A new Internet venture backed by computer executive Michael Dell's personal-investment firm and co-founded by idealab Chairman Bill Gross plans to become the first company to sell cars entirely through the Internet, bypassing showrooms and salesmen the way Amazon.com Inc. bypasses bookstores.
The venture, called CarsDirect.com, promises to heat up competition among auto makers, online-buying services and dealer groups such as AutoNation Inc., which are scrambling to control the growing number of consumers who go online to shortcut the traditional process of shopping for new and used vehicles.
CarsDirect.com, which already has sold $20 million of cars through a test Web site since December, is launching its updated Web site this month and plans to begin buying dealerships later this year, company executives say.
Eliminating the middlemen
Unlike other third-party online car companies, such as Autobytel.com Inc. or Microsoft Corp.'s CarPoint, CarsDirect.com doesn't funnel sales leads to dealers. In fact, consumers never have to talk to a dealer if they so choose. Instead, CarsDirect immediately gives consumers a set price online based on recent average selling prices. It works through existing dealers to get the car at those prices.
Consumers, who pay a credit-card deposit of $250 to start the process, can use CarsDirect to apply for financing through Bank One Corp.'s subsidiary Finance One. The subsidiary is signing a partnership with CarsDirect to create an online auto-financing venture. Finance One's existing network of about 10,000 dealers also will be used as a source of vehicles for CarsDirect. In the end, CarsDirect will deliver vehicles to buyers' homes or offices and even put its own brand on the back of the car.
"The auto business is probably the biggest retail segment in the world, but the direct model through the Internet has never really been applied to it before," said Glenn Fuhrman, managing principal at MSD Capital LP, which invests Dell's private funds and has taken a stake in CarsDirect. "People said they were doing it, but nobody really was."
Gross, who sits on CarsDirect's board, said that even when CarsDirect buys dealerships it "plans to close them down. We'll keep the land, but we won't have people on the showroom floor." Gross said the company already has $25 million in capital to begin acquiring dealerships. Gross's idealab, a venture incubator, has also backed eToys and Cooking.com among other Internet-retailing sites.
CarsDirect has also attracted other big-name backers, including Goldman Sachs Group Inc. and automotive publisher Primedia Ventures.
Watch out Detroit
"Detroit's going to be scared," said James McQuivey, senior analyst with Forrester Research in Cambridge, Mass., who wrote a report predicting such a company would be created. "Everywhere I go, people always ask if we could do the Dell model in cars and when is it going to happen." Dell Computer Co., founded by Dell, sells computers direct to consumers through the Internet.
But CarsDirect faces big hurdles. The company said it will be able to deliver cars anywhere in the country, but that means in many cases it will have to work through a tangle of state laws that govern car sales. It's also still only in the early stages of setting up a dealer network. AutoNation, the biggest auto retailer in the country, already has a national network and plans to sell $500 million of cars over the Web this year. Manufacturers also are forging ahead with their own sales on the Internet and will balk at cooperating with yet another third party trying to steal car sales online.
Chris Denove, director of consulting operations at J.D. Power and Associates, cautions that CarsDirect must keep its prices low. But that won't be easy since prices fluctuate as manufacturers and dealers raise and lower discounts. CarsDirect's co-founder and Chief Executive Officer Scott Painter said the company will keep prices in the lowest 10% of the range for given models. Initially, Painter said the company would even subsidize the price of a car to stay competitive.
"In the long-term, we think large volumes are going to help us make more money on the cars," he said. The company, which doesn't add service fees to the price of its cars, plans to sell vehicles at an "average" price for a given area and squeeze profits out of volume discounts from dealers. CarsDirect also plans to generate revenue from other services it offers, such as financing, maintenance and insurance, he said.
Will consumers commit?
"There's also a risk that consumers will be reluctant to commit to as costly a purchase as a car with just the click of a mouse.
"Three years ago, we were convinced that selling cars directly to the consumer online was the right model," said Alex Simons, group product manager for Microsoft CarPoint. "But we got overwhelming negative responses from them. They said they like the local presence."
Still, a number of auto makers are pursuing ventures that bring them ever closer to selling cars to consumers via the Internet. Ford Motor Co., through its minority interest in the Tulsa Auto Collection retail network, Tulsa, Okla., is selling Ford Mustangs on the Internet. And Toyota Motor Corp.'s U.S. sales arm is considering testing a new version of its Web site that offers a look at the company's inventory, said June Okamoto, the U.S. division's Internet marketing manager. But Okamoto said dealers remain a big part of the selling process.
Dealers who have worked with CarsDirect said they still feel as if they are a part of the process, especially when it comes to service. "We are getting consumers who are ready to buy and they are going to be long-term customers," said Ryan Autrey, dealer principal at Long Beach BMW, in Long Beach, Calif. He said he has sold about 14 cars through CarsDirect since January and has the same number on order.