Second to None

The used car market in India is disrupting the auto industry, already vrooming ahead of new car sales

Illustration: Kishore Das

It’s raining cars in India. Does this sound crazy? Maybe a little, since managements at India’s top passenger car companies are spending sleepless nights over the dearth of customers. Even as they may have cause for concern, there is a sub-segment in passenger cars that is worry free and booming. While the new car market is struggling, the used car market registered a handsome 15% growth in FY19 (See: Fast track). So, let’s correct that opening statement. It’s raining ‘used’ cars in India. 

And at four million units per year, it is already 1.2x larger than the new car market, which was around 3.3 million units in FY19. The sell-off period for a car has fallen to five years today. That is a significant fall from eight to 10, about five years ago. According to Amit Kaushik, MD and  country head at Urban Science, “Used car space has been growing significantly because of a reduced first term life cycle due to new offerings, body styles, new technology and brands.” 

But, as is the case with several industries in the country, 70-80% of trades in this sector also remain unorganised. The organised sector includes original equipment manufacturers’ (OEM) pre-owned channels, namely Maruti’s True Value and Mahindra’s First Choice, which have been around for nearly two decades. Then there are new disruptive companies such as Cars24, OLX’s Cash My Car, CarDekho’s Gaadi Stores, Droom and Spinny. Most of them have emerged over the past three-four years. 

The start-ups have become quickly popular, and they make money by charging up to 1.5% commission on each car sold through their platform. While, Cars24 started off as a pure play, a used car-buying company with brick and mortar stores, others such as OLX and CarDekho were operating as classifieds and listing platforms until recently. The promise of the market has pulled these players into setting up stores as well. 

They must be doing something right because investors have come flocking. Cars24 has, so far, raised $100 million, CarDekho raised $110 million in January 2019, OLX has set aside $10-15 million, and Spinny raised $13.2 million in May 2019 (See: Leading the change).

Gajendra Jangid, co-founder and CMO at Cars24, believes that the success of their business model is making investors confident. “We knew from day one that only a full-fledged brick and mortar-cum-online model would work in this market. That generates trust with customers,” says Jangid. 

It is a bit more than the success of a start-up, according to VG Ramakrishnan, founding partner at Avanteum Advisors. Buyers and sellers now trust more organised, glass-and-chrome businesses to get them a reliable product or the right value. “The used car sector is highly unorganised, people transact at local levels,” he says. Buyers usually like the familiarity of the used car salesman in the neighbourhood. “But you’re not sure whether you are getting the right price, quality and whether the vehicle’s papers are sound. With digital exposure, the customer’s expectation has also changed and they expect transparency in every transaction now. There is tremendous headroom for a shift from unorganised to organised.” (See: Phasing out chaos)

The new players are offering unprecedented convenience to people looking to sell their cars. Typically, a seller can book an appointment online or visit one of the stores with his car. After they have gone through a comprehensive checklist to assess the condition of the car and its parts, a report is generated. Based on the result, the two sides agree on the right bid value. 

While the customer sips on her coffee, the car (with the report) is posted on the buyer platform. Typically used car dealers, login through the app and place bids. The highest bid is communicated to the customer. And if she agrees, the car is shifted to a yard. All the paperwork, including ‘Registration Certificate Transfer’ is done by the company. An instant payment is made to the customer for an extra charge of #1,000, or there is a wait of three days. The entire process is finished anywhere between 30 minutes and one hour, according to Umang Kumar, president, CarDekho. 

Stepping on the gas

Cars24 claims that the customers come for the prices that new players offer. With their auction platform, they are able to offer 10-20% more than what the unorganised market or OEM-backed dealers do. “If you are selling on your own, you will be able to identify probably 10 people in the vicinity, whereas we will help you find customers across India,” says Jangid.

