A vote of confidence in the used car business?

On Thursday last week, Auto1 made a spectacular debut on the Frankfurt Stock Exchange, raising €1.8 billion, with a first day surge to 49% above the floatation price.  The IPO put a billion Euros into the Auto1 war chest, which the company has said will be used to accelerate their development of their B2C offer – AutoHero.  Whatever their plans, Softbank who invested €460 million for a 20% stake in Auto1 two years ago retained their stake – a vote of confidence from an investor who has had a bit of a rough ride recently, notably through their investment in WeWork, the co-working office space provider.

As you may have noted from my previous blogs, I don’t credit the investment community as a whole with great judgement on real value, as opposed to their appetite for hype, but Auto1 shares ended the week a third up on the IPO price, suggesting that there is a view that they have a winning formula.  It is also worth noting that unlike some other recent IPOs in the broader automotive sector, Auto1 is profitable.

In our research, ICDP flagged Auto1 as ‘one to watch’ a few years ago, as we felt their B2B offer to 60,000 dealers across multiple markets, would help dealers to improve their used car business.  There is a huge variation in used car performance between the best and worst dealers, with many falling well short of the benchmarks in the sector.  One of the key drivers of used car success is active sourcing of cars in demand, and the online auctions offered by Auto1 open up opportunities that would not be available if a used car dealer was reliant on local channels and trade-ins.

However, the continuing move into the B2C space by Auto1 brings them into competition with their B2B customers, and one wonders whether they can manage both channels when they are drawing on the same stock.  Do the ‘best’ cars all get routed through the (presumably higher margin) retail channel?  Will their B2B customers find that they are losing customers to AutoHero?  This channel conflict is not unique to Auto1.  In July 2019, BCA – traditionally a B2B auction house that had progressively added more services to provide dealers with showroom-ready used cars – launched a B2C online offer called Cinch.  This was initially a listings platform for their dealer customers to offer their stock to consumers, but last October, it switched to offering cars from its own stock, so competing directly with its own trade customers, and presumably competing with them for stock.  There are also parallels with the moves by Leaseplan and other leasing companies to create a B2C offer for defleeted cars, where cars are offered through their own physical outlets and online, rather than sold on to the trade directly or through auction.  By coincidence also in October last year, Leaseplan closed their UK NextCar operation – perhaps a sign of further retrenchments to come in Europe.  It seems to indicate that cutting out the middleman is not as straightforward as one might hope.

It's clear that if you’re going to compete with your customers, you need to be at least as good as they are in the marketplace.  If your offer is sub-standard in any way, then the customers will choose accordingly, but you will have upset your other customer base in the process.  There can be no ‘half moves’ or ‘pulling of punches’ – both channels need to be focused on making their respective businesses successful, and where they compete internally for resources, this needs to be on a purely commercial basis.  If you end up beating your own customers in the marketplace, it is then because you are doing a better job than them, not because you have tilted the table to the advantage of one channel compared to the other.

However, what these examples all demonstrate is that there is huge interest in the opportunities to bring scale advantages to the used car market.  An area that has in the past been seen by some as a secondary activity, is now attracting big players and big money.  Not all these recent developments will succeed, but other initiatives will follow – used cars could see the greatest change of all retail sectors in the next few years.