Restructuring at Canada Drives and recent turmoil within the wider North American online used-vehicle segment have cast a shadow over the prospects of retailers with fully online sales models, as industry insiders, including Canada Drives CEO Cody Green, grow doubtful about the profitability of automotive ecommerce.
The Vancouver-based company filed for and was granted creditor protection March 20, claiming in a release that its online used-vehicle sales business was “no longer viable” in the long-term. Green pointed to the high cost of holding inventory, among other industry headwinds, in a March 19 affidavit submitted in support of the company’s court filing.
Colin Richardson, principal of consultancy Omni-Channel Automotive Solutions, as well as business development lead for North America at auto tech company Phyron Software, said this assessment of the online sales model is “bang on.”
“It’s not feasible in its current iteration,” he said, adding that dealerships have made up ground on online sellers since early in the pandemic, eroding the new entrants’ competitive advantages.
“The differentiators that they had going to the consumer — buy online, delivery to home, things like that — are so easily replicated by a solid, high-performing dealer group.”
MANAGING INVENTORY KEY
Shahin Alizadeh, CEO of the Toronto-based Downtown AutoGroup, said dealers are already closing the gaps disruptors are working to exploit.
“That hole in the auto industry is shrinking in a massive way.”
Most dealers recognized over the past few years that they needed to embrace new technologies to stay relevant, Alizadeh said. Forward-thinking dealers have turned to new tools to manage inventory, keep tabs on the wider industry, and reach and retain customers, he added.
Experience also paid dividends as used-vehicle prices ran up, peaked and began a slow decline. According to the Canadian Black Book Used Vehicle Retention Index, values hit their highest point in March 2022 before declining 5.4 per cent through December.
In response, dealers slimmed down their inventories, even if it meant taking losses, Alizadeh said, while online sellers did not necessarily do the same.
“When you don’t manage your inventory based on realities in the market, and hope and pray that if you create it, the customers will come, eventually it’ll catch up with you.”
Viewing inventory as a potential “landmine,” one Vancouver-based online vehicle retailing startup has structured its business to avoid owning vehicles altogether.
“We will never hold inventory, and I say never quite definitively,” said MintList CEO Mike Wood.
GOAL IS TO SUPPORT DEALERS
Wood, who spent more than 30 years in the auto industry prior to co-founding Mintlist in 2020, said the platform takes a complementary approach to the current sales environment.
“We’re not looking to disrupt the dealership model. We’re just looking to assist the way the consumers buy and sell cars.”
The platform, which is in-use in British Columbia and Alberta, and soon to launch in Ontario, allows dealers to bid on consumer vehicles in online auctions, giving sellers transparency into how their vehicles are valuated. MintList also lists used inventory from the roughly 170 dealers currently on its platform.
As opposed to acquiring vehicles itself and looking to turn a profit, the company charges fees to dealers selling a vehicle and dealers purchasing consumer vehicles via auction, Wood said.
The tool is one alternative to the capital-intensive model used by Canada Drives and several other automotive ecommerce businesses that have run into trouble since late 2021.
STRING OF LOSSES, LAYOFFS
In the United States, the once rapidly expanding online sellers, most notably Carvana Co., Vroom Inc. and Shift Technologies Inc., have each seen their stock prices plummet by more than 90 per cent over the past 18 months, amid significant layoffs and steep operating losses. Management teams at the pared down businesses continue to work toward profitability, but cash flows at each company remained heavily negative as of the fourth quarter of 2022.
North of the border, Canada Drives competitor Clutch announced in January it would lay off 65 per cent of its workforce and exit Western Canada after a planned financing round fell through. At the time, Clutch CEO Dan Park blamed the tight capital environment in the technology industry for the move, noting the company had “secured its future” by opting to refocus on its best-established markets.
Today, he said he is confident the company made the right move.
“They’ve been tough decisions and a lot of hard work has gone in over the last year to make sure that we are sustainable, and that’s starting to pay dividends over the last several months.”
Park said he has no doubts about the viability of Clutch’s business model.
Unlike Canada Drives, he said Clutch, founded in Halifax in 2016, was “purpose-built to sell cars online from day one.” The company continues to see strong demand as it focuses on the fundamentals that make used-vehicle sales profitable for businesses — whether they be brick-and-mortar or online sellers.
“You have to have high-quality inventory that you turn super quick and are efficient with.”
Park said access to relatively inexpensive capital over the past several years set off “the push to really become the largest player as fast as possible,” but that environment has now shifted as growth capital across the technology sector dries up.
“The folks that were able to kind of pull back and right-size the business, are in a better position longer-term.”
Clutch may have a smaller geographic footprint than it did at the start of the year, but it is also running more sustainably, with profitability “just on the horizon,” Park said. Pushing into the black is the company’s focus short-term, he added, with expanding back into the markets it retreated from in January a longer-term goal.