Driveway: The lot you can visit in slippers

While the biggest chunk of Lithia Motors Inc.'s growth strategy is its acquisition ambitions, a strong second is the rapid expansion of its digital platform, Driveway.

By the time Lithia's five-year plan has played out, CEO Bryan DeBoer projects that Driveway will generate $9 billion in revenue — roughly three-quarters as much as the whole company did in 2019 and 2020 each.

In the drive to build a truly nationwide retail network, the ability to efficiently sell — and buy — vehicles online relieves the need to have a store in every town while also addressing a crucial pain point for consumers who do not enjoy or appreciate traditional auto sales practices. The profits from the online sales, DeBoer said, help fund physical acquisitions.

"The two strategies have to work together," he said. "Without the infrastructure, Driveway doesn't work, and without Driveway, we wouldn't have had the capital to drive shareholder value."

DeBoer aims to have a dealership within 100 miles of every U.S. consumer. Combined with Driveway, Lithia would then be able serve the entire country and not have to buy more stores to keep growing.

Driveway's foundation was paved with a series of strategic actions in 2017 and 2018.

In tech-forward Pittsburgh — home to Argo AI and other automated-driving experiments — Lithia acquired Baierl Auto Group in 2017 and added eight Day Automotive dealerships in early 2018.

Then Lithia hired George Hines, a digital commerce executive and former consultant, as its first chief of innovation and technology.

Investors, DeBoer said, fretted at the idea of spending $15 million to develop an online retail and finance platform and asked why the company didn't use the cash to buy more stores instead. But it was clear to him that a large number of consumers wanted to do business online — any time, any place — and the opportunity was immense.

"We probably spent five or six times that [initial $15 million]. We're probably pushing $75 [million] to $100 million. But we think about investment — that's a small amount compared to being able to achieve the 50-50 plan," he said, using his shorthand for the twin goals of $50 billion in revenue and $50 in earnings per share.

Later in 2018, Lithia invested $54 million in online used-car retailer Shift Technologies. The plan was to learn as much as possible from the San Francisco startup and test out the findings on the multidealership platform in Pittsburgh, Baierl.com.

In 2019, Lithia rolled out buy-from-home and then sell-from-home capabilities. Buy-from-home used a variety of vendors, including Roadster, Kelley Blue Book and J.D. Power. Sell-from-home was developed in-house in less than two months.

"Our ultimate state is to be able to provide consumers, if they choose, the ability to do everything in their slippers from home," DeBoer said.

Driveway officially launched last July, the same day as the five-year plan, and DeBoer said it's on track to reach a 15,000 annualized run rate by the end of 2021. It's maintained by 110 software engineers and data analysts in Portland, Ore., at the company's Driveway Innovation Center.

Late last year, Lithia's captive lender, Driveway Finance, went online and has been originating about 1,000 auto loans per month.

With a robust online presence — the ability to sell, buy, service and finance vehicles anywhere in the U.S. — Lithia and other would-be giants have the potential to overwhelm smaller groups and independent dealers, said Alan Haig, president of buy-sell advisory firm Haig Partners.

"At some point you start to use a digital strategy rather than physical dealerships to serve customers," he said.

"And what that means is you're slowly taking share away from other dealers that don't have a successful digital strategy or don't have the scale necessary to compete with an operator like Lithia."