New model shake-up for online used car sales

OPINION: The second-hand car business was revolutionised 20 years ago with the arrival of the internet, but there is a second revolution under way that promises to be even more disruptive and could have a significant effect on some of Western Australia’s best-known car yards.

An easy description of the second wave is to call it ‘Carsales.com Mark II’, in honor of the internet business that did more than most to capture used-car advertisements from newspaper publishers and change the way second-hand cars are traded.

This new model, which promises to eliminate some of hassles for buyers (and sellers) of used cars, is already being tested in Queensland by AP Eagers, one of Australia’s biggest car dealers, under the name of Carzoos.

Other big dealers are also experimenting with new business models, with the easyauto123 used-car warehouse being piloted by Automotive Holdings Group at Joondalup a notable example.

The Carzoos name is a clue to how it works. The aim is to capture and consolidate some of the thousands of used cars private owners try to buy or sell every day via the internet, often with limited success and a lot of frustration with the process.

In theory, operations such as Carzoos are peer-to-peer trading sites, which create a middleman to operate the buying and selling process, for a fee.

The appeal is that someone selling a second-hand car is likely to get a higher price through a private sale than via a trade-in, while avoiding prospective private buyers and the hassle of waiting for them to turn up, which they sometimes do not, and when they do you wish they hadn’t.

The benefits for prospective buyers are similar because all vehicles listed are mechanically checked before being listed, and are available for inspection on neutral ground. Carzoos says all vehicles it lists are six years old, or less, and there is a seven-day cooling off period when any second-hand vehicle bought can be returned.

Potentially, this latest change emerging in the used-car business could be even more disruptive than the advent of internet trading, which was spearheaded by Carsales.com, a backyard startup that has grown into a $2.6 billion stock-exchange listed company.

The creation of this new way to trade second-hand cars has caught the eye of investment banks, which see it as a game-changer in an industry overdue for disruption.

Citigroup Global Markets (Citi) analysed the used-car market in its latest research into Carsales.com, concluding that if Carsales.com didn’t lead the change someone else would.

Citi’s view is that the used car industry has reached a tipping point, with major car dealers exploring alternate business models.

“We anticipate a range of new models aimed at removing unnecessary costs from the dealer channel,” Citi said.

The bank expects four significant changes.

• Online car dealers.

• Peer-to-peer used-car marketplaces.

• Streamlined trade in processes.

• Increased value-added services to private sellers.

For anyone who has ever bought or sold a car privately, the changes expected by Citi are significant and could hit the profit margins of used-car dealers.

For most people, the private sales process starts with the question of whether it is preferable to accept a low-priced trade-in or deal directly with prospective private buyers, an often-irksome process

“Peer-to-peer marketplaces, while still in their infancy, promise the best of both worlds for sellers, removing the hassle of managing a private sales process such as buyer inquiries, test drives and price negotiation while offering a much better price for the car (private sale value less than fee),” Citi said.
“While there are number of variations in the approach these business take, the basic model is a managed private sale process.

“The peer-to-peer site handles all aspect of the sale in return for a fee (typically 8 per cent to 10 per cent of the final sale price). Most peer-to-peer sites only accept recent (under six years) used cars in good condition.”

A peer-to-peer marketplace is not a car dealer, Citi said, and even when a vehicle is listed, the owner generally retains use of the car until it is sold.

“When the process works as intended they (the marketplace operator) never takes ownership of the cars, they simply manage the sale process on behalf of the owner,” Citi said.

The emerging business models, if they prove successful, would partly cannibalise both the dealer and private segments of the used-car market.

“Give the need to pass an inspection and the restriction on the age of the vehicles accepted, take-up will be limited to a small segment of the market, however peer-to-peer will clearly skew towards higher-value, recent used vehicles, which is (a market segment) currently dominated by Carsales.com,” Citi said.

If Carsales.com embraces the new car trading system, it could significantly boost profits. If someone else takes the lead the internet car-trading leader could face a challenge to its earnings.