Brian Stafford sits at a desk of two card tables, laboriously pecking at a laptop. His office has paper-thin walls not 12 feet apart. He has a chair and a two-shelf bookcase. That's it.
It is Sunday. The office building in Austin, Texas - headquarters for carOrder Inc. - is like a ghost town. It has an open floor cluttered with chairs, card tables, computers and stacks of paper. A miniature basketball hoop sits against the wall. It looks like a company in transition. But is it starting up or shutting down?
'This is actually a big step for me,' Stafford says. 'I've always shared an office with whoever the finance guy was.' He adds after a pause, 'I kind of miss sharing an office with someone.'
Stafford is president of carOrder Inc. He is 24. Early last year, his financial backers gave him $100 million to launch an Internet-savvy chain of dealerships. His strategy: Buy 100 small dealerships on the edge of heavily populated cities and market the vehicles through the Web. CarOrder.com would sell the majority of its cars directly online, then deliver them to customers' houses. The dealerships would seldom be seen.
Stafford's plan looked good on paper, but he couldn't carry it out. One year later, he had spent much of his $100 million investment, with just one dealership to show for it. Despite Stafford's efforts - he often worked six or even seven days a week - his company failed.
Stafford's story is emblematic of a wave of Internet entrepreneurs who thought they could revolutionize the business of selling cars. Now they are struggling to survive. Microsoft's Carpoint swallowed DriveOff.com. Greenlight.com struck a marketing deal with Amazon.com. And reports say that Internet giant Autobytel is hunting for new investors.
Stafford and his peers had not counted on the resilience of the old economy businesses - traditional auto dealers - they expected to replace. This story details the triumph of the old economy.
Stafford started as an Internet entrepreneur three years ago while he was still in college. An auto dealer hired him to build a Web site; Stafford thought it was 'pretty flashy.' In 1998, he graduated from the Wharton School of Business with three degrees, ready to start his own company.
While in school, Stafford met talent scouts from Trilogy Inc., a consulting firm that wanted to launch an Internet car-selling service. Trilogy, based in Austin, raised $100 million to bankroll the project. First, Stafford planned to set up an Internet brokering operation that bought vehicles from dealers, then sold them to consumers. Meanwhile, he would start buying his own chain of dealerships.
Stafford found himself president of an online auto broker that intended to change the retail world. But dealers used their political clout to block his efforts to sell cars directly over the Internet. And with the help of automakers, dealers also launched their own Internet sales channels. Just a few months after Stafford launched his company, he was forced to lay off hundreds of employees.
It did not take long for him to conclude that brokering was a hassle. He had a better idea. With Trilogy's financial backing, the whiz kid went forward.
Stafford sits at the table of D'Zejay's Tex-Mex restaurant nestled in Austin's green rolling hills a few miles from his office. He looks too young to be an executive in the auto industry. To his right is his key assistant, Jerry Ducharme, a former dealer relations expert from Ford Motor Co., a thin-faced, white-haired man with an ever-present grin. The question comes: What would you tell companies trying to make it as online car brokers?
Stafford sets his coffee cup on the table next to his banana-nut muffin, leans his head back and laughs, as though he had left the game a million years ago. He exchanges glances with Ducharme, who also is cracking up. Stafford leans in again, smiling, 'I wish you luck.'
Stafford looked like a winner last January at the National Automobile Dealers Association convention in Las Vegas. He drew big crowds at the convention. This man, the dealers heard, would become the first e-dealer. The reactions he got? Raised eyebrows. Scowls. Some dealers walked away, determined to grab their own share of cyberspace.
But Stafford was pleased. He left that convention with letters from a handful of dealerships - which controlled 35 franchises - indicating they would sell vehicles to carOrder.com. Of course, it would take time. CarOrder.com's brokering business had sold 2,000 vehicles the previous month. And this was after minimal media fanfare. Aside from a couple of ads in The New York Times, the company's marketing budget was tiny. It had drawn customers from niche Web sites for car buyers and enthusiasts - even personal Web sites that had started drawing high amounts of traffic. No Yahoo! No Microsoft. No Super Bowl ads. Grass roots is what Stafford called it. Still, as he found, even the least expensive marketing plan does not guarantee a greater turnaround when it comes to brokering.
'It was the means to an end,' Stafford said. 'Our plan was to transition from brokering to owning stores. But the brokering was too expensive and not a very good business. And buying stores took a little longer than we initially expected.'
They once joked that carOrder employed more lawyers to untangle brokering laws than programmers to build its technology. Then came the downfall: Brokering was losing too much money, too fast. CarOrder laid off 100 employees in May. A larger cut came in August. When all was done, the company would drop from about 350 employees to 30. Its Web site would be as barren as its office on a Sunday morning.
Asked how the cutbacks felt, Stafford paused. 'It was tough,' he finally says. 'It was tough for everyone. It was a tough call but a right call.' It was tough. He repeats the phrase nine times.
