How used cars became the next big e-commerce battleground

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New companies focused on selling used cars online have struck deals to raise nearly $ 6 billion so far this year, as investors bet big the last major category of consumer spending to escape disruption to e-commerce will finally go digital.

Start-ups that barely existed before the pandemic and decades-old auto trade groups are rushing to develop the online markets, mainstream brands and expensive logistics infrastructure needed to tap a global used car market who is worth nearly $ 1 billion one year.

“The automotive space lags behind almost all other online retail spaces, but it’s now catching up,” said Alex Chesterman, founder and CEO of UK-based Cazoo, who predicts growth of over 300 per cent to nearly $ 1 billion this year.

Chesterman’s digital auto retailer is expected to go public thanks to an $ 8 billion deal with a specialist U.S. acquisition company this summer, generating nearly $ 1 billion in proceeds. Cazoo’s biggest UK competitor, Cinch, raised £ 1 billion ($ 1.4 billion) in new capital in May.

Cinch and Cazoo are just two of the biggest examples of the amount of fuel dumped at used car sites around the world, from India to Mexico.

“This looks like the last major resistance to the transition to a digital economy,” said Tom Leathes, co-founder of Motorway, another British car start-up. “It is high time this industry was disrupted and made more efficient. It has been bad for consumers for decades.

Companies from Europe, Latin America and Asia are looking to replicate the success of Arizona-based pioneer Carvana, which was founded in 2012 and is now worth more than $ 50 billion.

Carvana’s shares have more than doubled in the past 12 months, following annual revenue growth of 42% in 2020. Yet its share of the fragmented US used car market is estimated at less than 1% , which bulls see as huge growth. potential.

Consumers have been researching their next car purchase online for many years. But the transaction was usually done offline, although it was organized through a website like Auto Trader. Pandemic lockdowns have created fertile conditions for more car buyers to search online for the first time, as well as for dealerships to shift their attention from the forecourt to the web.

“There has been a dramatic shift in the vision of the industry for online business,” said Leathes, after Motorway raised $ 68 million last month to develop its online market, where dealers bid for private cars. “Over the past 12 months, all car dealers have had to become online car dealers. ”

Alex Chesterman, Founder and Managing Director of Cazoo, based in UK

Alex Chesterman, Founder and Managing Director of UK-based Cazoo, said: “The automotive space lags behind almost every other retail space, but it is now catching up. delay. © Daniel Jones / FT

At the same time, the chip shortage triggered by the manufacturing disruption of Covid-19 has spilled over into the global automotive supply chain. Limited production of new cars has driven up prices in the used market, intensifying competition for used vehicles and becoming a key driver of rising inflation in developed economies.

Used cars were already a £ 480bn ($ 660bn) market in the UK and Europe in 2019, according to data cited by Cazoo in its presentation to investors, far more than the mainstays of commerce. electronics such as clothing or consumer electronics.

But before the pandemic, less than 1% of all used car sales were made online. In contrast, digital channels account for a third of clothing sales and half of electronics retail.

“Three years ago it was a big call to get people to spend £ 20,000 on an online purchase,” said Will Turner, partner of Draper Esprit technology investor and Cazoo investor.

To make car buyers more comfortable with purchasing online, digital platforms such as Cazoo, Cinch, and Europe’s Autohero have introduced features similar to Amazon’s, such as no-frills seven-day returns. and delivery within days.

Chesterman predicts that within five to seven years, up to 30 percent of the used car market will have gone online. But unlocking this multibillion-dollar opportunity will require huge investments in acquiring inventory, building home improvement centers and delivery infrastructure, and marketing.

“Basically the challenge has always been that this is a heavy, complex and expensive model to start up,” said Rebecca Hunt, partner at Octopus Ventures, an investor in Cazoo. “There is no escaping this.”

For example, the costs of storing and delivering inventory, as well as handling returns, are much higher than in other online retail categories due to the size and price of the asset.

“Clearly there is massive demand,” Hunt said, “but no one has been able to deliver on a large scale.”

Arizona-based pioneer Carvana that was founded in 2012 is now worth more than $ 50 billion.

Arizona-based pioneer Carvana that was founded in 2012 is now worth more than $ 50 billion. © Laura Buckman / Bloomberg

This is now changing rapidly as investors push on the accelerator, with a series of private financings, initial public offerings and corporate blank check transactions.

Germany’s Auto1, which owns Autohero, raised $ 1.2 billion in primary funding when it went public in February, valuing it at around € 8 billion. Another new listing last month allowed Aramis – which operates used car markets in France, Spain, Belgium and the UK – to raise around $ 300 million in new money.

In private deals, Mexican Kavak raised $ 485 million at a valuation of $ 4 billion in April, while SoftBank led a $ 360 million investment in Singapore-based Carro in June. In India, Spinny has raised $ 165 million so far this year from investors, including Tiger Global.

“The market opportunity is so huge here that you want to have the best capitalized actor,” said Thibaut Large, partner at private equity firm TDR Capital, majority shareholder of Cinch.

While British rival Cazoo is only three years old, Cinch is part of the 75-year-old Constellation Automotive Group, which is also the parent company of webuyanycar.com and the UK’s largest car auction company. Uni, BCA. TDR privatized BCA in mid-2019.

Last week, TDR and some of the same investors who backed Cinch also invested € 400 million in CarNext, which operates in mainland Europe, to take on Autohero.

“There is latent demand in any of these markets,” Large said. “Consumers are not satisfied with all the traditional ways of buying a used car, so they jump at the chance to buy. [online]. “


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