I normally don’t write about B2C platforms, but what the heck, I normally don’t shelter in place or wear a mask either. Also, the Vroom S-1 was simply too interesting to skip. I’ll keep my comments brief and focused on the underlying economics.
What is Vroom?
Vroom “offers an end-to-end, e-commerce platform to research, discover, buy, sell, transport, recondition, price, finance, register, and deliver vehicles nationwide”. The company:
1. Buys used vehicles from consumers, auctions, used car companies, etc.
2. Picks up those vehicles from sellers, reconditions them, and
3. Finally, Vroom resells the vehicle to buyers using an e-commerce site. (Vroom even delivers the vehicle to the consumer.) Along with the vehicle sale, Vroom sells financing, insurance, and warranties.
As every company does these days, the company assures us it uses data science and machine learning to optimize every aspect of its business: marketing, customer experience, pricing, sales velocity, sourcing, and logistics.
Vroom E-Commerce Economics
While Vroom has three business segments, the heart of the company is its e-commerce operation. E-commerce accounted for 62% of revenue in the three months ending March 31, 2020. Vroom defines its Gross Profit per Unit as seen below:
For the three months ended March 31, 2020, here are the key metrics for Vroom’s e-commerce segment:
- Revenue: $233 Million
- Units sold: 7,930
- Average Revenue per unit: $29,382
- Total Gross Profit: $14.3 million or about 6% of GMV (think of this as total “take rate”)
- About 47% of this gross profit comes from Vehicle Gross Profit as defined above and about 53% of vehicle gross profit comes from the sale of additional products. The former seems to be shrinking, while the latter is growing.
Note: this is gross profit, not operating profit of the two product lines within the e-commerce segment–vehicle and product sales. Unfortunately, that’s as far as the S-1 takes us regarding product line profitability. Selling, general, and administrative costs are not broken out by product line or segment. (By the way. S, G, and A are much larger than gross profit right now. The company lost $41 million in the latest quarter.) In any case, it’s a thin margin business clearly dependent on upsells of financial services.
Vroom from a Platform Perspective
Vroom is an e-commerce platform for both buyers and suppliers of used vehicles. As you can see, it’s not a peer-to-peer marketplace as eBay motors or Craig’s List are. Vroom tries to add trust in the form of reconditioning and warranties, logistics for user experience, as well as transaction support in the form of financing. This also requires the company to add some physical infrastructure, but not full dealerships. Carvana appears to offer many of the same services (and vending machines), but I’ve not done an analysis of their business. (You get what you pay for in blogs.)
Any car dealer with a strong e-commerce presence is a reasonable, albeit local substitute for Vroom. CarMax and AutoNation might also become national competitors with “omni-channel” offerings, as Vroom notes in its S-1.
The used car market is so gigantic perhaps it can support many different flavors of what people term “marketplaces”. In any case, it will be fun to see these giants with different business models duke it out.