In mid-2001, CarsDirect.com was one of the few surviving online direct auto buying services and a brand leader in the industry. It acquired competitor Greenlight.com at the end of January 2001, while other sites—including Microsoft CarPoint's Drive-Off.com subsidiary and CarOrder.com of Austin, Texas—were shutting down. Nevertheless, CarsDirect.com CEO Robert Brisco was confident that the company would survive, eventually go public, and even achieve profitability.
SUCCESSFUL TEST LED TO NATIONAL MAY 1999 LAUNCH
CarsDirect.com was created at the Internet incubator Idealab, which also developed such Internet companies as eToys.com and GoTo.com. Co-founders were Bill Gross, founder of Idealab, and Scott Painter, who became CarsDirect.com's CEO. At the time CarsDirect.com was founded in Culver City, California, in late 1998, it was a bold step to try and sell autos and trucks directly to consumers through a Web site. Existing auto buying services, such as Autoweb.com and Autobytel.com, did not sell cars themselves. Rather, they referred prospective buyers to brick-and-mortar dealers, who paid them for the referrals.
CarsDirect.com began selling vehicles over the Internet through a test program launched in December 1998. Loan and lease financing for customers was provided by Bank One Corp., which partnered with CarsDirect.com to form CD1 Financial.com, an Internet auto lending and leasing company. The outlook for online car-buying services was favorable, according to Forrester Research, whose report noted that 2 million people researched their new car purchases online in 1998. Forrester projected that 17,000 people would buy their cars online in 1999, a figure that was projected to increase to 470,000 households by 2003, representing $12 billion in online sales.
CarsDirect.com's test proved successful. It sold 277 cars in April 1999, and in May the company launched its national Web site. It had received about $30 million in financing from several sources, including Idealab, which held a 40 percent stake in the company, and Michael Dell's venture capital firm MSD Capital LP. In the two months following its official launch, CarsDirect.com sold more than $1.5 million worth of vehicles a day, making it the fastest growing company developed by Idealab. It obtained vehicles from a network of 1,200 dealers.
To purchase a vehicle, prospective customers would use a series of pull-down menus at the company's Web site to select their cars and choose their options. In the final step, customers chose a method of financing their purchase. As the Los Angeles Business Journal noted, "CarsDirect is the only company through which a customer can make a complete purchase on the Web" of an automobile or truck. Later in the year, Gomez Advisors Inc., which ranked Web retailers, named CarsDirect.com the best overall automotive resource for online customers among the more than 100 automotive Web sites that offered some type of shopping help.
AIMED TO BE A BRAND LEADER
Five months after its national launch, CarsDirect.com began building its brand with a $20 million advertising campaign for the fourth quarter of 1999. The company hoped the campaign would help boost sales from more than 1,000 cars a month to more than 2,500 by the end of the year. According to Media Metrix, CarsDirect.com received 215,000 unique visitors in August 1999. Comparatively, referral site Autoweb.com received 731,000 visitors and Autobytel.com received 1.1 million. By November the company was selling more than 1,400 vehicles a month. As part of its brand-building efforts, CarsDirect.com announced a three-year deal to sponsor a NASCAR Winston Cup race at the Las Vegas Motor Speedway.
Also in the fourth quarter, CarsDirect.com named Robert Brisco as its new CEO, with former CEO and co-founder Scott Painter moving to vice chairman. Brisco was 36 years old when he joined CarsDirect.com. He formerly was president of the theme park and entertainment complex Universal Studios Hollywood and CityWalk. At one time, Brisco also worked as an advertising and marketing executive at the Los Angeles Times. He joined CarsDirect.com just after the company had raised $280 million in its mezzanine round of financing, an amount considered one of the largest private equity placements ever secured by an Internet company. Brisco planned to use the new investment capital to improve customer service and build the firm's brand. He told the Los Angeles Business Journal, "We want to make this the best retail experience consumers have ever had." Brisco also announced plans to expand the company's network of 1,700 dealer partners.
