Wrecks pile up in online auto sales sector
Thilo Koslowski saved $5,000 buying his 2000 Audi TT Roadster using online car buying service Cars.com. "It was a great experience," says Koslowski, a senior automotive analyst at Gartner Group.
J.D. Power and Associates and Gomez estimate online car sales could account for as much as 10 percent of automobile purchases by 2005, as both consumers and dealers grow more comfortable with no-haggle transactions. And Baba Sheety, an automotive analyst at Forrester Research, predicts that 6.5 percent, or $33 billion, of new-car sales will be completed over the Internet by 2005.
So why does the online auto sales sector look like a giant car wreck?
In the past 90 days, many Web-based auto buying sites have either closed or been acquired. The list of casualties includes Autoadvantage.com, Autoconnect.com, Bestoffer.com, CarOrder.com, Dreamlot.com, Driveoff.com, Greenlight.com and OpenAuto.com. Although more than 50 percent of all consumers looking to buy a new vehicle use the Internet for research, few of them complete their transactions online.
The fact is online auto buyers like Koslowski are as rare as used cars "driven by little old ladies from Pasadena." Internet sales account for just 1 percent of the roughly 50 million new and used cars sold nationwide each year, according to industry estimates.
The shakeout is largely blamed on flawed business models and strict state franchise laws, which bar automakers from selling vehicles to anyone but franchised dealers. The online car buying industry has also been struggling because some dealerships feel a threat from the major automakers moving into the car buying space. More than half of the 3,300 dealers surveyed for a December J.D. Power report said automakers wanted to put them out of business by selling vehicles directly via the Internet.
Yet, despite the fender benders, analysts remain bullish about the sectors future. Where are they placing their bets?
"The most popular business model for selling autos online is the dealership referral model," Koslowski says. Web sites Autobytel.com, Autoweb.com, Carpoint.com and Cars.com offer consumer information such as pricing trade-in values, even dealer incentives and a monthly payment calculator. These sites take consumer requests and send them to dealers. The dealers calculate the best price on the vehicle, check their inventory and send an e-mail with a price quote to the consumers.
Cars.com labels itself as a "digital marketplace" for consumers and car dealerships, says Mitch Golub, general manager. "Its for the consumer because we have terrific content," Golub says. "Its for the dealers because we drive traffic through their front doors. Thats the biggest differentiation between us and our competition. All roads lead to the dealer."
Cars.com, founded in 1998 in Chicago, has 130 newspaper partners, to cut its marketing and advertising expenses and to drive business to local dealerships.
Another emerging business model with promise is the "locate to order" model, spearheaded by General Motors along with Autobytel. On May 1, GM will launch a three-month test in the Washington, D.C., area, of its idea of selling autos online with guaranteed, dealer-set prices.
Visitors to Autobytel looking for Chevrolet cars and trucks can scout the inventories at 22 participating dealerships in northern Virginia, southern Maryland and the District of Columbia, says Mike Devereux, head of business development at e-GM, the automakers Internet arm.
Autobytel will also provide GM dealers with related training, Web-based customer service applications and other technologies, says Mark Lorimer, president and CEO of the Irvine, Calif., company.
Autobytel, which collects sales leads and passes them on to dealers, saw its stock premiere at $39.94 on April 1, 1999, then steadily drop to trade at its current range below $5. Yet, Lorimer predicts Autobytel will be one of the few auto buying survivors. "It takes a lot of knowledge to succeed," he says. "A lot of people who came into this space claiming to close car deals online didnt understand the complexities of the business."
In addition to the pure-play auto buying sites, automakers have created portals such as FordDirect.com and GMBuyPower.com for consumers to build the exact car they want. If they want to pursue a purchase, the site sends the information to the closest dealer. The sites dont disclose invoice prices, nor do they disclose dealer incentives or tell potential customers what their trade is worth.
The big drawback of these sites is that consumers spend a lot of time filling out forms and creating cars that dont exist at any of the dealerships, says Devereux at e-GM. "It just leads to frustration," he says.
Only one Internet pure-play remains to champion the direct sell or brokers site: CarsDirect, in Culver City, Calif. It bought its main competition, Greenlight, earlier this year. CarsDirect lets consumers find dealers closest to their ZIP codes that have the vehicles they want at the price they prefer.
In December, CarsDirect withdrew its IPO, based on "currently unfavorable conditions in the public equity market." The company has a strong cash position, with $100 million in reserves, and is poised to weather the dot-com storm, says CEO Robert N. Brisco.
"On the positive side, the weaker dot-com companies are failing and we are the beneficiary of their demise. We have seen record traffic numbers every month this year," Brisco says. "On the negative side, you tend to get painted by the same brush as everyone else."
Unlike most of the referral sites, CarsDirect allows consumers to make the entire purchase online without speaking to a dealer and can put a consumer in a car the same day. The company operates in 40 states and works with a network of more than 3,000 dealers.
Not only is Brisco head of the company but hes also a customer. He bought his metallic blue Lexus GS300 through CarsDirect last year.
Yet, sites like Carpoint, which is owned by Microsoft, think consumers dont want to close the deal online. They want to get as much information as they can and then go into the dealership. Carpoint attracts a million consumers every month and drives $8 billion in annual sales, says Betsy Frost, the companys director of consumer services. Carpoint works with 5,000 dealers nationwide.
In shopping for a new vehicle, about 40 percent of consumers in a recent Consumer Reports survey said they went to an automakers Web site, and about one-third surfed other sites as well. About three-quarters sought price information, while one-quarter went after financing details. Half of the respondents went after reliability data.
One of the most popular auto information sites is Edmunds.com. The Santa Monica, Calif., company provides information on new and used car prices, including trade-ins and car reviews and averages 2.8 million visitors per month, each of whom averages 20 minutes at the site.
The research sites are making consumers more knowledgeable shoppers and saving them time and money, Gartners Koslowski says. "With more and better information, the consumer can get a good deal."