CarTalk # 50 (On Automotive Marketplaces)
A deeper dive trying to understand the proliferation of automotive marketplaces, current state and future projections.
Hi friends
This is the 50th issue of CarTalk! Just like the 25th issue of CarTalk, I wanted to take my time with one topic only and explore it from a couple of angles. I hope you enjoy reading it as much as I enjoyed writing it!
Elephant in the room - I’ve been unable to maintain a weekly cadence for CarTalk. I’ve made peace with the fact that a busy job and two kids will take precedence over passion projects. I’m also growing fond of the idea of acting like less of a “weatherman” of new mobility - i.e. someone who tells you every week “here’s what’s happening right this moment outside your window” - and instead perform the role of a “climatologist” - i.e. to say “here are the global trends to watch out for over a span of years/decades”. There are some good weathermen out there I’ll happy recommend by the way - just ask me.
50th issue! Jeez Louise!
Buckle up!
In a world where we’re inundated with information - the infinite scroll of banal ideas packaged as Serious Think Pieces - every so often we do encounter a novel line of thinking that grabs us by our collars and teaches us a thing or two even if our brains were resisting. I was fortunate enough to encounter a series of articles just like that - Sarah Tavel’s three-part series titled The Hierarchy of Marketplaces. Sarah Tavel is a General Partner at Benchmark VC, storied investors in household names such as Uber, eBay, Instagram and a number of heavy-hitters.
Okay, what really was troubling me that Sarah’s series addressed? What do Marketplaces have to do with New Mobility, anyway? Everything, if you ask me. Where else will you buy your car? The dealer-free sales model continues to flourish in the automotive space (e.g. Tesla, Rivian, etc.), and customers continue showing high interest in touchless, contactless purchasing options, which bodes well for online automotive marketplaces.
In the above table, almost 60% responders globally are considering buying a car online, with a similar number choosing contactless sales! Good news for automotive marketplaces.
(Side note - why does the US show declining interest in contactless sales, even though the interest remains north of 50%? Another McKinsey article titled “Car Buying in 2030” addresses that:
Paul Gao: In the United States, you still have to buy a car from a physical dealer. The dealers, the franchisees, are still protected by regulation. The transition from physical dealership to digital dealership to virtual showroom might be faster in China or Asia than in more mature markets, where regulation tends to lag behind.
The graph above seems to corroborate just that.)
Back to what has been bothering me - it is the blossoming of so many automotive marketplaces to the point where it feels a little bit overwhelming. In fact, it was only after I wrote about Carvana a year ago that I started registering offerings from not only smaller upstarts, but also offerings by the OEMs themselves. This list is by no means exhaustive, but here’s a listing of automotive marketplaces in the US alone - Carvana, Vroom, Shift, CarGuru, CarFax, Autotrader, …. long list. Similarly, I came across the image below from a LinkedIn post which addresses the same concerns across the pond:
(Side note: BrumBrum in Italy is a funny name for an automotive marketplace. Will they change it to WhirrWhirr when their inventory is primarily electric?)
The question(s) in my mind concerning automotive markets have been:
Is there enough demand/supply to sustain so many marketplaces?
With so many middlemen in play between a car and driver, which of these will cave first? Will they go out of business, or be consolidated?
For those marketplaces that stick around, how will these marketplaces differentiate themselves from each other?
I’ve scratched the surface on this in a earlier CarTalk issue. The mental model I used then centered around unit economics - I posited that the marketplace that squeezes the most margin out of each sale wins in the long run. It’s not a bad lens to view the world through. Borrowing my own exhibit:
In that issue, I was happy to note that Carvana’s unit economics have improved significantly with time. I even ended up taking a small position in $CVNA. And yet, I was nowhere near getting answers to my questions.
This is where Sarah’s three-part series on marketplaces comes in. In part one of her series, Sarah lays out what differentiates a winning marketplace from the rest of the pack. Right off the bat, Sarah cuts through the fog and gets to the heart of the matter:
Whereas I had been approaching marketplaces dollar-first, Sarah’s treatment of marketplaces mandates delight-first! This is the sort of ethos that made Zappos the company it is today. Why should buying cars be any less delightful than buying shoes off the internet? One of the most memorable takeaways from Part 1 of the three-part series is:
No matter how large an incumbent may be, they are always vulnerable to a new entrant that makes buyers and sellers happier. In other words, happiness — not scale — is your moat.
