CarsDirect.com Hopes to Eliminate
Middlemen and Sell Entirely Online
By FARA WARNER
Staff Reporter of THE WALL STREET JOURNAL
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.
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 Mr. Dell's
private funds and has taken a stake in CarsDirect. "People said
they were doing it, but nobody really was."
Mr. 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."
Mr. Gross said the company already has $25 million in capital to
begin acquiring dealerships. Mr. 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.
"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 Mr. 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, Mr. 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.
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 Ms. 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.
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