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Fast and furious: the future for used car startups in Europe

A global chip crunch, Covid-19, millennials and cheaper offers have turned online secondhand dealers into unicorns 

By Eanna Kelly

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Photo by Samuele Errico Piccarini on Unsplash

Online secondhand car sellers in Europe hit fever pitch this year. We’ve seen the giddy rise of a new breed of digital car dealers like Cinch, Cazoo, Auto1 and Motorway, which let you purchase, part-exchange and finance used cars entirely online. 

This “buy from the comfort of your couch” pitch has found a willing audience in millennials, who don’t particularly want to haggle with skilful salespeople in shiny dealerships. And growth has been propelled by a global computer chip crunch, which has inflated the prices of new cars. 

Sifted has taken a peek under the hood of this rapidly expanding industry. We’ve mapped out the companies to watch and talked to experts about how far online car markets can go. 

Slow starter turned speed racer 

These are heady days for an industry that, until recently, was embracing the internet at a glacial pace. 

“Cars are finally following the same path online books and DVDs did 20 years ago. Cars came later — because you can’t obviously stick one in the post,” says Cazoo CEO and cofounder Alex Chesterman. 

The company, which says it has sold over 45,000 cars since launching in late 2019, floated on the New York Stock Exchange this August. Its biggest UK competitor, Cinch, raised £1bn in new capital in May. On the continent, SoftBank-backed Auto1, a German used car dealer, floated earlier this year with a value of $2.2bn.

“Cars are finally following the same path online books and DVDs did 20 years ago. Cars came later — because you can’t obviously stick one in the post”

The pandemic’s lockdowns, which shuttered dealerships, created fertile conditions for all of this. Decades-old car trading groups had largely resisted online selling before the pandemic, but soon found themselves facing competition from fast-moving startups.

“If you zoom right out and forget about the new car delays, there is a huge shift from offline to online taking place,” says Tom Leathes, cofounder and CEO of London-based Motorway. The four-year-old car auction site joined the ranks of unicorns in November after securing a $190m funding round that values it at more than $1bn. 

More than any age group, it’s Gen Z and millennials driving the shift online.

“Before, the sense was that 18-24 year olds were never going to own their own car — since the pandemic we’ve seen almost half a million buy from our site,” says Nick King, market research director at Auto Trader, a classified advertising giant. And those buyers were nearly twice as likely as boomers to shop for and buy a vehicle — new or used — entirely online, according to Cars.com, another classifieds site. 

“Houses and cars are a bit weird because their stated prices are rarely their real prices […] but now consumers want more transparency on prices”

King helped his daughter buy a Mini Cooper from Cazoo competitor Carzam, which has raised £112m in funding in less than a year since launching, after “some not very good experiences going to dealerships”. He’s happy with his purchase — “four years old but it looks brand new” — though he admits it was “a bit scary” transferring the £10k fee. 

It’s not just millennials, argues Chesterman. “People of all ages are opting for convenience”, he says. 

“Houses and cars are a bit weird because their stated prices are rarely their real prices; with some haggling in a dealer’s forecourt, for example, you’ll often find the price of a car can change. Consumers have grown used to a better online sales experience over the years so now they are much more demanding — and they want more transparency on prices.”

The fact that what they buy is more likely than ever to be a used car is the result of a lack of new cars. That is due to the persistent semiconductor chip shortage, as production sites in southeast Asia slow down amid Covid-19 outbreaks and the booming Chinese domestic market buys up many of those that do get made.

The global shortage of chips — and the average car needs about 1,400 of them — as well as elements like magnesium, which is used in airbags, brakes and steering columns, has led to far fewer new vehicles rolling off production lines.

Prices soar 

The production crunch has lifted used-car prices dramatically. In Ireland, for example, secondhand prices are almost 50% higher than before the pandemic, according to DoneDeal, Ireland’s largest classifieds marketplace.

“All the way through 2020, used car values were fairly stable. The minute we got into 2021, the prices started to rise. Year to date, it’s a 23.5% increase. That is a strong market,” said Philip Nothard, insight and strategy director at Cox Automotive, a US automotive service provider.

“It can’t continue at this trajectory of growth — there is a bit of caution setting in”

With waiting lists for cars growing to over a year, people are even paying more for a used car than its brand-new equivalent. An old Land Rover Discovery that may previously have sold new for £24k is now selling for £28k, says Motorway’s Leathes. 

