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The gold rush in used cars

An online evaluation gives you an estimated selling price; the vehicle is next inspected either at home or at a nearby physical branch; an online auction follows.Premium
An online evaluation gives you an estimated selling price; the vehicle is next inspected either at home or at a nearby physical branch; an online auction follows.

Buoyed by venture capital money and the ability to unlock value by aggregating greater quantums of demand and supply, services such as Cars24, Droom, Spinny, CarTrade and CarDekho are digitizing the used cars business. Selling a car on Cars 24, for instance, is a three-step process.

Late last year, Siddharth Mishra, a medical practitioner, decided it was time to upgrade from his Maruti WagonR hatchback to a premium sedan. In a bid to sell his old car, he did the rounds of a few used car dealerships but wasn’t satisfied with the price he was being offered. He then went on Cars24, one among a throng of digital used cars in the market and listed his vehicle. He ended up getting 40,000 more than what he was being offered at the brick-and-mortar dealerships. “I sold my car within a couple of days. While the return was higher, the process was even more convenient," Mishra said.

Mishra’s journey as a seller is being replicated across India as the digital used car market seeks to offer a superior solution to the neighbourhood broker who drives a hard bargain. Buoyed by venture capital money and the ability to unlock value by aggregating greater quantums of demand and supply, services such as Cars24, Droom, Spinny, CarTrade and CarDekho are digitizing the used cars business. Selling a car on Cars 24, for instance, is a three-step process. An online evaluation gives you an estimated selling price; the vehicle is next inspected either at home or at a nearby physical branch; an online auction follows.

Other digital platforms may not offer an auction model but are still very user-centric. They are willing to ‘burn’ more cash to retain the buyer or the seller. While traditional dealerships keep a fat margin on a sale, startups are happy to undercut. They also have less real estate costs, the benefit of which is passed on to the customers. That’s why Mishra and many others like him get hooked. In their bid to organize a large unorganized market, they are filling a void left untapped by the major automakers—except for Maruti Suzuki India Ltd and Mahindra and Mahindra Ltd, there are few organized players. A used vehicle purchase in India has always been a hyper local activity, dominated by local dealers in the markets of urban India. The information asymmetry inherent in these markets meant it was always a bit of a gamble. “Usually, customers go to a local dealer or a classified platform. However, this is not supposed to be a hyper local business since the person who wants to buy a vehicle could be living in another city," said Vikram Chopra, chief executive and co-founder of Cars24. “We are trying to create value by making it more like e-commerce compared to a hyper local business. Cars24 is not necessarily selling a car in the same locality," he added. Online platforms also offer choice, he said further. No offline dealer can have more than 200-300 cars in one place but online, that number could be in thousands.

For now, the share of the organized players is only 10% of the used vehicle market, but that’s changing fast. India’s pre-owned car market was hovering around 4 million units in 2019, or 1.2 times the new car market. That market could grow to 6.7-7.2 million units by 2022, a report by Mahindra First Choice Wheels Ltd, the pre-used car business of Mahindra and Mahindra Ltd, said. In terms of value, this translates to 50,000 crore. The share of organized retail channels is expected to grow to 30%. If that does happen, many of the smaller digital startups of today could become unicorns, or firms with a valuation of over a billion dollars, tomorrow. “The startups are trying to create value by organizing the used car space and the covid-19 pandemic has accelerated the shift in consumer behaviour towards digital platforms," said Avik Chattopadhyay, founder, Expereal, a branding and marketing strategy consultancy firm. “As the Indian market matures, if the growth in new cars is around 7-8%, the pre-owned space should also grow at the same pace. Also, with the new vehicle scrappage norms, the unorganized used car market will shrink further," he believed.

What sort of growth are these startups reporting now? It’s fast and furious.

The fast lane

India, today, has broadly four categories of used car startups. There are the horizontal classified players (Quikr and Olx), the vertical classified players, vehicle auction companies as well as retail platforms. Nearly all categories are seeing robust growth.

Amit Jain, chief executive and co-founder of CarDekho, a car search company, recorded a steep decline in traffic during India’s first lockdown. But his firm bounced back in a few months—post the first wave, unique visitors rebounded by 30%. “We were also clocking 15-20% higher growth from tier-two and tier-three markets. Now, people are booking a car online without even (physically) seeing the vehicle and that I feel is a behavioural change," he said.

Niraj Singh, chief executive of Spinny, a used car retailing startup, said the company was clocking sales of 100 crore per month. “We want to grow four times this year, and plan to sustain the growth in the next three years," he added. Till December 2020, the firm was operating in four cities—Delhi-NCR, Bengaluru, Hyderabad and Pune. It added four more cities by January and February and has plans to expand further in 2021. Jaipur-based Car Dekho is aiming to sell around 5,000-6,000 used cars every month by the end of 2021. Its long-term goal is to sell 50,000 to 60,000 cars every month over the next five years. Similarly, Droom, an auto marketplace, is optimistic too. By 2025, the firm expects to report $15 billion in gross merchandise value (GMV) and close to $800 million or a billion in net revenue. The Gurgaon-based startup currently has a GMV of about $1.5 billion dollars. Cars24 is currently selling 250,000 to 300,000 vehicles per year. “We think the numbers will go north of a million to 1.5 million in the coming years. Our topline has been doubling year on year and in the next 12 months, we will do a million dollars in sales," said Vikram Chopra.

