Attention Startups: The Automotive Industry Isn’t a Rust Belt Monolith
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selling it to the consumer for more than they pay for it, which seems like driving on a straightaway. Not actually, as most dealers make little money on a new car sale. Instead, they make money on new cars through Finance and Insurance (F&I), where the consumer decides to lease or finance the car, buys extra insurance like paint coverage, or extended warranties and service plans.
DealerTrak (nasdaq: TRAK), the dominant player in the space, is a venture-backed company. For dealers to make money here, it starts with getting the customer into the dealership. A new car customer is pretty savvy, as they have spent a tremendous amount of time researching their purchase on the Internet before they walk through the dealership door. Thus, the reason primary form of marketing for dealers is online as they are trying to meet the customer where they already are.
Google SEO & SEM, AutoTrader, Cars.com, and dozens of other website drive leads to dealers. Dealers pay by the lead ($5-$20), by the click ($0.50 to $5), and through monthly subscriptions for services. Today, companies like our portfolio company Mojo Motors are delivering a mobile and web experience for car shoppers that look and feel similar to a Facebook or Twitter experience in the customers’ interactions with the dealer.
Selling Used Cars – Selling used cars is even more complex than selling new cars. First, the dealer has to buy the used car at the right price, which can be from the consumer or from a wholesale source. Sometimes, to sell a consumer a car, the dealer has to take a trade-in car they don’t want to own. So now the dealer has to sell that vehicle in the wholesale market. So dealers buy and sell cars to consumer and buy and sell cars in the wholesale space. Then in the wholesale space they can sell the car at an auction, to a wholesaler, or another dealer. That’s a hairpin turn.
Then it gets even more complicated because dealers borrow money (a flooring line) to buy the new cars they have on their lot. On used cars though, they often have to use their own capital to buy them, so they don’t want the capital tied up too long. Like new cars, the dealer has to get the customer into the showroom, but in addition they manage their used inventory much more tightly than new. Again, tremendous opportunities here for startups, like our former investment OpenLane (acquired by Adesa – nyse: KAR), who was a pure play online platform focused on tools for dealers and manufacturers to manage the turn in and sale of off lease and used vehicles in the wholesale market.
Servicing Cars – Now that a consumer has bought a car, it has to have service and repairs. Dealers make money on parts and on the labor for this. In fact, a well-run dealership generates more than half its profitability from service. This too is complex, as there is service, warranty repair, mechanical repair, collision repair, car rental, and managing a work force with highly specific skills. This is where a dealer can run out of gas, as most customers don’t trust their dealer for service. This all boils down to one thing: Loyalty. A customer who keeps circling the track and returning for service is likely to stay with that brand and that dealership for their next car.
There are dozens of companies who have built their business around just helping dealers run this part of their business better. Xtime, another of our portfolio companies, which has nearly one third of the dealerships in North America as customers, solves what on the surface seems like a simple problem, but underneath is filled with massive complexity in an area of vital importance to the dealership.
In just these areas alone there are a tremendous number of companies and opportunities for startups. The opportunities grow by an order of magnitude when we also layer in that a dealership is a small business and they need software to run their business: CRM, ERP, accounting, and tools to make everyone’s job more efficient. If we take it a step further, there are tools and programs for dealers to work with the manufacturers, and of course all of the money the automaker spends on brand-building and selling cars too. All of which are areas that once understood are ripe with possibility for startups to create greater efficiency and drive top line for the entire automotive industry.