Besides Vending Machines, What Separates Public Used Vehicle Dealers Carvana and Vroom?
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Online used car dealer Vroom went public on June 8 at $22 per share, and the next day prices went as high as $45. As of early August, they sat around $66 per share.
To understand how its successful IPO may affect the online car market, as well as that of competitor Carvana, Jonathan Figueroa of GLG’s consumer goods and services team on July 17 spoke with Jonathon McCutcheon, founder and CEO of Supply Chain Technologies and former Supply Chain Director at Carvana. The below Q&A has been edited for length and clarity.
What are your general thoughts on the Vroom IPO?
I thought the timing was a bit risky. I expected the company to wait longer, given COVID and the uncertainty of it, but I know Vroom already had it in motion. The company went in with only a bit of differentiation from Carvana, which is okay given the size of the market. But it took a very conservative stance at the time it chose to IPO. Vroom was looking to avoid the issues that Carvana ran into with liquidity. It took an asset-light approach that translated to outsourcing most of its reconditioning and logistics that are a fair part of the customer service. But in the end, Vroom inspired enough confidence to raise almost $467 million.
When we think about the evolving competitive dynamics within the overall used-car-selling marketplace, how does Vroom fit in?
It’s definitely following the Carvana playbook, including the lessons-learned chapters. Vroom’s coming in a little bit more conservatively, not as edgy on the risk side. It’s going straight after volume, and its prices are reflecting that.
Carvana had a big leg up early on from DriveTime, splitting the resources of recon centers and all of the systems. Carvana spent a lot of money building up a private fleet, and Vroom is doing the same thing. Vroom, not able to emulate that gift from DriveTime, has chosen to outsource reconditioning until it can ease into its own proprietary sites. It’s outsourcing until it’s able to assess and build its own logistics capabilities, which makes sense this early on. Long term it’ll have to catch up. The other piece is that Vroom is focusing a lot more on luxury cars and it’s getting away with charging fees that Carvana doesn’t. The question is whether Vroom will continue to try to focus on luxury vehicles, or if it will try to expand the inventory mix more. I don’t know if Vroom will get away with those fees if it goes into subeconomy cars.
Looking at Vroom’s pricing and vehicle acquisition, it’s got equal capabilities with strong data science. Growth is reminiscent of the first year out of the gate for Carvana. The timing is brilliant given that Carvana’s growth has started to slow a little in 2020. Vroom’s IPO is good timing for everybody. It’ll bring more awareness and validation to the online buying of cars.
Carvana does a great job fulfilling orders, both on the buying and selling side, and the strength of the supply chain is impressive. The company’s vending machines have become popular, often seen on major highways. What is Vroom’s “vending machine,” so to speak? How does it excel on transaction fulfillment?
A lot of different processes play in behind the scenes that are used to funnel customers, secure conversion, and increase attachment rates. From that side, Vroom and Carvana are equal. The difference is from a presence perspective, Vroom has decided to be far more centralized, where Carvana has invested in some brick and mortar. Basically, Vroom has 13 outsourced and one proprietary recon center, as opposed to the eight sites that Carvana has, but no market hubs.
The major difference really is the vending machines. Those vending machines started off as a marketing gimmick. Carvana built the box and said this looks like a vending machine, and it made it so. It was fun and got a lot of press. Now it’s expanding to 22 of those things because they not only supplant and add to Carvana’s advertising dollars, but it’s a physical presence that gives the company a lot of press and recognition. There really isn’t an equivalent for that, because as far as physical locations, Vroom is virtually invisible. Vroom’s focus on brand recognition and trustworthiness will probably result in it spending as much in advertising as Carvana in the long run.
Can you walk us through how a strong supply chain and logistics operation flows into achieving stronger economics?
One of the Holy Grails of the supply chain is end-to-end visibility. If a company doesn’t know where its inventory is, it can be difficult to sell it, certainly in a timely manner. It sounds ridiculous, but as big as cars are, they get stolen and lost. How a company deals with inventory tracking is an absolute essential. It needs to know where vehicles are because the key thing it’s trying to overcome from a supply chain perspective is to move the product from wherever it is to the customer. Working from national inventories, that’s a big challenge.
The other piece is from a cost perspective, having an audit trail. Companies need end-to-end visibility of how much money they have spent on a vehicle. It starts with purchasing it and figuring out what retail is. That gives the margin, except take away the transportation and reconditioning costs. Sometimes a car is moved more than planned or needs more repairs. Cars can get hit while they’re on the lot. A lot of things happen in transit. Being able to understand how much profit is left in each car is a big deal.
Having integrated systems is something both Vroom and Carvana have absolutely excelled in, focusing on even integrating with outside services like banks and loans, everything that it takes to be able to upload documents, move money electronically, and not have to send paperwork to customers. That’s a huge piece that not only ties in with the buying of the vehicle, but also being able to tell the customer where it is and when they’ll have it. Carvana has an app that allows customers to track the car as it’s on the way to them. People get really excited about that, and as long as a company lets customers know what’s happening, most people are really forgiving. It’s when they don’t know that they get really upset.
When do you think we will see profitability from Carvana and Vroom?
That’s definitely the question. Carvana was on track to almost breaking even within the next year and a half before COVID hit. My guess is in three years it will break even and can continue to balance growth and profitability. The company still has a lot more growth runway. Vroom, if it’s smart, will go to 100% growth. It’s got a good start with the first triple-digit year. If it keeps that up, it can build itself up largely. I give it seven years before it switches from growth mode to profitability and starts breaking even. It’ll have to abandon its conservatism and invest in its own recon and logistics.
In the next five years, one of the other things that will make an impact is that there’ll be at least two other large players into the market. The market can support four or five. At that point, the joint efforts of all these folks give credibility and awareness to online car buying to bring it to the mainstream.
About Jonathon McCutcheon
Jonathon McCutcheon is the founder of Supply Chain Technologies LLC. Prior to this, Jonathon was the Director of Supply Chain at Carvana LLC. Before Carvana, he was Global Procurement Senior Manager at Pepsico Inc. He also has experience at Frito Lay, Ryder Systems, and Verizon.
This article is adapted from the July 17, 2020, teleconference “Vroom IPO and the Used Car Online Business Model.” If you would like access to this teleconference or would like to speak with Jonathon McCutcheon or any of our more than 700,000 experts, contact us.