Do Americans buy more new or used cars?
Why Detroit Loves That Used-Car Smell
Investors in used-car retail should watch out for auto makers’ move into this space, but should probably ease up on the panic button
A Ford used-car dealership in Detroit.
By Jinjoo Lee, WSJ
Jan. 25, 2022 7:03 am ET
General Motors and Ford F are veering into online used-car sellers’ lane. How quickly can they overtake them?
GM announced earlier this month that it will launch a new website, CarBravo, which will help its U.S.-based dealers market and sell all types of used cars online, not just its models. That would place it in direct competition with online used-car retailers such as Carvana, Vroom, Shift Technologies SFT +7.45% and even CarMax, KMX -1.47% which has both a bricks-and-mortar and e-commerce presence. Ford started inching into that territory last year when it launched a platform, Ford Blue Advantage, that also lets dealers list and sell used cars, though it is limited to its own-brand certified vehicles.
The move would help GM take a piece of the red-hot used-car market. Almost three times as many used cars were sold in 2021 as new vehicles in the U.S., according to estimates from Cox Automotive. This year new-car sales are expected to improve slightly, per Cox Automotive estimates, but the global chip shortage still isn’t resolved, and most of the action will still come from the used-car market. Historically, the only way auto makers could derive profit from the used-car market was through indirect means, such as charging fees to dealers for parts that they needed to recondition preowned, certified vehicles, notes Michael Montani, analyst at Evercore.
Investors in used-car retailers seem to have been properly spooked: Since GM’s announcement, CarMax and Carvana have collectively lost roughly $3.6 billion worth of market value, equivalent to about three years’ of CarMax’s projected net income last fiscal year. While investors should make sure not to let CarBravo out of their view, they might also want to ease up on the panic. The success of GM’s online platform will to some extent depend on how many dealers actually end up participating in the program and which vehicles those dealers decide to list. GM hasn’t given much detail on revenue-sharing, but Mr. Montani says that GM will likely take a listing fee from dealers on sales originated through the website, akin to how an online marketplace might charge fees to its sellers. If GM were to borrow a page from other online marketplaces, it might add on fees for other services, such as for providing vehicle appraisals.
Lithia Motors, LAD 0.63% one of the largest automotive franchises, has an online platform of its own—Driveway—that sells both used and new cars. Chief Financial Officer Tina Miller says GM’s platform could be a competitor to Driveway but stresses that GM’s move seems more geared at providing options for smaller dealers that don’t have the capital to invest in e-commerce.
Dealers rely fairly heavily on used-vehicle sales themselves. Used cars made up roughly 35% of dealership sales in the first half of 2021, according to the National Automobile Dealers Association, which notes that roughly two-thirds of used cars that dealers sell come through trade-ins.
Used vehicles are also more profitable to new-car dealers than their bread-and-butter business. Even in 2016, well before last year’s surge in used-car prices, dealers reaped 17% more gross profit on used vehicles than new ones, according to data from NADA. Sourcing used-car inventory, though, has been tough for smaller, independent dealers. Some 42% of used cars sold by dealers were sourced through trade-ins when customers bought new vehicles, according to NADA, and shortages have crimped such transactions.
If GM’s website helps some of them source those vehicles, it could end up being helpful. GM hasn’t clarified how it might handle the vehicles it sources that way, but one possibility is that it would offer the cars it sources through the website to dealers within that ZIP Code.
In any case, the used-car market remains fragmented. CarMax, the largest used-car retailer, had a roughly 2% share of the market back in 2020. The top 10 largest sellers collectively make up less than 10% of the used-car market, notes Ms. Miller.
What should probably concern used-car retailers is how much gas GM has in its tank should it decide that it is worth spending heavily on gaining used-car market share. Carvana and CarMax each spent less than $300 million on advertising in 2020. GM’s advertising budget is in the order of billions every year. Mr. Montani estimates that GM could take on sales volume that rivals CarMax and Carvana in four to five years.
For now, it is too early to tell how attractive the offering will be for GM dealers or for GM itself. Objects in the mirror aren’t necessarily as close as they appear.
Write to Jinjoo Lee at firstname.lastname@example.org