CarsDirect.com, the online buying service, jazzed up its management team with a new CEO from Hollywood and grabbed a quarter of a billion dollars of new funding from investors crazy about electronic commerce.
The company also is learning how to sell cars and trucks without losing $1,500 on each deal.
Last week, the company announced that private investors have poured $280 million into CarsDirect.com in addition to the $30 million in first-round funding. Its ambition is to become the dominant Web brand for auto retailing
The company is backed by Michael Dell, founder of Dell Computer Corp., and more than a dozen investment banks and venture-capital, media and technology companies.
'CarsDirect is trying to own the Internet consumer even more aggressively than the lead-generation services,' said Chris Denove, director of consulting operations for J.D. Power and Associates of Agoura Hills, Calif.
NO FUSS, NO MUSS
Unlike Web services that simply sell leads to dealers, CarsDirect.com wants to automate the entire vehicle transaction. It promises a 'complete' online shopping service: research, upfront pricing, financing, even vehicle delivery to homes and offices on flatbed trucks. CarsDirect.com also throws in a free six-year roadside-assistance plan.
The Web service buys vehicles from dealers and resells them to customers.
When it announced its new funding last week, CarsDirect.com named Robert Brisco, the 36-year-old former president of theme park Universal Studios Hollywood, its new CEO. Brisco, who earlier in his career was a senior vice president of advertising, marketing and new business development at the Los Angeles Times, replaces Scott Painter, who becomes vice chairman.
Since its startup late last year, CarsDirect.com has handled 6,000 vehicle transactions representing $150 million in new-car sales, Painter said. It now handles more than 1,400 deals a month. The service is clicking with online shoppers who still approach car buying with 'fear and frustration,' Painter said.
'It's a true alternative to buying a car off-line,' he said.
LEARNING THE BUSINESS
CarsDirect.com, in Culver City, Calif., caused a stir in May when it launched its service nationally, and one of its investors said the company would buy dealerships and shut them down. The Web company quickly backtracked.
Still, with all that new funding, Painter said, the company does not plan to embark on a major dealership acquisition program.
However, he holds out the possibility of buying a dealership for what he calls 'legal and regulatory' reasons. Painter declined to say whether CarsDirect.com has been classified as a broker in some states. But he acknowledged that 'there's a lot of benefit' in becoming a dealer to learn the business.
'We're not going to be in the retail business on the inventory and allocation side,' he said.
Out of the 500 people now employed at CarsDirect.com, fewer than 40 are involved in buying vehicles directly from dealers. The company has dropped its initial policy of pricing vehicles at invoice plus 1 percent, a move that led to underpricing vehicles by about $1,500 across the board, Painter said. The company now makes deals at market prices, he said.
CarsDirect.com learned that some vehicles in high demand, or simply in scarce supply, can command a big premium over invoice. Other vehicles can sell below invoice price.
CarsDirect.com is now breaking even on its vehicle deals as it learns the pricing ins and outs of each local market, Painter said.
The real money for CarsDirect.com will come from the finance, leasing, insurance and warranty products it will sell along with the cars and trucks, said Brisco, the new CEO.
'It's huge,' he said. 'We think that's a major portion of our business.'
Isn't that also a major part of the dealer's business? Painter promised that dealers who sell vehicles to CarsDirect.com will continue to earn 'incremental income' as well as handle the trade-in. CarsDirect.com plans to introduce a service that will automate the trade-in as part of its 'seamless' online service, Painter said.
Denove of J.D. Power said CarsDirect.com has a lot going for it: The service comes closer to putting the entire transaction online, it fills a need for shoppers who don't want to talk with a salesperson, it relieves dealers of the time-consuming process of handling Internet shoppers, and it shows pricing.
'The importance of (pricing) cannot be underestimated, because consumers are turning to the Internet to determine what is the fairest price to pay for a vehicle,' he said.
HEAVY LIFTING AHEAD
Still, big hurdles lie ahead. CarsDirect.com, Denove said, will have to find a way to sell vehicles at prices that compete with traditional dealers, and it will have to greatly scale up its labor-intensive service.
Brisco said CarsDirect.com would work aggressively to promote itself as the 'brand leader' in the online-buying service industry. Earlier this month, for example, it announced a three-year deal to sponsor a NASCAR Winston Cup race at the Las Vegas Motor Speedway.
With hefty financial firepower behind a brand campaign, Brisco doesn't see a conflict with manufacturers trying to promote car and truck brands or dealers seeking to build retail brands. All that frenetic branding activity will be 'complementary,' he said.
Painter is convinced that the CarsDirect.com approach will succeed over the long run. He can tell by the tears, and not the kind that some people associate with car shopping.
When his company delivers vehicles, Painter said, buyers are 'crying with happiness.'