Online Used Car Sales: A Tale of Two Strategies

Two companies with widely divergent strategies are leading the charge to develop the market for selling used cars online.

One company, Autotrader, Inc., directs buyers to the closest dealer or private seller via a vast database of more than 1.5 million available used cars, while the other, iMotors, Inc., sells directly to the buyer.

The iMotors strategy is to eliminate the need for the customer to find the car and negotiate the sale.

Two weeks ago, Autotrader.com introduced itself to the world with a Super Bowl advertisement that kicked off a nationwide campaign to become the best-known used car site on the Web. This week, iMotors.com expanded to the San Diego, California area as part of an ambitious $350 million (US$) plan to develop its service nationwide and internationally.

Both companies see gold in the used car market, which is estimated at $370 billion annually in the United States. According to a recent J.D. Power and Associates survey, 26 percent of used car buyers in 1999 used the Internet to find information, up from 14 percent in 1998.

By 2003, Power expects that figure to grow to more than 50 percent of used car shoppers.

Autotrader Backed by Information-Related Companies

Autotrader’s investors include companies with access to used car inventories. One investor is used car auction house Manheim Auctions, while another is the Dealer Services Group of Automatic Data Processing (ADP), which keeps inventories of used cars for its many dealers.

In addition, Autotrader has reached an exclusive online distribution deal with Trader Publishing Company, which publishes the Autotrader and AutoMart used car listing magazines.

All told, Autotrader claims to list more than 1.5 million used cars available nationwide, so that people living in major metropolitan areas are likely to find suitable candidates from nearby dealerships and private parties. It perceives its major competitors to be Autobytel.com, Cars.com and MSN Carpoint.com, which focus on new car sales but also carry used car information.

You Pick, iMotors Prowls

While most new and used car Web sites are information and referral services, iMotors sells directly to consumers who presumably loathe the used car shopping experience. “We started from scratch and built the business around the customer’s needs, not the traditional used car selling model,” said iMotors President Beth VanStory.

The process starts with iMotors and its customer agreeing on a price for a specific make and model of car. The company will only search for makes and models that are less than five years old.

The shopper then puts down a fully-refundable $250 deposit on his or her credit card, and iMotors searches nationwide to find a matching model — primarily from auction houses and dealerships.

It then gives the car a 129-point inspection at a special Vehicle Certification Center (VCC) and sends the car to one of its regional delivery centers for paperwork and delivery to the customer. So far, iMotors has one VCC operational in Sacramento, California and regional delivery centers from Seattle, Washington to San Diego.

The company said the average process takes about two to four weeks, depending on the difficulty in meeting customer requests. It guarantees a price lower than the Kelley Blue Book retail price and also offers trade-ins and financing.

To show its commitment to the market, iMotors recently signed a multi-year, $350 million contract with Bechtel to build up to 30 state-of-the-art VCC centers worldwide.

iMotors has raised $77 million to date from a variety of venture capital firms, including Oak Investment Partners and Paul Allen’s Vulcan Ventures.

Which Strategy Will Win, If Any?

Which strategy is going to win? Interestingly, the two companies are not really direct competitors. Autotrader does not sell and deliver used cars itself, while iMotors does not provide a listing of available cars.

Autotrader’s battle is to distinguish itself by creating the largest listing of used cars available nationwide — and to then have those listings utilized. Its biggest problem is having too many vehicles that are not really near the shoppers. Its biggest long-term competitors, for example, will be local sources of used car information, such as online versions of local newspapers, and auto malls that create their own listing services.

iMotors, by contrast, is pioneering a new sales channel for used cars and is creating a high overhead operation with its fixed investment in VCCs and regional delivery centers. Can it do so and still beat prices in the existing used car system?

Car sales giant AutoNation could not, as the company recently took a charge of $430 to $490 million to close down its used car megacenters. The stores claimed to offer late model used cars at fixed low prices without high-pressure sales tactics, a strategy that iMotors is attempting to implement on the Internet.

The key difference is that while the used car megacenters had limited inventory, iMotors will let customers specify the exact make and model they want.