Startups see used-vehicle space ripe for disruption

Carvana CEO Ernie Garcia repeatedly points out the extreme fragmentation of the used-vehicle market. His oft-cited leading proof point? That the largest player in the space — CarMax — has just 2 percent of the market.

For Garcia, that means the door is wide open for other players, namely the online used-vehicle retailer he co-founded in 2012. Seven years later, Carvana, now a public company, is not yet profitable, but it's on pace to sell nearly $4 billion in used vehicles in 2019 and has a market capitalization approaching $11 billion.

And other entrepreneurs want in on the action.

After a first wave of used-vehicle startups launched early this decade, more new ventures are arriving, keen on upending different aspects of the market and grasping investor backing. Some are well-versed in auto retailing, while others are newer to the business. Established disruptors such as CarMax and Carvana have provided inspiration to some of them. The new wave of players all identify pain points or inefficiencies they are betting on exploiting.

The timing for these Web-based, used-vehicle ventures could be right, said Brad Erickson, senior analyst at investment bank Needham & Co.

"There's an opportunity for a few brands to make a name for themselves and do it efficiently in a way that physical car dealers cannot," Erickson told Automotive News.

Behind Erickson's view: Vehicle shoppers are now starting to get comfortable with the idea of buying a car online. That shift is still in the beginning stages, he said, but it will pick up as more young people comfortable with doing business online or through mobile apps buy cars.

Moreover, the market is huge. Cox Automotive estimates that 39.2 million used vehicles will be sold in the U.S. this year.

Beyond Carvana, early startups include online retailers Vroom and Shift Technologies, both of which started in 2013 and have attracted hundreds of millions from investors, including from traditional dealership groups AutoNation Inc. and Lithia Motors Inc. Vroom CEO Paul Hennessy has estimated the used market as worth $750 billion.

Another early player, Beepi, failed in late 2016, but a piece of it merged with Fair, a used-vehicle subscription service that has attracted hundreds of millions of dollars from investors and encountered its own challenges on the path to profitability.

Other used-vehicle ventures include:

• Blinker, founded by a former dealer in 2013, which is expanding and gaining new funding.
• Tred, which launched in 2013 to offer test drives but later shifted its model to online peer-to-peer used-vehicle sales.
• Current Automotive, started in 2018 as an online reseller of electric vehicles.
• Swap Motors, which launched in 2016 to auction privately owned cars to dealerships.
• Carvenience, a 2017 startup that buys used vehicles directly from consumers.
• Lazy Chimp, which went live in 2018 to put used-vehicle sellers in touch with dealers.
• R8TR, started this year to provide on-demand used-vehicle inspections.

Blinker essentially removes traditional dealers from used-vehicle transactions and shifts it all online.

"It really was about trying to give the private individual the same tools that the dealer has, to be able to buy and sell their car," founder and former dealer Rod Buscher said. "Craigslist is such a terrible experience, because there's no safety and security. There's no verification."

Buyers can get approved with a picture of their driver's license and by answering a few questions. Blinker completes titling and taxes. Blinker went live in 2016 and in July said it had landed $10 million in new capital. Operating in California, Colorado, Florida and Texas, it's free for both buyers and sellers, making its money on the financing end.

Buscher, who spent four decades in auto retail and once sold stores to AutoNation, said Blinker has a big expansion in the works and is working with a large automaker to help it unload off-lease vehicles.

Alex Johnson, who co-founded Swap Motors in the Chicago area in 2016, is looking to disrupt both the digital and physical aspects of used-vehicle transactions.

"My experience with auto was being a consumer," Johnson said. He bought a used BMW 7-series a few years back but never drove it, so he decided to sell it.

Shopping it around to several local dealerships, he said he was greeted with a "huge range in price, with no rhyme or reason, no justification behind it."

Swap Motors began providing online auctions of privately owned vehicles to dealers.

But when the volume of sellers began to drop off — Johnson attributed that to dealer bidders trying to get vehicles for wholesale prices — Swap Motors also launched an online private-seller-to-private-buyer marketplace.

