On Vroom’s vir­tual car lot, there’s no pres­sure

On Vroom’s web­site, there’s no hag­gling and ship­ping is free “We have to make sure the car is amaz­ing”

Bloomberg Businessweek (Asia) - - FOCUS ON/MID-MARKET - Jing Cao

About a year ago, vi­o­lent storms hit the Hous­ton area. When the flood­wa­ters re­ceded, Vroom, an on­line seller of used cars, dis­cov­ered it had lost more than 100 ve­hi­cles, equal to about $3 mil­lion in sales. It was a re­minder that the two-year-old Web startup faces some of the same chal­lenges as a brickand-mor­tar re­tailer.

Vroom is one of sev­eral com­pa­nies seek­ing to con­sol­i­date the frag­mented used-car mar­ket. But un­like ri­vals Beepi, Shift Tech­nolo­gies, and Car­vana, which mostly con­nect buy­ers and sellers via on­line mar­ket­places, New York-based Vroom buys all of its cars, then re­fur­bishes and guar­an­tees them—much the way a tra­di­tional dealer does.

Al­lon Bloch, the for­mer ven­ture cap­i­tal­ist who runs Vroom, says many Amer­i­cans who are happy snap­ping up a $10 shirt on­line re­main leery about go­ing there to buy a car, typ­i­cally the sec­ond-big­gest pur­chase af­ter a home. “If a con­sumer spends tens of thousands of dol­lars on a car that they’ll use for many hours ev­ery week and may own for years, we have to make sure the car is amaz­ing both

me­chan­i­cally and cos­met­i­cally,” says Bloch, who was a part­ner at ven­ture cap­i­tal firm Grey­lock Part­ners.

Tra­di­tional chains such as CarMax have helped im­prove the used-car buy­ing ex­pe­ri­ence. But many con­sumers still dread walk­ing onto a dealer’s lot. Vroom and other used-car e-tail­ers say they re­move the has­sle and hard sell. All of­fer hag­gle-free pric­ing, free de­liv­ery, and re­turns within a lim­ited pe­riod.

Amer­i­cans buy 40 mil­lion preowned ve­hi­cles a year, yet CarMax, one of the largest play­ers, has just 2 per­cent of the mar­ket. With plenty of room to grow, Vroom has raised more than $250 mil­lion in eq­uity and debt from in­vestors in­clud­ing Gen­eral Cat­a­lyst Part­ners, Cat­ter­ton, and John El­way, the for­mer quar­ter­back who’s now gen­eral man­ager of the Den­ver Bron­cos, the 2015 Su­per Bowl champions. In 2015 in­vestors poured more than $900 mil­lion into used-car e-tail­ers glob­ally, al­most dou­ble the amount from the prior year, ac­cord­ing to CB In­sights.

Vroom is bet­ting it can win over con­sumers by com­bin­ing tra­di­tional deal­er­ship ser­vice with the ro­bust se­lec­tion on­line shop­pers have come to ex­pect. The com­pany spe­cial­izes in ac­ci­dent­free, low-mileage cars. It’s hard to find any­thing on its web­site man­u­fac­tured be­fore 2013. There are more than 35 brands—in­clud­ing, re­cently, an As­ton Martin and a few Tes­las.

Vroom de­vel­oped its own lo­gis­tics soft­ware to keep tabs on its in­ven­tory of as many as 4,000 ve­hi­cles. Bloch says the pro­gram helps the com­pany’s fa­cil­i­ties in Dal­las and Hous­ton, where ve­hi­cles are in­spected and prepped for sale, work as smoothly as a fac­tory assem­bly line. Buy­ers get a 90-day war­ranty, seven days to re­turn the car for a full re­fund, and one year of road­side as­sis­tance. Bloch says his prices are 8 per­cent lower on av­er­age than those of other deal­ers. Af­ter click­ing “Buy,” a cus­tomer typ­i­cally re­ceives her car in less than a week.

Vroom’s two fa­cil­i­ties process a few hun­dred cars a day, us­ing al­go­rithms to fig­ure out which ve­hi­cles should be loaded onto which truck to be de­liv­ered where. The com­pany farms out half the de­liv­er­ies, but in the next 12 months, Bloch plans to bring the whole op­er­a­tion in-house, so Vroom can move to 24-hour de­liv­ery. Of course, that means buy­ing trucks, hir­ing driv­ers, and adding fa­cil­i­ties, in­clud­ing one open­ing this year in In­di­anapo­lis.

Be­cause its fixed costs are higher than most e-tail­ers’ and its prices are cheaper than those of­fered by tra­di­tional deal­ers, Vroom will need to move a lot of metal very ef­fi­ciently to make money. The com­pany says it sold tens of thousands of cars last year, gen­er­at­ing about $900 mil­lion in rev­enue. Get­ting the cars out the door quickly is key, be­cause their value de­pre­ci­ates ev­ery day they sit un­sold. The longer it takes, says Bloomberg In­tel­li­gence an­a­lyst Kevin Tynan, the less Vroom makes and the less cash it has to buy more in­ven­tory or build out oper­a­tions. Bloch de­clined to spec­ify a time­line to prof­itabil­ity, say­ing the com­pany is fo­cused on in­vest­ing in growth.

In April, an­other flood hit Hous­ton. At 6 a.m. on a Mon­day morn­ing, about two dozen Vroom em­ploy­ees braved the rains to move ve­hi­cles to higher ground. To iden­tify the most high-risk cars and their lo­ca­tions, the work­ers con­sulted newly tweaked soft­ware. This time, Vroom lost only about a dozen ve­hi­cles.

At its Hous­ton fa­cil­ity, Vroom preps a Ford Mus­tang for sale

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