SURVIVED DOT.COM SHAKEOUT OF 2000
By the time Brisco took over as CEO, CarsDirect.com had figured out how to price its vehicles without losing money on every sale. Initially, its policy was to price vehicles at invoice plus one percent. That resulted in under-pricing by about $1,500 per vehicle. CarsDirect then changed its policy to make deals at market prices. The company found that some high-demand vehicles could be sold at a much larger premium over invoice, while other vehicles could be sold below invoice price. By the end of 1999 the company was breaking even on its vehicle sales. It expected much of its revenue would come from the finance, leasing, insurance, and warranty products it could sell along with each vehicle. Dealers would participate by earning incremental income and handling trade-ins.
In early 2000 CarsDirect.com began offering extended service contracts, which added $800 to $900 to the cost of a vehicle. The company also improved its Web site by adding live online customer service technology that helped shoppers fill out forms and complete the purchase process. In March 2000 Cars-Direct forged an alliance with competitor Autoweb.com in an effort to capture a larger share of online automotive buyers. The two companies planned to jointly develop a direct new car buying service on Autoweb.com which would enable consumers to receive a fixed price on vehicles and conduct the entire purchase process online.
CarsDirect.com, as well as the entire online auto business, suffered through several speed bumps in 2000, some more serious than others. At least two consumer-based studies offered negative assessments of the online auto business. They included one by CNW Marketing/Research, which showed that eight different Web sites, including CarsDirect.com, routinely published inaccurate pricing information. An evaluation of five sites by Consumer Reports found that in many cases potential customers did not receive requested price quotes within two days. Oftentimes, the quotes were for vehicles other than those consumers requested. Meanwhile, established brick-and-mortar dealers were lobbying state legislatures to further restrict online auto sales, which already were prohibited in 11 states. Additional opposition was coming from the Big Three automakers, which warned their dealers not to sell cars to online brokers. For its part, CarsDirect.com noted that it was not a broker, did not intend to buy dealerships, and was not violating any dealer franchise agreements with the automakers.
CarsDirect.com planned to go public in 2000 and filed for an initial public offering (IPO) in May 2000. It planned to raise $175.2 million through its IPO. However, as the market for Internet IPOs shriveled during the year, CarsDirect.com scrapped its IPO plans in December. It was one of 27 companies that withdrew their registration statements for IPOs. Although CarsDirect.com lost $144 million in the previous 15 months, the company announced it had developed plans to be a profitable, long-term player. As a private company, it had raised more than $300 million in private equity financing since its inception. That included a mid-2000 investment from the Penske Automotive Group, which bought a 10-percent interest in CarsDirect.com for $17 million. As a result, all 117 Penske-owned dealerships would display their inventory on CarsDirect.com 's Web site. By this time CarsDirect.com had 2,500 licensed franchised dealers in its network. Following the investment by Penske, Roger Penske replaced Scott Painter on CarsDirect.com 's board of directors, and Painter subsequently left the company to start a new company called Direct Ventures.
The end of 2000 and early 2001 saw an industry downturn for online auto sales. CarsDirect.com reduced its workforce by 12 percent in November, laying off about 90 of its 750 employees. On February 15, 2001, Microsoft CarPoint shut down its DriveOff.com subsidiary. The direct selling segment of the online auto business further consolidated in February 2001 when CarsDirect.com acquired competitor Greenlight.com, which enjoyed exclusive arrangements with Amazon.com and Autotrader.com. Following the acquisition, CarsDirect.com CEO Robert Brisco noted three immediate benefits. First, CarsDirect.com experienced a 25-percent increase in sales and traffic, much of which came from Greenlight.com 's relationships with Amazon.com and Autotrader.com. Second, the acquisition brought in three more top dealer groups to the company's network of dealer partners, giving CarsDirect.com four of the top six automotive dealership groups in the United States. Finally, CarsDirect.com gained customer relationship management (CRM) technology in the acquisition. As a result of the acquisition of Greenlight.com, CarsDirect.com became the exclusive automotive partner of Amazon.com and had a "car tab" on its site. The company also gained direct mail access to Amazon.com 's huge customer base of 29 million people, representing one in 10 U.S. households.
By 2001 CarsDirect.com had increased the size of its affiliated dealer network to nearly 3,000 dealers. Brisco noted that the industry was in the midst of a shakeout, where only the strongest, best-capitalized companies would survive. He predicted that there would be another year or two of industry consolidation. Meanwhile, CarsDirect.com would offer consumers the largest multi-brand automotive shopping experience in the marketplace.
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SEE ALSO: Greenlight.com; Business-to-Consumer (B2C) E-commerce