021 undoubtedly improved the 229 GBP loss in 2020. However, it is well short of the 900 GBP per unit ambition for 2022, and well below the levels achieved by the traditional dealer groups.

It is too early to write off dedicated online used car retailers. Many people like the hassle-free proposition. But right now, the more likely disruption looks set to come from the emergence of agency models. The other unknown is the social element of used car buying.

After each lockdown, we saw that people wanted to see and touch the used vehicles they were interested in. There are some cultural differences across Europe, but the trend overall is people are finding their next car online, but most will want to see it and the dealer in person to conclude the purchase. The issue for online retailers is will an online only value proposition create enough sales volume and profit.