Haven't Heard of Virtual Car Dealerships Yet? You Will.

The emergence of virtual auto dealerships is part of a larger trend in retail.

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February 3, 2021

Reposted from LinkedIn

You may buy your next car from a virtual car dealership.

In the US, we already have Carvana, Vroom, Shift, and Tred, among others; HeyCar and Cazoo are cracking the European markets open.

The emergence of virtual auto dealerships is part of a larger trend in retail.

Heavyweight Merchandising vs. Lightweight Merchandising

The big theme in consumer retail by now is this: Lightweight Merchandising beats Heavyweight Merchandising.

By merchandising, I mean promoting the sale of a good to customers.  By lightweight and heavyweight, I mean the asset intensity of the merchandising machine (or the amount of stuff and effort it takes to sell the good).

Heavyweight Merchandisers include Borders (bankruptcy, 2011), Toys "R" Us (bankruptcy, 2017) and Macy's (not looking so hot, 2020).

These Heavyweight Merchandisers were truly heavy: each chain had hundreds of stores, all stocked with tens of millions of dollars worth of products (yet never the exact item you're looking for, somehow).

It's easy to say "Amazon put them out of business."

More thoughtful reflection reveals this: Heavyweight Merchandisers, with their high built-in fixed costs (rent, logistics, inventory) struggled to compete with Lightweight Merchandisers with lower fixed costs, as consumers learned to buy that product online.

Traditional Car Dealerships: Heavyweight Merchandisers

Traditional car dealerships fit the Heavyweight Merchandiser definition to a tee.  A single store may have as much as $50mln in inventory on display.

And this inventory isn't books that can just be put on a shelf until they sell.  Vehicle inventory needs to be maintained, washed, inspected, insured, and audited - it's very expensive to merchandise automobiles.  According to the National Auto Dealer's Association, the average American dealership incurred almost $1,000 per new vehicle sold in rent and financing charges.

That works, as long as shoppers haven't learned to buy cars online.  But due to Covid, online buying is the biggest driver of retail vehicle sales in many places in the US right now.  Software-as-a-service providers such as Montana-based WebBuy are doing extremely well lately helping traditional car dealerships retrofit their operations into virtual dealerships.

Enter the Virtual-First Dealerships

While many traditional dealers are adding a virtual component to their existing dealerships, virtual-first dealerships like Carvana, HeyCar, and others are making strides.

Because the Lightweight Merchandising model has such low fixed costs, virtual-first dealerships are well suited to offer services to focused audiences.

visitor.us is an example: we are a virtual-first dealership focused exclusively on international visitors.

More than 3 million international visitors spent 60 days or longer in the US in 2019.  Renting a vehicle for that long is absurdly expensive, yet serving them with the Heavyweight Merchandising model would have required opening dealerships in all or most of the major American ports of arrival.  This probably isn't feasible, which left the international visitor audience underserved.

For Lightweight Merchandisers like visitor.us, pursuing an audience of 3 million makes enormous sense.

Differentiating as a Lightweight Merchandiser

But Lightweight Merchandisers aren't just competing against Heavyweight Merchandisers - they're also competing against other Lightweight Merchandisers.

In many retail segments, that other Lightweight Merchandiser is Amazon.  In the dealership space, it may turn out to be Carvana - they have the biggest war chest at the time of writing.

But because we're in the early innings of the transition to virtual-first dealerships, there are still plenty of opportunities to create differentiated experiences.

Incorporating value-added services that solve a specific audience's pain points is the key to differentiating in the Lightweight Merchandising world.

For instance, it turns out that registering and insuring a vehicle in the US is really hard if you don't live here.

visitor.us differentiates itself from other virtual-first dealerships by solving the registration and insurance problem for international visitors: we can have plates on the bumper and insurance in the glovebox of any car for sale in America - before the visitor arrives.  And we can broker the vehicle's sale before they head home.

I suspect that virtual-first dealerships serving other targeted audiences will emerge, carving out niches for themselves by incorporating value added services that solve their audience's pain points.

Wrapping Up

If you haven't heard about virtual auto dealerships, you will.

They are using Lightweight Merchandising to disrupt traditional auto dealers.

It took a while for consumers to buy books, toys, and clothes on the internet, but now that we're used to buying that way, the Heavyweight Merchandisers are struggling.

Covid is accustomizing us to buying vehicles on the internet, which creates enormous opportunities for virtual-first dealerships.

Some will do very well offering vehicles for sale to the masses, while other virtual-first dealerships will succeed by focusing on targeted audiences and incorporating value-added services that solve that specific audience's pain points.

If you want to buy a car in America, even if you’re just visiting, get in touch with visitor.us today!

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