BREAKING: Fort Lauderdale, FL, June 19, 2017 – Amazon.com (NASDAQ: AMZN) jolted the automotive retail industry this morning when it announced plans to buy giant AutoNation (NYSE: AN); introducing more uncertainty into a sector already faced with massive disruption on the horizon ranging from online car sales to autonomous vehicles.
The $5.33 billion deal, a 30% premium over AutoNation’s current market value, heightens a years-long attempt by Amazon to penetrate the automotive retailing space in America. Amazon has already announced plans to rebrand AutoNation’s 300+ locations as “Amazon Vehicles,” and will reportedly offer free 2-day shipping to its Prime members on any vehicle located up to 500 miles away.
Not Really, of Course
Amazon didn’t really buy AutoNation, of course, but they certainly have the cash to buy every single publicly-traded automotive retailer and still have billions left in the bank. The question is not “Will Amazon buy an existing automotive retailer?” but rather, “Which existing automotive retailer will Amazon buy?”
Okay, so which retailer will they buy?
At first blush, the Wall Streeters will point to Carvana (NYSE: CVNA) as the likely target, given their reported “advantages” in the online selling space. However, upon closer inspection (and Amazon will certainly inspect this one closely), Carvana offers nothing Amazon cannot build for itself much more cheaply than the $3 billion or more it would cost to buy Carvana.
But, doesn’t Carvana have the online sales market cornered?
Not even close. The ability to fully sell cars online (save for the “wet signature” requirement in every state) is available right now to every dealer in America – including new car dealers. Moreover, there will be literally thousands of dealers that will add this to their websites in the next 12 months or so; effectively negating any advantage Carvana feels they can claim.
Finally, without the profitable fixed operations departments, and physical lots where local customers can browse, Carvana finds itself at a decidedly large disadvantage to traditional dealers.
Is Amazon Buying Carmax?
If Amazon is only interested in selling pre-owned vehicles, then Carmax (NYSE: KMX) – or the much smaller and seemingly more efficient CARite – makes more sense. These operations are already profitable and have physical lots for buyers to browse. Plus, many used retail chains like CARite already include profitable fixed operations departments.
Of course, CARite, with only 24 locations, is likely much too small to catch Amazon’s eye. Additionally, they would need to add true online retailing to give Amazon the package they’re probably seeking.
So, we’re back to Carvana?
Nope. Again, not even close. To paraphrase what I wrote earlier, any dealer can add true ecommerce functionality to their website today (using cost-effective tools like AutoFi). Plus, third parties (like Chase) have the ability right now to complete car deals fully online even for those dealers not quite ready to add this to their sites.
Amazon Needs Bricks & Mortar Auto Retailing
Amazon discovered with their attempts at the grocery business that without physical stores their penetration would be limited. (Thus, the Whole Foods purchase last week.) The same is true for automotive retailing.
As I wrote in Why Carvana Will Fail, “T-Rex doesn’t want to be fed. He wants to hunt.” In other words, consumers might hate the dealership experience, but most still want to shop for cars. An unprofitable Carvana would require too much additional investment to create an offline shopping experience satisfying enough for today’s consumer.
Okay, what about Vroom and Texas Direct Auto?
Alright, now you’re making some sense. What Wall Street seems to believe Carvana is, Vroom might actually be… plus, they own Texas Direct Auto and all of the terrifically efficient processes Texas Direct has created and improved over the years. (And, I believe they might be profitable.)
Why Won’t Amazon Buy AutoNation?
Who said Amazon won’t buy AutoNation? At a market cap just a billion or so above Carvana’s, AutoNation offers so much more, including: instant profitability; fixed operation, 75 times the footprint (if you only count Carvana’s vending machines); and new cars.
But, will the OEMs let Amazon buy new car franchises?
While there will be some concessions required for approval (as there would be no matter who was buying AutoNation), I cannot imagine an OEM that would want to be left on the outside looking in on a deal like this. I predict that if Amazon bought any dealer group, the bulk of the OEMs would be lining up to facilitate even more transactions in favor of Amazon.
Well, then which new car group makes the most sense?
Truly any of the publicly-traded groups are a bargain right now (in terms of market cap). Additionally, all large non-public groups (like Berkshire Automotive) should probably be included in Amazon’s target list. Finally, players with international presence like Penske Automotive (NYSE: PAG) or Group 1 (NYSE: GPI) possibly make more sense than a group with only a domestic footprint, like Asbury (NYSE: ABG).
To help make the point about these groups being bargains: as of this writing, Carvana’s market cap is twice that of Asbury or Group 1 or Sonic (NYSE: SAH); with just a fraction of the sales and footprint these groups possess.
If Amazon plans to crack automotive retail (which I believe they do), they will buy someone who is profitable, with a large footprint, and then grow from there. So, while this post’s headline is inaccurate today, I cannot imagine a similar headline isn’t on the horizon… and it might just be much closer than you think.
Steve Stauning, is considered an expert in most everything automotive, from sales and marketing to The Customer Experience. He is also an extremely popular keynote speaker, writer, and industry consultant. Learn more about Steve at SteveStauning.com.