If you can’t beat ’em, join ’em: Mobile car-buying startups linking fortunes with the car salesman

Credit: financialpost.com

The auto dealer — around for more than a century and viewed almost as negatively as members of Congress — looked like a ripe target for disruption when retailing moved online. Now that startups have tried and failed to beat the car salesman, many are taking a different route: catering to them.


After watching predecessors like TrueCar Inc. and Ford Motor Co. stumble in their attempts to bring more Amazon-like e-commerce to car shopping, a new wave of auto finance upstarts has emerged. Rather than fight a dispersed and politically-connected dealer industry, they’re bringing the country’s 17,000 new-car dealers into the digital age, meaning consumers aren’t going to be bypassing the dealership to buy new rides anytime soon.


I want to go after the biggest part of the pie, which is how consumers buy cars today


“The market is so big that there’s nothing preventing someone from creating a new dealership model, but I want to go after the biggest part of the pie, which is how consumers buy cars today,” said Kevin Singerman, founder of AutoFi, a two-year-old San Francisco-based startup that began piloting its mobile financing app with Ford dealerships this winter. “That’s a much more attractive opportunity.”


Almost 20 years after the internet brought price transparency to the U.S.’s almost $1 trillion-a-year new car sales market, several steps of the shopping process have migrated online. But as buyers turn to Kelley Blue Book and AutoTrader.com for price comparisons and Consumer Reports for model reviews, they remain unable to finish the car-buying process without a visit to the dealer. The average consumer visited about 2.8 dealerships before buying a car in 2016, compared to 3.5 in 2012, according to JD Power & Associates.


Cracking Financing


The portion of the buying process that’s yet to be cracked — solidifying financing and insurance — remains a profit center for dealers and has become a target for startups, though most are now taking aim with dealers’ blessings. The new apps replace tedious paperwork with a few taps and swipes on a smartphone, but the underlying economics are little changed.


In most of these digital-age car-financing apps, the same banks quote the same rates they would in a dealership, and the so-called “dealer reserve” — the fee the dealer gets for being an intermediary between lender and borrower — remains baked into the monthly car payment. That’s the case at Irvine, Calif.-based mobile financing app AutoGravity, said chief marketing officer Serge Vartanov.


The startup, which makes money by charging dealers and banks an origination fee once a car sale is completed, counts several ex-finance executives from Daimler AG among its founders and is backed by the German carmaker. The founders visited dealerships and lenders before writing a single line of code, Vartanov said.


AutoGravity is looking to improve the car shopping experience “without disrupting anyone,” he said.



Couch Surfing


AutoGravity makes a “white label” version of its app that dealers can roll out with their own branding. It allows shoppers to pick a car, find a dealer and apply for credit approval all from their couch.


“It feels nice being able to go through the loan process without having to dress up and go down to either a bank or heaven forbid the dealership,” one user, Justin Turpin, wrote in a review on the Google Play app store. “Of course once you do get the loan you have to put your pants on to get the car.”


The startups have good reason to tread lightly on traditional dealer turf. Scott Painter, former head of vehicle pricing site TrueCar, stepped down in late 2015 after angry dealers nearly bankrupted the company by withdrawing from the site over concerns it was squeezing them on pricing. Jacques Nasser, a former Ford chief executive officer, was forced out in 2001 after his attempts to sell vehicles online incurred dealer wrath.


There are also practical reasons for dealers to stick around. Most consumers want to test drive a big-ticket purchase like a car, and dealers need to do in-person inspections to assess the value of a trade-in, said Chris Sutton, an analyst with JD Power. They also do repairs and maintenance work, and with cars growing more complex and software-laden, that work becomes more specialized.


Franchising Laws


Regulations also work in dealers’ favour. Franchise laws that have been on the books for decades were put in place to prevent manufacturers from opening stores that would compete directly with mom-and-pop dealers. Tesla Inc. has been challenging the direct-sales ban on a state-by-state basis, with mixed results.


Even the most futuristic of technologies are carving out a role for dealers. BMW AG and Fiat Chrysler Automobiles NV are rolling out augmented reality features for smartphones and several automakers are developing virtual reality goggles that let consumers inspect cars remotely but ultimately still steer them to a dealership, according to Accenture PLC.


Car dealers will continue to play a vital role as the point of sale and delivery


“Car dealers will continue to play a vital role as the point of sale and delivery,” said Georg Bauer, a former BMW and Tesla executive who founded a mobile car-buying startup called Fair with TrueCar’s Painter. “They need to embrace and adopt new technologies and alternative ownership models to stay in the game.”



Used Cars


To be sure, there are startups in the U.S. that have already put the entire car buying process online — including those final steps dealers are gripping tight. But they’re confined to the used-car market due to franchise laws and manufacturers’ reliance on dealer networks. Used-car startups raised $1.1 billion globally last year, down from a peak of $1.2 billion in 2015, according to data from CB Insights.


Vroom is a three-year-old startup that buys, refurbishes and delivers used cars to shoppers’ doorsteps without making them visit a dealership. The company sold 50,000 units last year and had $1.1 billion in revenue, according to CEO Paul Hennessy.


