Step on the gas: How the pandemic changed the auto industry

Commentarya month ago
Before COVID-19, online car sales struggled to gain traction.
Pre-pandemic, online apparel sales had reached ~30% penetration in the U.S. In contrast, we estimate online sales accounted for less than 2% of all U.S. vehicle sales.
Because vehicle purchases are infrequent and expensive, consumers conduct considerable due diligence prior to purchase. This is especially true for used car sales, as the engine, accessories, and even the smell can differ across used options of the same model. As a result, most consumers have traditionally opted to assess potential used car purchases in-person.
But as our readers are well-aware, the pandemic has impacted virtually every stage of the globally-integrated automotive industry. The pandemic itself has increased demand for personal vehicles. At the same time, semiconductor chip shortages have slowed new vehicle production. This, in turn, has led to increased demand for used vehicles.
Amid these changes, online purchases of used vehicles have inflected upwards. We believe there are three key drivers behind this trend:
1.
Larger online retailers have been able to source greater used vehicle inventories, as a result of their strong existing relationships with auction homes and their ability to source vehicles directly from customers and entirely online.
2.
Customers are increasingly able to find the car they want from these large online retailers. This is critical, because—again—vehicle purchases are infrequent and expensive. As inventory bases grow online, it becomes easier to acquire the exact vehicle one wants online vs. at brick-and-mortar lots.
3.
Lastly, during the pandemic, individuals have been keen to avoid unnecessary human contact. This has been a boon for personal vehicles and for e-commerce in general. The used car industry is no exception.
We believe COVID-19 induced tailwinds have accelerated the development of the online used car industry. Increased online adoption not only builds public trust for the online channel, but also allows online retailers to provide customers with cheaper pricing (unit economics improve as online retailers scale) and an overall easier search for the exact vehicle they want.
In a nutshell, we believe online car sales will continue to trend up. Our clients may benefit from this trend through our investments in CarGurus (CARG), an Opportunities portfolio holding. CarGurus is a leading online auto marketplace, which we believe is uniquely positioned as the low-cost competitor. Auto retailers use CarGurus as a platform for advertising their inventory. We believe CarGurus offers a superior customer experience, and holds very strong network effects and pricing power.
Additionally, as a result of the industry’s shift online, we believe retailers will spend more marketing dollars online. Customer acquisition costs are essentially “rent” for online businesses, and as online vehicle sales increase, we expect “rent” (aka marketing spend by auto retailers) on CarGurus to follow suit.
In other words: step on the gas.

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