Happiness as a moat. Profound.
Some examples:
In closing Part 1, Sarah says:
If you’re worried you may have chosen too small a market, you’re probably on the right track. Just make sure it’s not a dead end.
Emphasis mine. Helpful advice for any nascent marketplace - start small, differentiate, delight your customers
In Part 2 of Hierarchy of Marketplaces, Sarah lays out the concept of Growth Loops and Happiness Loops. Let’s tackle them one at a time! On Growth Loops, Sarah says,
Growth loops help you drive down your cost of acquisition by leveraging your existing buyers and sellers to help you grow.
What might a Growth Loop look like in an automotive marketplace context? A non-exhaustive list:
Word-of-mouth starts driving sales, helping marketplaces save on marketing and Customer Acquisition Cost. Cazoo (UK auto marketplace) sponsors not one but two Premier League soccer teams just to get the word out!
More repeat purchases from cohort of customers
On the supply side, volume based discounts from OEMs - the #1 marketplace has purchasing clout because it can move way more vehicles than the second-best option.
It is the job of the marketplace to identify the appropriate loop and maximize them. Growth Loops are the marketplace equivalent of “economies of scale” - that’s not the real insight. The insight that I took away is that chasing Growth Loops in isolation is a fool’s errand. To succeed, marketplaces should focus on Growth Loops that drive Happiness Loops in tandem.
So, what’s a Happiness Loop?
Again, in Sarah’s words:
Happiness loops act like a sorting function on your supply, helping your buyers find the best suppliers (and avoid the bad ones).
What might a Happiness Loop look like in an automotive marketplace context? Again, a non-exhaustive list:
On the demand (buyer) side, Happiness Loops can be unlocked by offering more vehicle choices in the marketplace, matching customers with the best OEMs, offering reliable after-sales services, all of which foster repeat behavior.
On the supply (seller) side, Happiness Loops are unlocked by promoting the best suppliers, improving cash conversion cycles, increasing unit margins.
All very clear when put in these terms, right? Growth Loops and Happiness Loops. Once the two loops are spinning in harmony, the world is yours to conquer!
Except, no. The article goes to list 6 reasons where the markets won’t tip in your direction even with the two loops running. Not all 6 reasons apply to automotive marketplaces in my opinion, but three certainly do
Competition - If your region has another automotive marketplace operating in the same general geographical area, you’ll be forced to step your game up because Growth and Happiness loops alone won’t guarantee success. Yes, you may delight a customer but so might the other company. In such a scenario - differentiate, differentiate, differentiate.
Low fragmentation on either side of the market - In an automotive context, you may have millions of car buyers but only a handful of OEMs to supply vehicles. Marketplaces (unless they are big) will always be at the mercy of these OEMs. Multiple marketplaces will be vying for the same cars to add to their inventory to boost Happiness Loops (by offering customers a variety of cars to choose from). In a supply constrained environment like we are currently in, unit economics for car marketplaces will suffer.
Inability to corner the buy side: I consider this an extension of #1. Car purchase is really infrequent - the Happiness Cycles occur once every 5 years, giving plenty of room to shift perceptions of your automotive marketplace, have competitors emerge, and so on.
As I type all this out, I’m coming to the realization that automotive marketplaces are a hard business to be in! What hope do, then, the Carvanas, the Shifts and the Vrooms of the world have? Sarah, in Part 3, left me with one final insight:
“Coexist” stickers may be good for car bumpers, but not for the marketplaces selling said cars. Sarah makes it even more tactical:
Carvana, coincidentally, has been following this playbook. Carvana started an online marketplace when no one was really looking. They have been able to continue their growth quarter over quarter.
Still, the above exhibit focuses on the number of transactions Carvana is doing. It never addresses the “Happy GMV” - are customers happy buying off of Carvana? Meaningfully happier than Shift/Vroom/others?