The start-up has seen good traction over the past two years. “We grew 2x in FY18 and 3x in FY19,” he says. It has expanded to 150 stores in 33 cities across India, with presence in all metros and key Tier-I and Tier-II cities. It is now selling 12,000 cars per month. Jangid says that their start-up is modelled after Germany’s Auto1 and UK’s Webuyanycar. The first, valued at €2.9 billion last year when Softbank took a 20% stake, sells about 40,000 cars a month. The second, which is set to go private after handing over its business to TDR Capital for £1.6 billion, clocks 300,000 cars a month. He says that Cars24 has taken lessons from such peers’ operations — one is to add value to the service, such as bringing in professionalism, and the other is to be credible. “The sellers and buyers need to trust the platform. We generate that by introducing transparency in bidding, paper transfers, valuation and payment,” adds Jangid.

Guazi, founded in 2015 and operating in the Chinese market that is 5x India’s, built its reputation by only listing serious buyers and sellers. Softbank invested $1.5 billion in the start-up, valuing it at $8.5 billion. China is seeing rising demand for used cars even as new car sales are slowing down. Between 2016 and 2018, its market grew by nearly 50% to 15 million units.

Kumar of Jaipur-based CarDekho shares more reasons for choosing their services, “No OEM can even remotely match the experience the online player gives a customer. If you go to Maruti True Value or Mahindra First Choice, the experience is not as convenient. There is no auction, there are no thousand dealers bidding for your car.” And since OEM businesses are geared towards scaling up new car sales, they may not be as interested in selling pre-owned cars like these start-ups.

Usually, the OEM’s outlets are owned by dealers, who simply use the channel to dispose old cars that one gets under exchange schemes. There is a visible disinterest in upgrading their technology or service. These outlets also run on a decentralised system whereas start-ups are monitored closely and pulled up for operational inefficiencies by investors. 

If Cars24 pioneered this space, other players are catching up fast and even changing the nature of the business by adding additional services. Unlike Cars24, CarDekho has been dabbling with both new and used cars, listing, and a news website. It has evolved from a classifieds site to enabler to buyer of used cars in the past four years. 

In 2015, they were telling customers the right price to buy a vehicle, besides offering a safety inspection. A year later, they also threw in financing and today the cycle is complete – they help the buyer sell the used car. “Unlike others, we are a full-stack player,” says Kumar. CarDekho, which jumped into the offline market six months ago, already has 30 stores now. “We are live in Delhi and Bengaluru, and setting up shop in three more. We will be live in 10-15 cities by October 2019,” says Kumar.

They claim to be dealing in 1,000 cars every month at their offline outlets and a total of 3,000 cars per month under the used-car vertical. But the pre-owned segment makes up just 25% of its overall business. It also generates customer leads for OEMs and dealers, besides selling financing and insurance.

Interestingly, financing of used cars, at 15% in FY19, has outpaced that of new cars in India, which grew 5% in the same period. Sunny Kataria, VP, OLX India, the classifieds leader that opened used car stores a few months ago, has observed the rapid growth of the new market. “Demand for pre-owned cars over the past two years has grown twice that of supply. After studying customer patterns and doing market research, we realised there were many who wanted to sell their car immediately,” explains Kataria on why they took the offline plunge.  

Within seven months of launching the first store, OLX Cash My Car opened another 55 in top seven cities of the country. While it’s still too early for Kataria to reveal sales figures, he agrees that the car business is important for the platform. Of the 50 million monthly active users, 10-12 million engage in car listings, contributing to 25% of the platform’s traffic. While sellers were earlier only listing their products for sale on the platform, now they can sell to OLX directly. 

It may sound as if the seller alone has it easy when using these platforms. But, companies claim they address pain points on both sides — seller and buyer. For Cars24, which claims to have over 10,000 channel partners; each has to pay subscription fee to access the auction platform. But, why would a buyer join their platform and not continue buying cars from the unorganised market?

“They can find the right car, at the right price, at the right time. We are providing an assortment of cars. The second is that this is time saving. Typically, they have to spend 50% of their time sourcing used cars. With us, they don’t have to go out, negotiate, or do the paperwork. We do everything for them, including delivery of the car to their doorstep,” says Jangid. A buyer can employ their energies on refurbishing and selling the cars. CarDekho has also been offering one-year warranty on used cars.

