Car-shopping company Shift seeks to follow Carvana with 2020 IPO

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What happens to the car trade – that eternal intermediary between car manufacturers and consumers – in the Amazon age?

It is a question that has launched a series of startups in the car store space and has stimulated existential anxiety in established dealer chains. Amazon.com Inc. has started the creation of a website for research and assessment of cars in 2016 and works this summer together with Hyundai Motor Co. and tire manufacturer Monro Inc. Tesla Inc., the largest fully electrical manufacturer, does not work with dealers at all, and prefers a business model built around showrooms and online ordering.

It is a question that has launched a series of startups in the car store space and has stimulated existential anxiety in established dealer chains. Amazon.com Inc. has started the creation of a website for research and assessment of cars in 2016 and works this summer together with Hyundai Motor Co. and tire manufacturer Monro Inc. Tesla Inc., by far the largest all-electric manufacturer, does not work with dealers at all, and prefers a business model built around showrooms and online ordering.

It is against this background that Lithia Motors Inc., a 72-year-old physical dealer chain with sales of $ 10 billion last year, collaborated with Shift, a 5-year car-building company from San Francisco. Shift plans to become public in 2020 after $ 140 million in venture finance last month, including a strategic investment from Lithia.

The alliance expresses the pressure on dealers to adapt to the technological changes that occur in car dealerships. Although most national chains have the shoppers browse through the inventory and calculate online financing, they are reluctant to let buyers complete a purchase without luring them to the dealer.

Lithia invested $ 54 million last month in the standby machine of the used car and became the largest investor. Shift hopes that the scale and scale of Lithia – not just cash, but also the labor and garage space for storing and refurbishing used cars – will boost expansion outside California's home market. Lithia gambles. The Shift engineers in Silicon Valley are helping to sell more cars. Shift, with app-driven shopping and home-delivered test drives, could give Lithia a chance to shield itself from disruption by catching up on an IPO.

"We are not as technically skilled as our customers really need," said Lithia CEO Bryan DeBoer. "The cooperation between Shift and Lithia finds that balance between brick and mortar and technology, so that consumers can choose what they want."

Although the two companies will continue to buy and sell cars separately for the time being, they are going to share data. Shift, which expects to sell 8,000 used cars this year, will have access to Lithia's inventory of approximately 75,000 vehicles to feed its algorithm, so that both companies will have a more accurate idea of ​​which cars. at what prices will run the fastest.

Shift tries to follow the path that is being struck by Carvana Co., maker of a car sales machine & # 39; that allows motorists to shop online and pick up their new wheels from a multilayer glass structure without a test drive. Carvana instead offers a seven-day money-back guarantee. The company's shares have tripled since it became public in April and analysts predict that sales will double more than $ 1.9 billion this year, although it is not intended to make a profit until 2020.

George Arison, the co-CEO of Shift, said he is engaged in total fundraising mode, calling on public investors to contribute to the $ 280 million that the company has already collected. His goal is to achieve next year sales of $ 275 million to $ 300 million, from about $ 130 million to $ 140 million in 2018. "We consider this as a final round to a possible IPO," he said. "It is not a promise that we will be made public, but we want to be well-positioned to be public."

Wall Street analysts are still scratching their heads about whether the deal will play as both companies imagine. "This contributes to the technical story of Lithia, but in the same way it is still a very early day," says Jamie Albertine, an analyst at Consumer Edge Research. "Investors are still waiting for more details and information on how this will stimulate profitability over time."

Another bonus for Lithia: Shift sells only used cars, where national chains flow to. Margins on new vehicle sales are shrinking as car manufacturers demand more investment and introduce sales targets that can limit earnings, said David Whiston, an analyst at Morningstar Inc. in Chicago. While other chains set up standalone occasions, Whiston said, Lithia took a shortcut by taking a share in Shift.

"A combination of Carvana or Shift, or maybe even from companies we have not heard of, smaller startups that are still hatching, they will become much more important for traditional dealers," said Albertine. "This is going to be a very gradual change over time and it is far too early to call a winner."