Brokering was simply too expensive. Others in the industry were finding that out, too. But why was it so difficult to buy a dealership? Ducharme, who joined the company in April before the first shakeout, says they were hobbled by unclear communications with the dealers' association. As carOrder was trying to acquire franchises, NADA was consulting with automakers, trying to prevent dot-coms from selling cars.
'This is the core of the misunderstanding,' Ducharme said. 'A lot of dealers and manufacturers thought that the dot-coms would get some sort of super-franchise that would allow them to sell cars for less and less, bypassing the dealers.'
Stafford may have fed the misconception when he claimed carOrder would shave $1,000 off the price of a car. But he has a simple explanation why it took so long to buy dealerships. 'Bright-eyed enthusiasm,' he says. 'When you're really excited about doing something and you think you can see that big picture out there, you want to make it happen as quickly as you can. Bright-eyed enthusiasm. That's what it was more than anything else.'
`We are dealers'
Stafford halted his brokering business in August. Two months later, CarOrder.com switched its name to carOrder Inc. On November 2, the company purchased its first dealership, a Nissan store in Palmdale, California. Now, Stafford and Ducharme have a new mantra: 'We are dealers.'
They own a dealership, and they say they will own more soon. They want automakers and dealer associations to treat them as they would any other dealership. Trilogy has given them another $25 million. And they say they still have some portion of the $100 million - they won't say how much - that Trilogy gave carOrder a year ago. They will open their Web site again, and they will focus on Northern California, where they will buy their next few dealerships.
Dealers once feared that Internet companies would never have to spend a fortune buying bricks and mortar. But now it seems that carOrder is an emblem of victory for the old economy.
The troubles afflicting carOrder are typical of the upheavals within e-commerce. Most of the independent Internet car sellers are struggling to survive. Dealers are flocking to the Web. More than 80 percent of dealers use Web sites to interact with customers, according to NADA. Even the automakers have begun touting their member dealer groups on the Web. The market is poised for a shakeout.
Brokers are sending armies of lawyers nationwide to contest the state laws banning online auto brokering. But it seems unlikely they will outmaneuver dealers who have spent decades donating money to lawmakers. The dealers have used their political power to block factory-direct selling. They are overpowering Internet brokers, too.
Greenlight.com has spent $15.2 million to become the exclusive auto retailer of Amazon.com. CarsDirect.com got a needed boost when Roger Penske invested $17 million. The former race car driver supplied the broker with his dealerships' inventory in exchange for a 10 percent share of its equity.
AutoWeb and Autobytel are two publicly held consumer referral sites that post inventories of their customer dealers online. Both have more than 5,000 participating dealers. Neither has earned money since opening in 1995. They face a dilemma: If they charge higher fees to participating dealers, fewer dealerships will sign up. And the fewer dealers they have, the less useful they are to their online shoppers.
None of the privately held companies appear to be earning money, either. The AutoVantage buying service has sold itself to the more popular AutoNation. Cars.com, despite being owned by a Chicago joint venture of several newspaper chains, signed a $10 million deal last summer to market itself on AltaVista. And now the automakers have entered the fray. General Motors and Ford Motor Co. have moved aggressively to market cars and trucks online.
Internet auto retailers are in the second phase of the three-phase Internet car-selling phenomenon, according to Forrester Research, a consulting firm in Cambridge, Massachusetts. The first phase saw online shoppers use the Internet as a tool for information. The second phase will see more of those shoppers buying online, and the third phase will integrate order-to-delivery.
'The moves that the companies are making today are going to end the online auto free-for-all,' says Baba Shetty, a Forrester research analyst. 'For a while, it seemed that an immutable law of the automobile industry - scale economics - did not apply to online sales.'
Now, Shetty says, car selling over the Internet will give the auto industry economies of scale. Until now, too small a percentage of Internet shoppers bought online. That will change as consumers become more willing to use the Internet to make major purchases.
Who will dominate e-retailing in the United States? Likely, it will be the companies with well-known brand names such as Microsoft or GM. Stafford has to wonder whether there is room for an independent company that markets its own dealerships through low-profile Web sites - dealerships with minimal sales staffs.
Harold Wells, chairman of NADA, which recently welcomed Stafford as a member dealer, thinks carOrder faces a battle.
'It would be very, very difficult for them to be serving the consumer that way,' says Wells. 'I don't think the consumer is going to separate himself from the level of service that the traditional dealer is going to provide. I don't think there's enough of a difference in price in order to make that work.'
Stafford seems undaunted. He failed at brokering but managed to buy a dealership. Despite a tiny ad budget, he sold more than 1,000 cars a month. He lost most of his initial $100 million bankroll but attracted additional funds from his financial backer. Still, Stafford's plan is hugely risky. His setbacks were costly enough to kill the average Internet startup. Although he's determined to continue buying dealerships, carOrder will live by the Web. And the old economy auto industry appears eager to wage battle. Sitting on the second shelf of Stafford's office bookcase is a pair of boxing gloves. He will probably need them.
You can e-mail writer Joe Kohn at [email protected]