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New ventures focused on selling used cars online have struck deals to raise almost $6bn so far this year, as investors bet big that the last major category of consumer spending to escape ecommerce disruption will finally go digital.

Start-ups that barely existed before the pandemic and decades-old automotive trading groups alike are racing to build out the online marketplaces, consumer brands and costly logistics infrastructure needed to tap into a global used car market that is worth almost $1tn a year.

“The automotive space is lagging the online shift versus almost all other retail spaces, but it’s now playing catch-up,” said Alex Chesterman, founder and chief executive of UK-based Cazoo, which is forecasting revenues to grow by more than 300 per cent to almost $1bn this year.

Chesterman’s digital automotive retailer is set to go public through an $8bn deal with a US special purpose acquisition company this summer, generating proceeds of almost $1bn. Cazoo’s biggest UK competitor Cinch raised £1bn ($1.4bn) in new capital in May.

Cinch and Cazoo are just two of the largest examples of how much fuel is pouring into used-car sites around the world, from India to Mexico.

“It feels like the last major holdout in the shift to a digital economy,” said Tom Leathes, co-founder of Motorway, another UK automotive start-up. “It’s about time that this industry was disrupted and became more efficient. It’s been bad for consumers for decades.”

Companies across Europe, Latin America and Asia are looking to replicate the success of Arizona-based trailblazer Carvana, which was founded in 2012 and is now worth more than $50bn.

Carvana’s shares have more than doubled over the past 12 months, after growing annual revenues by 42 per cent in 2020. Yet its share of the fragmented US used-cars market is estimated at less than 1 per cent, which bulls see as showing huge growth potential.

Consumers have researched their next car purchase online for many years. But the transaction has usually been completed offline, even if it was arranged through a website such as Auto Trader. The pandemic’s lockdowns created fertile conditions to convince more car buyers to look online for the first time, as well as for dealers to shift their focus from the forecourt to the web.

“There’s been a seismic shift in the industry’s view of online business,” said Leathes, after Motorway raised $68m last month to build out its online marketplace, where dealers bid for privately owned cars. “In the past 12 months, all car dealers have had to become online car dealers.”

Alex Chesterman, founder and chief executive of UK-based Cazoo

Alex Chesterman, founder and chief executive of UK-based Cazoo, said: “The automotive space is lagging the online shift versus almost all other retail spaces, but it’s now playing catch-up.” © Daniel Jones/FT

At the same time, the chip shortage triggered by Covid-19’s manufacturing disruption has cascaded through the global automotive supply chain. Constrained production of new cars has pushed up prices in the second-hand market, intensifying competition for used vehicles and becoming a key driver of rising inflation across developed economies.

Used cars were already a £480bn ($660bn) market across the UK and Europe in 2019, according to data cited by Cazoo in its investor presentation, far larger than ecommerce mainstays such as clothing or consumer electronics.

But going into the pandemic, less than 1 per cent of all used car sales were conducted online. By contrast, digital channels account for a third of clothing sales and half of electronics retail.

“Three years ago, it was a big call to get people to spend £20,000 on an ecommerce purchase,” said Will Turner, partner at tech investor Draper Esprit and a Cazoo investor.

To get car shoppers more comfortable with buying online, digital platforms such as Cazoo, Cinch and Europe’s Autohero have introduced Amazon-like features, such as no-quibble seven-day returns and delivery within a few days.

Chesterman predicts that within five to seven years, as much as 30 per cent of the used car market will have moved online. But unlocking this multibillion-dollar opportunity will require huge investment in acquiring inventory, building refurbishment centres and delivery infrastructure, and marketing.

“Fundamentally the challenge has always been it’s an operationally heavy, complex, expensive model to get off the ground,” said Rebecca Hunt, partner at Octopus Ventures, an investor in Cazoo. “There’s no getting away from that.”

For example, the costs of storing and delivering inventory — as well as handling returns — are far higher than in other categories of online retail because of the size and price of the asset.

“It’s clear that there is massive demand,” said Hunt, “but nobody had been able to deliver at scale.”

Carvana, the Arizona-based trailblazer which was founded in 2012, is now worth more than $50bn.

Carvana, the Arizona-based trailblazer which was founded in 2012, is now worth more than $50bn. © Laura Buckman/Bloomberg

That is now changing fast as investors push on the accelerator, with a series of private financings, initial public offerings and blank-cheque company deals.

Germany’s Auto1, which owns Autohero, raised $1.2bn in primary funding from its IPO in February, valuing it at around €8bn. Another new listing last month saw Aramis — which operates used car marketplaces in France, Spain, Belgium and the UK — raise around $300m in new money.

In private deals, Mexico’s Kavak raised $485m at a $4bn valuation in April, while SoftBank led a $360m investment in Singapore-based Carro in June. In India, Spinny has raised $165m so far this year from investors including Tiger Global.

“The market opportunity is so huge here you want to have the best-capitalised player,” said Thibaut Large, partner at private equity firm TDR Capital, Cinch’s majority shareholder.

While its British rival Cazoo is just three years old, Cinch is part of 75-year-old Constellation Automotive Group, which is also the parent company of webuyanycar.com and the UK’s largest car auctions business, BCA. TDR took BCA private in mid-2019.

Last week, TDR and some of the same investors that backed Cinch also put €400m into CarNext, which operates in continental Europe, to take on Autohero.

“There is latent demand in any of these markets,” said Large. “Consumers are dissatisfied with all the traditional ways of buying a used car, so they jump at the opportunity of buying [online].”