Online Car Platforms Busy Retooling in the Connected Economy as Growth Slows

The stocks of online car companies have been volatile, to say the least. Double-digit swings (up and down) have been the norm over the past few days as they add services to woo consumers.

But beyond the vagaries of share price movements, the data and the commentary gleaned from the earnings calls paint a portrait of the state of online car buying, specifically, and the state of the connected economy in general — and how the consumer is faring.

And beyond those macro trends, many of the online vehicle players are busy building out their last-mile efforts in bids to become end-to-end providers and boost margins.

Growth Slows

Carvana CEO Earnie Garcia may have summed things up succinctly when he said on the earnings call that “while we continue to expect to rapidly gain market share our shift in focus means growth in units and revenue will be slower than it otherwise would be in the short-term.”

He went on to state that “we also don’t know exactly what to expect from industry level sales in the near-term in light of everything going on in the economy.”

The platforms, in other words, are retooling their efforts in the midst of inflation, where consumers are navigating macro challenges, where growth is growth, yes — but is facing headwinds. Carvana, for example, saw its retail units sold in the quarter total 117,564, an increase of 9%.

That’s a  bit of a slowdown from the 14% seen in the first quarter, as measured year over year.  And the company’s letter to shareholders shows that even though revenues were on an upswing, gross profit per unit was down to $3,368, off $1,752 from a year ago. Inflation (and higher input costs) hits everyone, it seems.

And during the question and answer with analysts, Garcia noted that the company increased its unit sales in a used vehicle market that declined about 15% on a unit basis. Jockeying for market share, then, is the norm.

Right now, of course, consumers are still spending. Garcia stated on the call that “we’re seeing higher incomes in general … and higher FICOs in general fare a little bit better in this environment. All else constant, that’s leading to higher purchase prices. It’s leading to differences in mix and attach rates for financ[ing].”  Most financing companies are continuing to see strong performance in terms of credit performance, he said.

And yet, as reported here recently, lending may be a tough haul. A credit crunch looms for auto lenders — perhaps most imminently for those lending to the subprime market.  By way of example, Credit Acceptance, which helps auto dealers offer vehicle financing — including to consumers who have less-than-stellar credit profiles — has warned on repayments. Collection rates have declined to a recent 67.1% and where the company had given a forecast of 67.6%.

In a nod to the logistics buildouts that are seemingly natural extensions of the platforms — beyond eCommerce and beyond credit — Carvana is integrating its acquisition of ADESA’s U.S. business. Integrating the latter’s existing and potential reconditioning operations, the company said earlier this year, can contribute approximately two million incremental units to Carvana’s annual production at full utilization.

Buyers are Skittish

The theme of the slowdown is echoed by CarGurus, where as noted in this space, management commentary said sales for the current quarter would slow from Q2. CarGurus saw its Q2 sales rise 135% to $511 million for the three months that ended June 30 but warned that a mix of economic headwinds and weakening demand for big-ticket purchases would be a drag on top-line momentum. In this case, it is the challenge of dealer acquisition that remains in place. We noted that the pace slowed to 1% and brought the total to 31,143 paying dealers in Q2. The average revenue per dealer rose 4% in Q2 to $5,550.

CarGurus said its average monthly users fell 10% to 29.5 million and its monthly sessions slid about 1% to 81.1million. Supply chain shortages have dovetailed, management said on the call, with rising interest rates and inflation, right into a seasonal slowdown that marks the second half of the year.

For CarGurus, and similar to Carvana, the buildouts continue. CEO Jason Trevisan said on the call that the vision is to offer a single point of (connected) contact where consumers can shop, finance, buy and sell. “For dealers, we will continue to focus on growing engagement on the CarOffer platform and pioneering the digitally enabled automotive market with our Digital Retail offerings,” he said. As for lending, he said that CarOffer has already captured 2% of the wholesale market and continues to gain share of the $400 billion addressable market.

In the meantime, as Sam Zales, CarGurus president and chief operating officer said, “wholesale and retail pricing at all-time highs. It makes a buyer or seller skittish … it takes a while to recalibrate that. Consumer demand is softening.”

Vroom’s eCommerce units slipped by almost 50% in the quarter, to a bit more than 9,200, and its total eCommerce revenues declined by 44% to $321 million even as the average price for each eCommerce unit was up 9%. We note that the sales cycle appears to be lengthening, as eCommerce average days to sale was 127 days, an 88% gain (partly on the heels of titling issues). Retail financing was $32 million in the most recent quarter.

CEO Tom Shortt said that looking ahead, “we intend to sell nationally but operate more regionally around our reconditioning centers and transportation hubs. We expect to build density and regions to drive marketing and supply chain economics while improving customer delivery times. We have a significant opportunity to reduce the number of miles or vehicles travel and reduce inbound and outbound transportation costs.”

The connected economy has made it easier for buyers and sellers to find each other. But the macro has made pulling the trigger to get the sale done a bit harder (for consumers). That means that the long haul — the network buildouts — will be key as the nascent online car buying industry matures.