How Online Car Marketplaces Emerged From COVID-19 Stronger Than Ever

Few industries have experienced volatility during COVID-19—both severe sales drops and accelerated growth—quite like online used car marketplaces. In the past couple of months, buying and selling cars online quickly transformed from the way of the future to an imperative in the present. Why has the industry proven so resilient, and is the trend toward buying and selling cars online a temporary fad, or an indicator of the Amazon-ification of automotive retail? I sat down (virtually) with Toby Russell, Co-founder and Co-CEO of online used car marketplace SHIFT, to learn more.

An Industry In The Spotlight

At first glance, the online used car marketplace space is not an obvious choice to experience unprecedented growth during COVID-19. The demand for transportation has shrunken with people working from home and shelter-in-place orders in many of America’s most densely populated cities. Moreover, one would expect consumer spending on big-ticket items like cars to decline in a time of economic stress and rising unemployment.

In fact, in the second half of March and throughout April 2020, sales of online used cars dropped significantly as consumers adjusted to a new economic reality. SHIFT sales in April dropped 40% from February sales levels, and the company’s main competitors, Carvana and Vroom, both publicly traded companies, also experienced major sales challenges. Carvana’s April sales dropped 40% from 2019 levels and Vroom was forced to sell off a significant portion of its inventory at a steep discount. However, as consumers became accustomed to this new normal, they started searching for a safe and effective way to meet their transport needs, from grocery shopping to getting to a hospital in case of an emergency. Online used car marketplaces quickly filled this role.

Part of the emergence of these marketplaces has to do with the nature of their business model, and the benefits they offer relative to other transportation methods. When COVID-19 started spreading, many traditional auto retailers and dealerships shut down, as did public transportation in large cities like San Francisco. Even in instances where public transport remains operational, the prospect of being in a crowded environment has proven too much for many people to bear. Alternatively, ride sharing and peer-to-peer car rental platforms also present challenges due to the high velocity of riders passing through the vehicles. Finally, with air travel restrictions, there’s been a large shift for vacationers from air travel to personal vehicle travel. For many, private transport is the only viable option, and if one doesn’t already have a car, an online used car marketplace is likely his or her best bet to obtain one (and a cost-effective option relative to purchasing a new car).

Rising To The Challenge

The confluence of these market factors provided online car marketplaces a unique and massive opportunity to serve countless new customers. As Ivan Drury, an analyst at Edmunds, noted: “together, Carvana, Vroom and SHIFT sold fewer than 300,000 cars in 2019, less than 1% of the used-car market in the U.S.” On the other hand, this opportunity challenged the resources and capacity of these not yet profitable marketplaces, and forced a reinvention of the online used car buying and selling experience to cater to new audiences looking for the benefits of online retail without sacrificing the traditional car buying and selling process. 

The leading online used car marketplaces all responded to this sink-or-swim situation with impressive execution, prioritizing safety and propelling the industry forward. As a result, Carvana and Vroom performed strongly in the latter half of Q2 2020, and SHIFT’s May 2020 sales returned to their previously record-high February levels.

Shifting Gears

While the industry as a whole has displayed an impressive ability to operationalize at a scale far greater than anticipated, what differentiates San Francisco-based SHIFT and its COVID-19 experience, and why I was particularly interested in speaking with SHIFT Co-CEO Toby Russell, is the adaptability and innovation the company demonstrated at the onset of the crisis. SHIFT’s user experience diverges from Carvana and Vroom in the key area of test driving. Carvana and Vroom each offers a 7-day grace period or “return policy” post-purchase to ease the commitment of the transaction. However, SHIFT conveniently brings its cars to its prospective customers and allows them to test drive the vehicle before purchasing.