Meanwhile, chipmakers are still overwhelmed by orders, meaning many believe new car production may be stuck at reduced levels for some time. Gartner, the analyst house, has projected a best-case scenario that sees semiconductor availability returning to normal by summer 2022.

Still, the sharp price gain for used cars is beginning to slow. “It can’t continue at this trajectory of growth — there is a bit of caution setting in,” says Nothard.

Souped-up motors 

So despite the promise of new car production picking up again sometime, investors believe the online sellers are here to stay and will only grow.

“Those business models are not [solely] built on a shortage of new cars. They are real challenger brands,” says Andy Shields, global business unit director of Indicata, a market research and consultancy company. 

And they’re awash with cash. Motorway, which runs daily auctions and sells roughly 8,000 cars a month, says it made £306m in sales in the third quarter this year, a more than 300% increase from the same period in 2020. 

Carzam says it’s on track to reach 20,000 vehicle sales and to turn over £250m in its first year of trading.

“It’s a huge market with room for lots of players to play,” said Chesterman. Cazoo launched in Germany, following the acquisition of car subscription service Cluno, and France last week. 

Next up is Spain: it bought Spanish car site Swipcar for €30m recently to give it a launchpad into the country for next year. 

It’s fasten your seatbelts time

Investors project aggressive growth for online car sellers in Europe in the coming years.

Selling cars is “probably the most fragmented industry there is,” says Shields. “In Europe, you have 140,000 dealers, some which stock as little as 40-50 cars, all occupying a <1% market share. It’s like a high street with no big chains, just little shops. The opportunity for consolidation is absolutely huge.  

“It’s Darwinian: you’ll get lots of players coming in, very quickly they’ll die away until one or two become mega-players.”

“Selling cars […] is Darwinian. You’ll get lots of players coming in, and very quickly they’ll die away”

With plenty of growth potential still in the UK, Motorway is not rushing to expand abroad, Leathes explains. “We sell 8,000 cars a month, which is still less than 1% of monthly cars sold in this country,” he says. 

Online players have a bigger reach than physical retailers. Chesterman believes as much as 30% of all car sales will happen online in five to seven years.  

“In a country the size of the UK, the likes of Cazoo can have one big base and deliver all over. If you look at a franchise dealership, it could build a site for half a million pounds that would only be doing 1,000 cars in total,” Shields says. 

So far, car companies have been slow to react to the online disruptors. “It’s been little toes in the water when it comes to the internet,” says Shields. If you buy a BMW today, for instance, you can do some of the purchase online but then you might have to complete the transaction at a showroom, he explains. 

The lack of urgency from car companies to sell online is explained by all the money tied up in physical showrooms, says Shields. “Car companies don’t want to undermine their investment.” 

“It’s going to put huge pressure on the franchise dealer networks as they simultaneously get hit by new internet players” 

Online retailers are pricing cars on average 3% below market value, undercutting independent and franchise dealers, he adds. “Right now, the market is so buoyant that everyone is creating good money — but traditional players will come under more and more pressure from these challenger [sites].” 

The likes of Cazoo and Cinch have “woken up a lot of people, no doubt,” says Nothard.

“If some of these car company CEOs were honest with themselves, the consumer would not be getting the ‘omni-channel sales proposition’ they’re getting today were it not for Covid and these disruptors.”

Vroom or bust

Online challengers are not the only cause of concern for the big car manufacturers: they also anticipate that electric cars will see a big source of their revenue disappear.   

“The franchise dealer business model is fundamentally built on after-sales maintenance; they can all expect six-ten hours worth of business per [combustion engine] car,” explains Shields. “But with electric vehicles, you might only get one hour of service work — there’s no oil to service, for one thing. 

“It’s going to put huge pressure on the franchise dealer networks as they simultaneously get hit by new internet players.” 

Future bans on new petrol and diesel cars, pencilled in for 2030 in the UK and some other European countries, will also “help keep the used car market healthy”, adds Leathes. 

Nothard predicts some consolidation of franchises in Europe and a “move towards agency” for car companies entering the electric vehicle era.

“At the moment, Mr Manufacturer doesn’t have a relationship with the customer. So in the future, the manufacturer will be constantly fighting to go around the dealer and get directly to the customer; they’ll be able to monetise your data, sell you upgrades for your dashboard that you can download through the cloud,” he explains. “They can only do that if they have control over the relationship; control over you, the car buyer.” 

Eanna Kelly is a contributing editor at Sifted. He tweets from @EannaKelly1

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