SFT - Shift Technologies

[Broeb22]

At this point, Carvana, Vroom, and Shift Technologies are now all public companies operating in the online-only space.

 

I don't want to preclude this conversation from other traditional dealer companies like CarMax, AutoNation, and Lithia, because I think they very well could evolve to offer competitive services to the online-only dealers.

 

I'm mainly interested in which of these three online-only companies may have an advantage of the others.

 

Shift Technologies seems interesting to me because of slide 7 from the linked presentation below. Shift claims to be focused on older cars vs. Carvana and Vroom being more focused on newer cars.

 

https://investors.shift.com/static-files/864618e5-6c42-4faf-ba5a-68d20c223ced

 

I think this different focus could be a source of advantage over time as Shift builds technologies and processes designed to specifically deal with the challenges associated with purchasing older vehicles (greater variation in quality, challenges in pricing due to quality differences, less financing available, lower credit quality applicants, etc.).

 

Also, by focusing on this value segment of the used car market, Shift is "fishing where the fish are". Specifically they are competing most directly with the small-lot used car dealers that are less sophisticated than the large auto dealerships that Carvana and Vroom are potentially competing against.

 

I think Carvana and Vroom will certainly try to expand their TAM by going down-market, but the question is will their processes be transferable to a market segment where the inventory is increasingly less commoditized?

 

 

 

[KJP]

One potential issue is covering the high fixed costs of the logistics system.  I assume it costs roughly the same in overhead to acquire (not price, but SG&A), transport, recondition, photo, and transport again to the online buyer an $8,000 car as it does an $18,000 car.  So, what is the average gross profit per unit on a used car that sells for say, $8,000, versus one that sells for $18,000?  If it is substantially lower, then you need to push proportionately more volume through your logistics system to cover that system's fixed costs, which presumably would take longer and require even more capital than Carvana's model. 

[Jurgis]

I still cannot wrap my head around how someone can buy a used car without test drive first. At least at regular dealers, I've been given obvious lemons - cars that do not start !!!  ::)  ::)  ::) - to test drive. What would you do if you bought such car without test drive? Yeah, you can return it, but that's a huge hassle time/money/documentation-wise even if the return is free.

[KJP]

I still cannot wrap my head around how someone can buy a used car without test drive first. At least at regular dealers, I've been given obvious lemons - cars that do not start !!!  ::)  ::)  ::) - to test drive. What would you do if you bought such car without test drive? Yeah, you can return it, but that's a huge hassle time/money/documentation-wise even if the return is free.

 

Good question.  Has anyone bought a car from Carvana then "returned" it within the 7-day period (or whatever timeframe you get)?  If so, how much of a hassle (if any) was it?

 

Note that on slide 5 of the linked presentation, Shift refers to "At home test drives"

[Broeb22]

One potential issue is covering the high fixed costs of the logistics system.  I assume it costs roughly the same in overhead to acquire (not price, but SG&A), transport, recondition, photo, and transport again to the online buyer an $8,000 car as it does an $18,000 car.  So, what is the average gross profit per unit on a used car that sells for say, $8,000, versus one that sells for $18,000?  If it is substantially lower, then you need to push proportionately more volume through your logistics system to cover that system's fixed costs, which presumably would take longer and require even more capital than Carvana's model.

 

I think based on Shift's information, anyone investing in these companies has to wrestle with that possibility as either Carvana will stop growing as quickly if they exhaust the low-mileage market, or they will also see their gross profit per unit stagnate if they go lower end.

 

My bet would probably be that the independent dealers are likely also earnings greater profits per car to cover their own fixed costs, so maybe this issue is moot?

 

It will be interesting to follow for sure...