"Not a new model; Craigslist has been doing it for 20 years; Facebook Marketplace, OfferUp — they're all doing the same thing," Johnson said. "But what I didn't like about their services is that it's entirely digitized, and selling a private-to-private transaction is not exclusively a digital process. It's more of a hybrid."

Swap Motors has opened physical locations where buyers and sellers can meet, and the company walks them through the transaction, helping with title transfer and loan payoffs. The company has five locations in the Chicago area.

"Ultimately, our plan is to work with a national auto service center, kind of like a Jiffy Lube or a Pep Boys, to conduct the evaluations for us," Johnson said.

The company does not hold any inventory or sell any vehicles.

Lazy Chimp, another Chicago-area startup, does hold inventory, but only as a last resort. Like Swap Motors, Lazy Chimp puts sellers in touch with dealers, letting dealers bid on the cars. Dealers pay a flat $199 fee.

Inspiration for the venture came in part from studying CarMax.

While CarMax is a leader in giving people an offer to buy their vehicles on the spot, the process still mostly entailed a private seller having to locate a physical CarMax store, said Tariq Khan, general manager of business development.

"It really kind of blossomed off of CarMax's success and saying, 'Hey, we can do this a better way,' " Khan said.

In development since 2015, Lazy Chimp's website went live a year ago. Most transactions are in the Chicago area and other parts of Illinois, but it has had sellers from other Midwest states.

It plans to expand to Indiana, Michigan, Wisconsin and Ohio in the next 12 months, Khan said.

Lazy Chimp is also partnering with automakers and their finance divisions as a place where customers can turn in leased vehicles and the relevant automaker's dealership network can make offers on the vehicle.

"So it jumps a tremendous amount of steps and cost for the manufacturer," Khan said. He declined to identify the automakers.

Carvenience, on the other hand, basically just unloads whatever it buys. The Decatur, Ga., company's pitch is that private sellers need not head to a dealership — Carvenience will make them an offer online and come to their homes to pick up the vehicles.

"It's not like we've reinvented the wheel," said Markus Neudorfer, director of operations. "We just made the wheel better."

Carvenience sells the purchased vehicles at auction, though Neudorfer declined to name the auction provider it uses. "We just need to dispose of the units we purchased," he said.

The company operates only in the Atlanta area right now, but he said expansion is imminent. "We will go national," he said.

While younger users trust the come-to-your-house concept, Neudorfer said some older sellers want to physically unload their cars elsewhere. So the company plans soon to open a brick-and-mortar drop-off center, likely in the Atlanta area.

One key aspect of the used-vehicle market that Carvenience is exploiting: It's getting harder and harder to find good inventory.

Neudorfer said the company has developed a knack for grabbing one- or two-owner, accident-free vehicles.

"That's the car that every dealer wants," he said. "A lot of dealers can retail that car, and we're just taking it right out of the market before it gets into it and providing it to a dealer."

Even condition reports are not safe from attempted disruption. R8TR is a newly launched shared-economy app in the mold of Uber. Instead of sending drivers to pick up passengers, it dispatches prescreened vehicle inspectors to do prepurchase inspections.

"R8TR was ultimately created out of necessity," said Fallon, Mo.-based dealer Rocky Hauhe, who co-founded the company.

Because it was harder to find good inventory at auction, Hauhe pursued Craigslist and Facebook Marketplace and hit the streets to buy vehicles.

After being frustrated by the condition of some vehicles he found, Hauhe teamed up with Tom "TJ" Kirgin to develop the R8TR app. It offers condition reports at less than 50 percent of the lowest cost of traditional inspections and performs them in 48 hours or less, Kirgin said.

In addition to private buyers, there has been interest from dealers in using the app at auctions in lieu of traditional condition reports, Kirgin said.

With the advent of the newest players, established retailers and the first-wave startups have not sat idle.

CarMax, plus some of the country's largest franchised dealership groups, are rolling out their own digital retail offerings, saying customers should be able to do business when, where and how they want to.

Carvana has brought financing in-house. Vroom partnered with Chase to give sellers cash offers on their vehicles within minutes.

Despite the burgeoning opportunity, the winners are far from decided.

As Vroom's Hennessy has said of the used-vehicle market: "This is massively fragmented and owned by no one."