Used car e-commerce platform Shift has acquired some of competitor Fair Technologies’ technology, allowing Shift to become the Amazon of the used car marketplace, a platform that displays third-party listings from dealers alongside the company’s own inventory.
The deal is a nod toward the direction the online auto market is moving, where even the sale of used cars will require a first-class, seamless user experience. Rising inflation and a supply chain that was already constrained by the pandemic and will now suffer further due to Russia’s war in Ukraine has led to a decrease in new car purchases, which means fewer used cars are hitting the market.
Demand for vehicles, however, has not dropped, leading to skyrocketing prices for used cars. From 2020 to 2021, prices on Shift’s platform went up nearly 40%, from around $16,400 to a nearly $23,000 average sale price, according to George Arison, Shift’s co-founder and CEO. More generally, year-over-year, used car prices have gone up nearly 33%, according to data from Car Gurus.
“In Q1, we’re starting to see retail inventory prices start to depreciate like they normally would, so our assumption is that 2022 will be more like 2019 in terms of normal patterns of depreciation, but we don’t expect prices to go back to where they were in 2019,” Arison told TC, noting the average car sales price increase from 2021 to 2022 is so far only 17.5%, but that those vehicles are on average a year or two older than the previous years. “Which is really tough because people who thought they could afford a $450 per month car are now told to buy that same car for $600 per month. On top of that, you have a higher interest rate because interest rates are going up.”
The result is that the average consumer is shrewder than ever and eager for a site that can help them find the best deal for the best price and with plenty of flexibility. Companies that don’t get the UX down won’t survive as the industry consolidates and responds to such consumer demands. The average expected revenue lost from poor digital experiences in the automotive industry is as high as 18%, according to new research from Qualtrics, which also found that reducing the effort required to a complete a task online can lead to a 23% increase in spend.
That’s what makes Shift’s purchase of Fair’s tech so powerful.
Fair, which has had a tumultuous past marked by unsuccessful attempts to commercialize auto leasing and subscriptions, spent the last 18 months building what amounts to a fintech platform, one that allows customers to shop for cars from a variety of sources from the comfort of their home; schedule test drives, fulfillment and delivery; handle trade-ins; buy insurance; purchase or finance a car; and buy “anything that you could possibly want to attach to a car transaction,” said Brad Stewart, CEO of Fair.
Dealers can win from this tech, too, because they “can manage the entire transaction via a proprietary digital onboarding platform, then easily schedule an at-home delivery,” according to Shift’s Q4 and financial year 2021 letter to shareholders, which notes that the platform can help dealers not only participate in e-commerce but also grow market share.
“This arc of self service, of being able to shop from your couch, of getting it in two minutes, of integrated transaction capabilities that come with a brand promise — does Shift have it all figured out? I think strategically they do,” Stewart told TC. “Ultimately, self-service today has to continue to be refined and improved in a way that allows you or me to get on the site and transact versus picking up the phone to ask for support, which we still see quite a bit.”
Stewart said he could imagine a world where eventually all pricing options were included, such as subscriptions and leasing, two ventures that ultimately led to Fair’s demise as the startup realized not was scalable and did not have product-market fit. On the one hand, leases or subscriptions could incur an additional $25 per month, for example, when compared to financing a vehicle. Even though those options provide a lot of perks in terms of service, maintenance and trade-ins, in today’s economy, customers are less likely to increase spending even marginally.
At the same time, that extra $25 per month wasn’t enough to cover the cost of operations on Fair’s end, which meant the company scaled in a very inefficient, unprofitable way. So unprofitable, in fact, that despite its new winning product feature, Fair was basically forced to sell its most prized asset after burning through so much of its vast sums of cash: The company had raised a total of $2.1 billion in over 13 rounds, the latest of which was in 2019.
Now, without having to put down any money upfront, Shift is reaping the benefits of Fair’s tech, and its relationships with dealers, to lay the groundwork for the future of automotive purchases. In a transaction that’s expected to close during the second quarter, Shift will buy Fair’s assets for $15 million in cash and a number of shares of Class A common stock equal to 2.5% of Shift’s outstanding shares. At today’s stock price, that equals about $44.8 million, but the real number will depend on Shift’s share price at the transaction’s closing date.
The purchase will be funded entirely by SoftBank Group, which has agreed to loan $20 million to Shift to be paid back by 2025, an attempt to recover a sliver of its losses. SoftBank Vision Fund invested $385 million in Fair’s Series B, and SoftBank itself, along with Mizuho Corporate Bank, gave the company $500 million in debt financing back in 2019. Fair’s debt has been sitting with SoftBank Group since December 2020, said Stewart.
While Fair’s dealer marketplace team will join Shift, Stewart is unlikely to follow along and instead intends to take some time to think about his next move, the executive told TC. Fair’s other assets — its legacy fleet and consumer accounts business — are being sold privately to a financial buyer. The proceeds will go into the company’s cash reserves, which will be used to pay down the debt, according to Stewart.