Driving their optimism is a change in consumer behaviour. And the pandemic has certainly played a leading role.

New drives

The pandemic has made people wary of public transport— they would much rather commute by their own cars. But not all can afford a new one. Vehicle prices are shooting up with rising raw material costs, shortages, Bharat Stage 6 emission standards as well as newer safety norms. On the other hand, the purchasing power of customers may have reduced because of the pandemic. Many Indians have lost jobs or had their salaries pared last year. And many families have higher out of pocket healthcare expenses today compared to a couple of years ago. All this has accelerating the demand for used cars and shifting their preferences towards the organised sector. Potential car buyers are now more open to online platforms.

“In April and May this year, we saw a huge rise in covid-19 cases. However, our business did not slip that much. It was down only 12-15% compared to more than 80% witnessed last year," said Sandeep Aggarwal, founder and chief executive of Droom. “There are fundamental growth drivers which are pushing the sales of used vehicles especially online," he added. Apart from the pandemic boost, the organized market is expected to gain from another secular trend, in vogue for a few years—India’s younger demographic who don’t want too much hassle while buying anything. They are aspirational, tech-savvy, and are more likely to check for cars online than hop multiple dealerships.

With personal mobility becoming more of a necessity rather than a luxury, some startups like Droom and CarDekho are planning to organize the entire ecosystem around a car purchase, such as insurance, finance options, vehicle delivery and other services, further boosting the convenience factor. This one-stop shop approach also makes business sense. “We are a platform play, so we do lending, insurance, used and new cars. That’s how we differentiate from other players. The customer acquisition cost also becomes lower, since there are too many verticals within auto. We ensure we are able to service customers in a holistic way," said Amit Jain of CarDekho.

These holistic services and the aggressive expansion across multiple cities have been possible on the back of huge venture capital and private equity interest—one of the surest signs that the market is at an inflection point.

Dollar chase

Over the years, online marketplace Droom did not attract much interest from investors from the United States. One reason was that its founder Sandeep Aggarwal was indicted in an insider trading case by the Securities and Exchange Commission in 2013. The case, though, was dropped in 2020 after Aggarwal paid a fine of $32,500. “In the past, a lot of marquee investors from the US and western Europe stayed away from me (also Droom) despite me having a track record of creating a billion-dollar company (ShopClues, which he co-founded). However, for the first time in our seven-year-old journey at Droom, we raised money from US investors in January 2021," Aggarwal said. He did not divulge the names of these investors.

Nevertheless, for Aggarwal, the funding was a moment that reinforced his belief in the potential of the used car market in India. So much so, he is now contemplating a public listing.

Droom may explore a listing on the Bombay Stock Exchange or Nasdaq in the second half of 2022. “We have done everything that it takes to be a public company listed on the BSE or Nasdaq. We would prefer to be listed on Nasdaq because in terms of future follow-on offerings for a technology company, there is much more depth and breadth in Nasdaq," said Aggarwal.Cars24, which became a unicorn after raising $200 million in October 2020 from DST Global, Moore Strategic Ventures and Unbound, may also explore an initial public offering sometime in the coming years.

Not just India, even globally, the spread of pandemic has boosted sales of used vehicles as customers shunned public transport and ride sharing services. On the back of this trend, startups in the segment have either raised fresh funds from private equity investors at a higher valuation or have listed themselves on different stock markets.

In 2020, American online used car seller Vroom completed a successful initial public offering and raised $500 million with a market capitalization of $2.5 billion, according to Market Watch. Another online vehicle marketplace, Carvana, also reported a substantial jump in stock price last year, as investors bought into the trend of customers using digital platforms to buy, sell or lease pre-owned vehicles. Last month, Singapore-based Carro, raised $350 million in a series C funding from marquee investors like Japan’s Softbank Corp. Britain’s online used vehicle marketplace, Cazoo, is also exploring an initial public offering through a Special Purpose Acquisition Company (SPAC), with a valuation of around $7 billion. The company also raised $311 million in October with a valuation of more than $2 billion.

Private equity firms are bullish about India in the long term since vehicle penetration per household is one of the lowest. According to Niraj Singh of Spinny, potential investors are super excited about this category, especially on the organized side. “In all big markets, startups operating on the organized side of the market are seeing a great response from customers. Seeing those trends, suddenly, bankers (in India) have become very excited about the organised side of the used car market," he added.

They now believe one can build very large businesses by organizing what is essentially an unorganized market.

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