This added feature introduces a set of logistical and safety considerations SHIFT had to address in the context of COVID-19. In response, SHIFT swiftly (within literal days of the California lockdown order) rolled out several updates aiming to, in the words of Russell, “make the cars safer, the test drive and buying process safer, and the process more accessible.” First, SHIFT tweaked the car delivery and test drive process to be contactless, no small logistical feat. Second, the company began applying antimicrobial treatments to all of its vehicles free of charge to prevent the spread of germs. Additionally, SHIFT created an Essential Workers Program providing discounts to essential workers. Given SHIFT’s initial dire financial situation due to COVID-19, and the emphasis it puts on its test drive as a core differentiator, the measures implemented by the company proved to be critical to the health and future of the business, which has since announced plans to go public this year.

When asked what about SHIFT’s team and operations enabled the company to rally as it did, Russell emphasized a focus on consistently adapting to ever-changing customer needs. He also recognized the value of building a cross-disciplinary team including diverse backgrounds and perspectives to foster creativity and collaborative decision making. In this case, developing and executing upon a COVID-19 strategy required input and cooperation across car delivery personnel, auto mechanics, designers, software engineers, product managers, and more. Lastly, Russell noted his gratitude and SHIFT’s good fortune that from a strategic perspective, much of its strategy, such as delivering a test drive vehicle to someone’s home or expanding into the “value” segment of cars that are at least 8 years old with over 80,000 miles (a space in which Carvana and Vroom are not active), was reinforced by COVID-19 circumstances.

The Future Of Online Car Marketplaces

Looking ahead, the question remains: how much of the recent growth of online used car marketplaces is a sign of the times as opposed to a fundamental shift in purchase behavior? According to Russell, for the most part, the industry dynamics and growth driven by COVID-19 will persist.

The trajectory toward online car retail has been pulled forward significantly. Even a few months ago, many in the industry believed it would take another 5 years for online car marketplaces to really take hold. The reason the adoption of online car marketplaces will continue to accelerate is simple: it’s a much better customer experience. According to a 2019 report published by CarGurus, 96% of people start their car shopping experience online, researching and becoming pricing experts for the cars they’re interested in. But, in most cases, these consumers can’t actually buy the car they see online. Rather, they’re referred to a dealer who may or may not have the car. This asymmetry between the car shopping experience and transacting experience will not continue to be acceptable to consumers increasingly accustomed to a streamlined online retail and fulfillment experience.

With the shift toward greater adoption of online car marketplaces will undoubtedly come greater scrutiny and competition from traditional car dealers looking to adapt their own legacy models. Russell is not worried about this increased competition because of high barriers to entry, the first being the difficulty of developing a functioning e-commerce capability. This infrastructure is particularly complex to build in the automotive space, as any online marketplace must account for financing and warranty requirements, and the ability to transfer large dollar amounts and vehicle titles. Fulfillment presents another barrier. The fulfillment of car transactions is meaningfully different from other types of fulfillment—a car can’t be boxed and shipped like most other products purchased and fulfilled online. 

Another notable trend, albeit one that Russell acknowledges might not last, is the migration from new to used car transactions, and from used to highly used. Recent SHIFT data shows that older and lower priced cars are in high demand: these types of vehicles historically accounted for 15-20% of SHIFT test drives, but recently have increased to 30-40% of test drives. SHIFT’s previously mentioned value segment of older SHIFT-certified cars targets this growing demand.

Finally, historically, peak demand for test drives was weekends. More recently, peak demand has shifted to Wednesday-Friday as people working from home look to test drive at the end of the workday. The jury is still out on whether the shape of the retail week and the seasonality of the retail year will change and flatten long-term.

A Wild Ride

The past few months have tested and validated the value of online car marketplaces, and have proven that the automotive industry cannot and will not be exempt from the forces of disruption transforming retail. Time will tell if SHIFT can apply the same innovation on display during COVID-19 to separate itself from the pack of online marketplaces, or if well-established Carvana and fast-growing Vroom will take the lead. Regardless, given the amount of room for growth, the online car marketplace industry is one in which multiple players can maintain sizable share and sustainable businesses. The future is indeed bright for online used car marketplaces.

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