On a grand scale

So, there is massive opportunity to convert a large unorganised market into an organised one, and everyone wants a piece. Ramakrishnan believes, “There is a lot of headroom for growth and profit. Bundling of services such as finance and insurance can lead to profitability.”

Everything looks like a fluffy piece of cake then. Not really. What about the cash burn? Brick-and-mortar stores cost money to set up as also does employing manpower, acquiring customers, and holding inventory, if need be. Then this has to be replicated in multiple places. The start-ups are doing what many other start-ups do — using the money they raise from investors while also spending on branding to attract customers. 

Urban Science’s Kaushik sees an upside with cars more frequently sold to buy newer styles but warns of inventory cost risk if the sale is not completed on time. Kaushik adds, “Just like OEMs, these companies need to study analytics such as demand forecasting, buying and selling cycles to make the model more efficient and overcome the risk of pile-ups, which can kill their margins.”

Cars24’s Jangid argues that inventory costs are really nothing. Nearly all the cars get sold on the day they are brought to the store, with so many bidders across the country. “We have an extremely lean set-up. In 90% of the cases we are able to sell within one hour, remaining cases we give you a quote in a day or two,” he says. Also, an unsold car is stored in the seller’s parking space till it finds a new buyer. 

CarDekho also follows a lean model, “Our 500-800 sq ft stores don’t need big parking spaces and we have five hands at each store.” That said, he admits, “Today, we don’t charge the consumer enough to actually make money on the business. There are costs of setting up stores, getting inspection engineers, having yards and transporting the car.”

Evidently, the businesses are in investment phase and don’t make big money. But Cars24 has been here the longest — nearly three years. Do they clearly see a path to profitability? Jangid says they do see that when they scale, but for now, the priority is to own the market. “We have profitable unit economics,” he says. The company wants to have 500 stores in three to four years. It has set an ambitious target of 100,000 cars per month from the current 12,000.

Of course there is no quick profit to be made, says Avanteum Advisors’ Ramakrishnan, adding, “Nobody makes money on the first day in such businesses. If you’re making operational profit in two to three years, it’s okay.” At the same time, he finds Cars24’s 100,000 cars per month an ambitious target; that would amount to owning 20% of the entire market. He expects the used car market to be six million units in two to three years. 

Kumar of CarDekho believes that their integrated model will help them sustain their good run. He says, “We are not just a used car business, we are an integrated used car business. We can make money on financing and insurance.” These segments already bring in majority of the revenue for the company. “As a standalone service, I am not sure used car sales is very profitable, but an integrated model can be.” he adds. Ramakrishnan agrees that bundling of services is a good idea to improve profitability. Cars24 claims they are supporting their partners with financing options. That gives the buyers confidence to trade freely on the platform. 

Rather than competing with OEMs, the start-ups are already exploring potential synergies. Typically, in the Indian market, 25% of new cars are bought by trading in old cars. Currently, OEMs have to process the old cars through their channel. “We have a very strong relationship with OEMs and dealers. We could enable those customers to get a better deal on a new car — that is one area of discussion,” explains Kumar. “Secondly, at some point in time, we would like to enable after-sales services such as servicing and repair for our customers,” he says.

An omnichannel strategy may work considering that it helped legendary US-based used car retailer CarMax. Although the US has traditionally been a big and mature used car market, CarMax has been struggling with volatile sales growth. In 2018, it decided to shift to omnichannel strategy in its oldest market, Atlanta. Customers now use online stores largely for product discovery and the offline outlets for buying, though e-shopping is possible with pick-up and drop-off services available. Happy with the response, CarMax plans to extend the service to most of its customers by February 2020. In fact, most offline players have transitioned to the omnichannel auctions model with Cox Automotive’s Manheim and Carmax being prominent players. The US used car market is estimated to be 40 million units/year with an annual growth rate of 1% to 2%.

Used car companies definitely have enviable headroom for growth, with buyers keen on upgrading their vehicles often and happy to trade in their old car through a professional service provider. But the start-ups will have to keep a close watch on costs and tie-ups with OEMs, who might just be glad to have an organised and tech-savvy partner.