The new stars of Wall Street in automotive retail – Carvana, Vroom and soon Shift – are gaining both value and market share, despite staggering losses.
So what defendable market advantage do they have over traditional car dealers? Nothing really. More or less, they offer a new way of thinking about the customer.
So as the market value of Carvana, and its newer rivals Vroom and soon Shift (going public through a reverse merger with a Special Acquisition Company), soar into the stratosphere, while still not even coming close to making any money, car industry veterans like myself have to ask, why?
The last research report I read about Carvana from a respected Wall Street investment firm said the usual things about growing sales and market share, and how increased growth will bring down the reconditioning costs and SG&A, and how, indeed, this is a new day for in-app car sales, marking a revolution similar to the Amazon effect (losing money initially, but owning the market in the future).
What Market Defensible Advantage?
Is there anything that Carvana is doing now or plans to do that is unique or couldn’t easily be duplicated, really (except for a balance sheet propped up by investors that can withstand eye-watering losses), if it turns out a larger group of folks are willing to buy a used vehicle, sight unseen, with no test drive, inside an app (with a limited return policy)?
Yes, they have an app-driven “purchase” system, but who doesn’t see this capability coming to dealers soon, through many vendors in many variations (including this author’s own start-up, I have to add)? And the thing about app technology is that developments and processes inevitably get better, faster and cheaper with time, so coming in later, for a dealer, may well be an advantage, not a disadvantage.
These in-app purchase providers, like Carvana, have spent a lot to build a first mover advantage in their brand. However, all dealers that I know have built up a local personal presence and, with many more face-to-face customers, they are the incumbents in their neighborhoods.
As to physical plant, well, here traditional dealers win hands down. Although they don’t have car “elevators” (at $5 million cap cost per copy), dealers have physical facilities that invite used-car buyers in for test drives, personal interaction and retail service facilities that allow for lifetime customer service as well as initial used-vehicle reconditioning. All of this is paid out, or will be paid out, from current business activity, which, last time I checked, is why most dealers make a profit per unit sold, versus the in-app new guys who hope one day to get their volume up and their reconditioning and SG&A down to the point where a profit may be in sight.
So Why Wall Street Investor Love?
The reason why Wall Street has embraced the Carvana and in-app sales story for used cars, I think, has far less to do with a physical plant or technology advantage, and far more to do with dealer culture. That is, these new entrants gain market share specifically because investors believe they are reading customer wants and needs directly and are adapting their processes accordingly.
Wall Street is betting these new folks will do it better for the changing customer on the horizon, and by the time the traditional auto retailers are willing to change, they will own the market.
This is not as farfetched as it seems at first glance. Let me give you some real-world examples.
If the taxi industry had united to offer an easy, in-app booking and payment experience, Uber and Lyft probably would not have dealt the industry a death blow over the past decade.
(My partner in my current start-up knows this firsthand; he offered taxi companies the “Uber killer app” for them to use and unite with in 2009 in New York City and had virtually no takers. Now all are too broke to participate – taxi medallions’ value went from $1.4 million to less than roughly $150,000 during the same period.
Of course, some will point out, correctly, that none of the new folks are yet making any real money, so the jury is still out on valuation. But does anyone really see Uber or AirBnB, etc., ever going away completely? They have reached critical mass in market capitalization, brand equity and customer base to be able to survive and lead, in all probability.
This is precisely where/why Carvana has the valuation it has, because it is approaching that point of market cap, customer momentum and acceptance that it will survive in the future, as a big market share consolidator.
The only questions are how much and what kind of growth curve.
Next, Part II: “So What Do We Make of All This?”
John F. Possumato (pictured above, left) is an attorney and the founder of DriveItAway, which creates platforms and applications enabling automotive retailers to offer new app-enabled mobility options, including remote rental and rent-to-purchase options.