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Tesco cars were launched last month. It was hardly a massive global launch; In fact low key would be my appraisal. To be honest if I wasn’t in the trade I am fairly sure I wouldn’t be aware of it. Tesco’s investment here has been in the greater scheme of things modest. I am sure they are very realistic as to the amount of market share they can hope to capture and by when. But let’s be honest here, Tesco sell everything, cars are just another link in the retail chain. If you can sell a car you have opened up an opportunity to sell finance, insurance, servicing, fuel, tyres, exhausts the list goes on and surely that is why they are in the market at all?
First off, a bit of background on what Tesco have actually bought. Tesco have purchased a stake in Carsite with further options to increase the holding. Carsite in turn were bought into last year by Sir Trevor Chinn former CEO of the Lex Leasing Group, and he is the man who has stitched together the two partners to form the new company.
Carsite have previously been lumped into the same box as Autoquake, as they were both internet retailers. However the business models differed greatly. Previously I would have backed the Carsite model over the Autoquake one. Essentially Carsite was a site, that’s all; they carried no stock and operated out of an airfield in Bedfordshire which was conveniently shared with a couple of other companies, which included lease companies. Their overheads were site management, some sales/handover staff and a building with phone lines and consumables, and probably most importantly the advertising bill. Essentially Carsite got first option to advertise cars coming back off lease, if they received a deposit on a car or substantial interest they would take the car from the leasing company and prepare it for the customer. If an advertised car received no deposit then it stayed with the lease company and probably went to auction. So what they did was gamble on advertising costs, that’s about it.
I have had some dealing with Carsite in the pre Sir Trevor Chinn days. I found them good to deal with, and set up a supply chain with them to one of my overseas buyers. The main problems I had with them were: (A) lack of cars: They never had access to the amount of cars they were advertising. (B) Lack of variety in their stock.: This may have been more my problem than theirs but it is a fact that if you are living off ex-lease cars you will have a lot of duplicate vehicles in your stock book. (C) The product wasn’t great. That’s not a criticism of Carsite. A lot of their cars came back from Motability and two other leasing companies, and in my opinion they needed to broaden their inbox to get a better standard of car.
So do I think Tesco will be successful? You can stand in front of the tide all you want but the internet is upon us and will only grow in strength. I can think of few things now I would hesitate to purchase on the Internet. Internet car sales will continue to be a slow growing niche as it cannot, at the moment, satisfy the majority of buyers who want full dealership facilities. However there is an increasing number of buyers looking to purchase in this way, Tesco have already set up partnerships with car servicing centres to take care of warranties , Surely in time Tesco cars will form an alliance with a car underwriting company or look to set up their own operation. Lets be honest take away the internet aspect and it’s not dissimilar to how many car supermarkets work now.
Tesco obviously have massively deep pockets and can absorb losses in a new market (witness what they are trying to do in the states with “fresh + easy”) even so I can’t see how deep their pockets need to be. They have not committed to setting up garages around the country and employing hundreds of staff. They have formed an alliance with an established company and will act as agent between sellers and buyers, it’s not the sort of operation that will burn cash, even if it does take a while for them to optimise the system. Too many internet based companies have put the emphasis on the technology, and a lot of companies have been formed by tech people on the basis that they know how to code a cool website and will learn the car industry as they go along. As has been proven in the past the medium is not the message. There are several carcasses of failed internet retailers on the side of the road. Some would point to them as evidence that its risky business, however there have been factors.
In timescale the internet has in a short period become a constant in most of our lives. The technology has caught up to support the ideas. Companies like Jam Jar operated (only a couple of years ago) at a time where the internet was something I dialled up on my PC when I came home from work in the evening. Now I read the newspaper front pages on my Smartphone in bed, before I get up to start the day. People sit on the train browsing on their laptops, pads and phones routinely. Everybody has the time to browse for consumables, or cars on the web. Previous Internet based companies where generally marketed well or had good finance behind them etc but where still viewed as “Internet start ups”. Subsequently no matter how well they were presented they were distrusted. This time it is Tesco. People trust Tesco we are talking about a company with 6000 stores worldwide that controls 30% of the UKs retail sales. It’s fair to say they are pretty big and well trusted; it’s fair to say that £99 refundable deposit on a car will be taken as read by everyone bar extreme cynics.
So far they have ticked a lot of boxes but what else do they have .Lets have a quick look at the man who is heading up the business Sir Trevor Chinn. That would be the same man who steered the ship at lex leasing from the 60s through the 90s when they became the largest car lease/finance company in the country, eventually taking over the RAC. It would be fair say the contacts are there to solve any supply problems and the car trade business experience is proven. Whether it is today or next year , internet based selling will be a fixture of the market in the future. It will be a slow evolution rather than the revolution I would have foreseen years ago. There will always be room in the market for local used car garages although personally I believe it a braver man than me who would set up a traditional car lot today. Any dealer will attest that the internet has at least proved that if you advertise a car online cheaply, somebody will travel three hundred miles to buy it from you. The old reliables that car dealers would pay a premium for, like a pitch in a good area to capture passing trade, are less and less important as people are prepared to go further afield for bargains.
Tesco have already come out and stated they have no intention of starting a price war. This for me is the bottom line in the car trade. The sort of margins on cars sold now are increasingly smaller, and more and more profits are being subsidised by the cut from finance and warranty sales. Ultimately there is only so low a car can be priced. And in many instances the big supermarkets and retailers are already working off slim margins. Tesco will not be in a position to dictate the price because lease companies will only sell to them if they are taking a premium over auctions or current remarketers, and auction prices are holding steady because the lease companies are run on such lean figures that they really only want to lease stock that will have attractive residuals. We have all seen the problems that niche leasing companies have run into in recent years.
So that’s my summation. Tesco are not here to eat up the market, they are certainly not here to knock 30% of the price of used cars because that is an impossibility, but they are on the right lines for taking a piece of the action, and I will be watching their growth with interest.
© 2011, MD. All rights reserved.