By comparison, AutoNation, the largest dealership group in the U.S., sold 225,713 used cars in 2016 — plus 337,622 new ones, according to its annual report. Hennessy says he has enough scale to avoid charging customers a dealer reserve fee on financing, a win for customers who also get to skip the dealership.


Neither Vroom, nor used-car online marketplace Shift, which offers online credit approvals and doorstep delivery, seems too intent on eating dealers’ lunch. They say the market is big enough to accommodate everyone, and they aren’t planning to push their dealer-free used-car strategy into the new-car market.


Tech Savvy


Dealers themselves are embracing technological change because they realize they have no choice but to accept the dominance of e-commerce, said Sutton of JD Power.


Geri Lynn, the owner of a Nissan dealership in Houma, La., bought new web tools earlier this year that allow shoppers to negotiate a whole purchase online and just come into the dealership to sign the paperwork. Despite all the change, she’s confident enough to be investing a couple of million dollars in remodeling her dealership.


“We don’t make $5,000 on a used car like we used to, but I don’t know any dealers in this country that are not earning a good living,” said Lynn, who’s been in the business since 1985. “Dealers are smart and they know how to make money, and they’re going to find ways to make money even when the rug gets pulled out from under them.”


Bloomberg News


Top Stories

Eighty per cent of small businesses try to go green, without government urging: CFIB study

Tax hikes only make it harder to be eco-friendly: Comment
  • 1 day ago
  • 11

Cenovus may sell parts of acquired natural gas assets, analysts say

Canada's Cenovus Energy Inc has said it may sell parts of the Deep Basin natural gas assets it recently bought from Houston-based ConocoPhillips
  • 3 days ago
  • 10

Axiom Mining releases high grade sampling results

On Monday AVQ announced further high-grade results from a rock chip sampling program at its Solomon Islands project. The post Axiom Mining releases high grade sampling results appeared first on Finfeed.com.
  • 1 day ago
  • 10

Term Sheet — Tuesday, April 25

On deals and dealmakers.
  • 2 days ago
  • 10

These Celebrities Actually Provide Decent Financial Advice

They’re… just like us?Obvious ChildIt’s Bloomberg Businessweek’s Showbiz Issue 2017, and they asked eleven celebrities to discuss personal finance:11 Celebrities on How They Spend Their MoneyYou’d expect these to be stories about splurgin
  • 2 days ago
  • 10
farawayyachtingcharters - Easy Branches
botoxfillerveintheraphyinphuket - Easy Branches

Latest in Financial

IBs are the focus for Tradeworks automation platform – Interview with FinanceFeeds

FinanceFeeds - "IBs are an increasingly important factor in the retail FX ecosystem, especially so here in Asia and hence their requirements constitute an important aspect of our road-map" says Thomas Nyegaard at Tradeworks in Singapore The post IBs are the focus for Tradeworks automation platform – Interview with FinanceFeeds appeared first on FinanceFeeds.
  • 12 minutes ago

Trump has ‘agreed not to terminate NAFTA at this time,’ Canada and Mexico told

Instead, Trudeau and Peña Nieto ‘agreed to proceed swiftly... to enable the renegotiation’ of the trade deal,’ the White House announced Wednesday
  • 1 hour ago

China industrial profits maintain double-digit growth in March

CHINA'S major industrial firms continued to post double-digit growth in March, adding to signs of a stabilizing Chinese economy, official data showed Thursday. The companies reported a 23.8-percent year-on-year
  • 2 hours ago

Celsius Resources release promising cobalt copper exploration results

Shares in Celsius Resources (ASX: CLA) are continuing to run on the back of extremely promising cobalt-copper results released last week. The post Celsius Resources release promising cobalt copper exploration results appeared first on Finfeed.com.
  • 2 hours ago

Venus Metals identify high grade zinc

Venus Metals Corporation (ASX: VMC) that the company had identified thick high-grade zinc mineralisation at shallow depths at its Pincher Well zinc-copper prospect resulted in the company’s shares surging 25%. The post Venus Metals identify high grade zinc appeared first on Finfeed.com.
  • 2 hours ago

Spotify Buys Startup To Help It Track Musician Royalties

The startup focuses on a hot technology.
  • 5 hours ago

For PayPal, Mobile Continues To Drive Growth

PayPal's payments app Venmo had a record quarter for payments volume.
  • 6 hours ago

Euthanasia Drug Found in Canned Dog Food

"The safety of pets is and always will be our first priority"
  • 6 hours ago

Netflix Might Actually Release Some of Its Films in French Theaters

Two Netflix films might hit French theaters before competing at the Cannes Film Festival.
  • 6 hours ago

Canada reports progress with U.S. on lumber, but ‘not there yet’ on a deal: Freeland

The spat erupted in the run-up to talks on updating the three-nation North American Free Trade Agreement, which Trump says he will abandon unless big changes are agreed
  • 6 hours ago

Google and Facebook Account For Nearly All Growth in Digital Ads

Google and Facebook took virtually 100% of the growth in the U.S. ad market.
  • 7 hours ago

Weight Watchers Hires HSN’s Mindy Grossman As CEO

Previously led direct-to-consumer retailer since 2008.
  • 7 hours ago