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Auto-sale startups are dealing in dealerships

by GABRIELLE COPPOLA BLOOMBERG NEWS | March 27, 2017 at 1:56 a.m.

The auto dealer looked like a ripe target for disruption when retailing moved online. Now that startups have tried and failed to beat the car salesman, many are taking a different route: catering to them.

After watching predecessors like TrueCar Inc. and Ford Motor Co. stumble in their attempts to bring more Amazon-like e-commerce to car shopping, a new wave of auto finance upstarts has emerged. Rather than fight a dispersed and politically connected dealer industry, they're bringing the country's 17,000 new-car dealers into the digital age, meaning consumers aren't going to be bypassing the dealership any time soon.

"The market is so big that there's nothing preventing someone from creating a new dealership model, but I want to go after the biggest part of the pie, which is how consumers buy cars today," said Kevin Singerman, founder of AutoFi, a 2-year-old San Francisco-based startup that began piloting its mobile financing app with Ford dealerships this winter. "That's a much more attractive opportunity."

Almost 20 years after the Internet brought price transparency to the U.S.' almost $1 trillion-a-year new car sales market, several steps of the shopping process have migrated online. But as buyers turn to Kelley Blue Book and for price comparisons and Consumer Reports for model reviews, they remain unable to finish the car-buying process without a visit to the dealer. The average consumer visited about 2.8 dealerships before buying a car in 2016, compared to 3.5 in 2012, according to JD Power & Associates.

The portion of the buying process that's yet to be cracked -- solidifying financing and insurance -- remains a profit center for dealers and has become a target for startups, though most are now taking aim with dealers' blessings. The new apps replace tedious paperwork with a few taps and swipes on a smartphone, but the underlying economics are little changed.

In most of these digital-age car-financing apps, the same banks quote the same rates they would in a dealership, and the so-called "dealer reserve" -- the fee the dealer gets for being an intermediary between lender and borrower -- remains baked into the monthly car payment. That's the case for Irvine, Calif.-based mobile financing app AutoGravity, said chief marketing officer Serge Vartanov.

The startup counts several ex-finance executives from Daimler AG among its founders and is backed by the German carmaker. The founders visited dealerships and lenders before writing a single line of code, Vartanov said.

AutoGravity is looking to improve the car shopping experience "without disrupting anyone," he said.

AutoGravity makes a "white label" version of its app that dealers can roll out with their own branding. It allows shoppers to pick a car, find a dealer and apply for credit approval all from their couch. AutoFi has a similar model, letting shoppers apply for financing from their phone -- before going into a dealership to sign the paperwork. Both make money by charging dealers and lenders a fee once a sale goes through on the app.

"It feels nice being able to go through the loan process without having to dress up and go down to either a bank or heaven forbid the dealership," one AutoGravity user, Justin Turpin, wrote in a review on the Google Play app store. "Of course once you do get the loan you have to put your pants on to get the car."

The startups have good reason to tread lightly on traditional dealer turf. Scott Painter, former head of vehicle pricing site TrueCar, stepped down in late 2015 after angry dealers nearly bankrupted the company by withdrawing from the site over concerns it was squeezing them on pricing. Jacques Nasser, a former Ford chief executive officer, was forced out in 2001 after his attempts to sell vehicles online incurred dealer wrath.

There are also practical reasons for dealers to stick around. Most consumers want to test drive a big-ticket purchase like a car, and dealers need to do in-person inspections to assess the value of a trade-in, said Chris Sutton, an analyst with JD Power. They also do repairs and maintenance work, and with cars growing more complex and software-laden, that work becomes more specialized.

Regulations also work in dealers' favor. Franchise laws that have been on the books for decades were put in place to prevent manufacturers from opening stores that would compete directly with mom-and-pop dealers. Tesla Inc. has been challenging the direct-sales ban on a state-by-state basis, with mixed results.

To be sure, there are startups in the U.S. that have already put the entire car buying process online -- including those final steps dealers are gripping tight. But they're confined to the used-car market due to franchise laws and manufacturers' reliance on dealer networks. Used-car startups raised $1.1 billion globally last year, down from a peak of $1.2 billion in 2015, according to data from CB Insights.

Vroom is a three-year-old company that buys, refurbishes and delivers used cars to shoppers' doorsteps without making them visit a dealership. The company sold 50,000 units last year and had $1.1 billion in revenue, according to CEO Paul Hennessy.

By comparison, AutoNation, the largest dealership group in the U.S., sold 225,713 used cars in 2016 -- plus 337,622 new ones, according to its annual report. Hennessy says he has enough scale to avoid charging customers a dealer reserve fee on financing, a win for customers who also get to skip the dealership.

Neither Vroom, nor used-car online marketplace Shift, which offers online credit approvals and doorstep delivery, seems too intent on beating dealers. They say the market is big enough to accommodate everyone, and they aren't planning to push their dealer-free used-car strategy into the new-car market.

Dealers themselves are embracing technological change because they realize they have no choice but to accept the dominance of e-commerce, said Sutton of JD Power.

Geri Lynn, the owner of a Nissan dealership in Houma, La., bought new web tools earlier this year that allow shoppers to negotiate a whole purchase online and just come into the dealership to sign the paperwork. Despite all the change, she's confident enough to be investing a couple of million dollars in remodeling her dealership.

"We don't make $5,000 on a used car like we used to, but I don't know any dealers in this country that are not earning a good living," said Lynn, who's been in the business since 1985. "Dealers are smart and they know how to make money, and they're going to find ways to make money even when the rug gets pulled out from under them."

SundayMonday Business on 03/27/2017

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