Online Used Car Sites Face Uphill Ride

A new report by Forrester Research, Inc. shows that gradual consumer acceptance and strained business models will prevent online used car sites from achieving a strong position in the marketplace.

The report is particularly bad news for Autotrader, Inc. and iMotors, Inc., the two companies that are focused on pioneering the market for used cars online.

Autotrader directs buyers to the closest dealer or private seller via a vast database of more than 1.5 million available used cars, while iMotors sells directly to the buyer. The iMotors strategy is to eliminate the need for the customer to find the car and negotiate the sale by handling those services itself.

Market Needs Sites with New and Used Cars

Forrester says that as used car sites ramp up and expand their offerings, they will soon find that they are not getting much bang for their marketing buck by sinking millions (US$) in building just a used car brand. The report argues that the market really wants sites that combine both new and used cars.

“Owning the used-car customer life cycle will prove problematic, as consumers shift back and forth between new and pre-owned models,” the report asserts. “Leaders will appeal to all consumers by providing one stop that presents all their car-buying options — going beyond configuration of a dream vehicle to instant comparison of price and warranty options from both new and used models.”

Heavy Costs Hurt Online Dealers

Another problem for online car dealers is the heavy costs associated with implementing the national infrastructure, staff and real estate needed to handle used car procurement, refurbishment and delivery. Forrester asserts that such overhead will keep iMotors in the red for the foreseeable future.

“That won’t be the only costly challenge,” the report adds. “To drive sales volume and recoup its investments, iMotors will need to spend lavishly in order to build a mainstream brand.”

Offline used car companies are facing the same problem. Giant used car company AutoNation, Inc. 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.

AutoNation discovered, however, that consumer used car tastes seem to run in cycles. With automobile manufacturers keeping new car prices down and also offering healthy rebates and financing, late model buyers have shifted recently away from used cars to new cars, turning AutoNation’s used car-only superstores into expensive mausoleums.

Need for New Tactics

Forrester concludes that as consumers accept buying used cars via the Internet, the only used car sites that will succeed are those that expand their offerings.

“To grab higher transaction fees, firms will look beyond the current trinity of financing, insurance and warranty partners and focus on after-market services,” the report says.

By cementing deals with such players like NAPA and Midas to offer parts ranging from tires to transmissions, Forrester predicts that online used car dealers will be able to provide nationwide service that is on par with new car dealers.