Bringing all these frameworks back to new mobility, it begs the obvious question - what will make an automotive customer happy? Ignoring personal preferences, in aggregate this is what a Deloitte study concludes that customers want:
If Deloitte is to be believed, the most crucial aspect of buying a car is an in-person element. Boring!
And yet, not unreasonable. For a number of folks, a car is the most expensive item they’d buy (in some cases an order of magnitude more expensive than their next most prized possession). Makes sense you’d want to kick the proverbial tires a bit.
However, for those who are willing to try newer ways:
That’s a better list - customers want the car buying process to be easy, transparent, convenient.
Even though the Deloitte study is slightly dated (Sep-Oct 2020), the results are somewhat disappointing and bring to mind a quote from Steve Jobs:
“Some people say, "Give the customers what they want." But that's not my approach. Our job is to figure out what they're going to want before they do. I think Henry Ford once said, "If I'd asked customers what they wanted, they would have told me, 'A faster horse!'" People don't know what they want until you show it to them. That's why I never rely on market research. Our task is to read things that are not yet on the page.”
Towards that end, I found a more recent report that sounds very promising:
Three-quarters of car dealers agree that offering more digital options to customers is essential to long-term survival,” Helms said. “Many now claim to offer digital retailing solutions to shoppers, but the reality is a near majority of dealers are providing only light digital capabilities, many of which take place during the early phase of the shopping process — things like applying for credit, finding information on rebates and incentives, determining a payment.”
Cracks have long been appearing in the status-quo business operations of car dealers. Above quote confirms what the automotive customer today values - something online marketplaces are set up to easily provide!
In summary, car buyers will be delighted if the marketplace:
Lets them research vehicles online
Offers both in-person or virtual (HD pics, VR) methods of touching and feeling
Offers haggle-free online quote
Offers online financing and contract signing
Offers a home delivery for vehicle handover
Effectively, marketplaces need to mimic something like this:
Having read the marketplace series and put all the pieces together, do I think my unresolved questions around automotive marketplaces have been addressed? More or less - I do have a better mental model than I used to!
However, I want to take it a step further and apply what I just learnt. As a thought experiment, the challenge I want to pose myself is - knowing what I know about the hierarchy of marketplaces, combined with my understanding of how automotive companies work, how would *I* go about designing the perfect marketplace that crushes every other marketplace out there?
Let’s take a shot at it, shall we?
Differentiate, differentiate, differentiate: Right off the bat, my marketplace would offer EVs only. Why? It’s 2021. Also, EVs are expected to be >50% of US passenger car sales in less than a decade. It also differentiates me from the other marketplaces like Carvana / Shift / Vroom who are trying to move EVs and ICEs together. I’d aim to understand the customer concerns specifically related to buying an EV and address those front and center, getting those Happiness Loops spinning!
For instance, I love that Safety Concerns rank so high in some markets and not others. This level of differentiated education is something other marketplaces would likely not care to provide.
Big fish in a small pond - My EV-only marketplace wouldn’t dare go near a big, tier-1 city like NY, LA, or SF given mobility options are plentiful (competitive marketplaces, public transportation, micromobility options etc.) I would pick a tier-2 city such as Seattle, Atlanta, Denver so I have a strong shot at proving my concept out, establish my Growth and Happiness Loops without a bigger fish breathing down my dorsal fins.
Digitize customer checkpoints: From what I’ve learnt, customers increasingly want car buying to be similar to buying a couch off Wayfair. Having identified the key customer checkpoints above, my marketplace would digitize all of them!
Thank You, Come Again: In a small market, I could get by for a while by selling one car to a customer every 3-4 years. However, I’ll soon need to ideate on ways to reach back into my customers’ pockets again and again. Post-sale happiness is a key portion of an automotive customer’s journey:
As an EV-only marketplace, I would hire electrical contractors to help first-time EV buyers install chargers in their homes (Happiness Loop + more margin / sale). I could throw in one free car wash a month for the first year (Happiness Loop but eats into margin). I could sell a EV-specific service packages whereby I could have mechanics do house-calls. The point remains - one car sale every couple of years just won’t cut it. I’ll have to find way to prolong my relationship with customers.
Pretty exciting, isn’t it? Think the market will allow an EV-only marketplace to exist? Carvana, here I come!
That’s all from me folks. Have a great week!
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