Describing the current auto finance experience as “too complex and confusing” and stuck in the “status quo,” TrueCar Cofounder Jim Nguyen made a pitch to auto finance execs at the American Financial Services Association (AFSA)’s 2015 Vehicle Finance Conference in San Francisco: Engage consumers directly or continue subjecting them “to the finance manager at the dealership.”
“Why can’t we have a Lending Tree-type environment so I can see all my options?” he asked. “What if you were to take a leap beyond that and let the intelligence of the system determine the best deal, because it’s all empirical?”
By “system,” he meant the TrueCar algorithm, and the “leap beyond” refers to an environment in which consumers shopping on TrueCar will make buying decisions based on price as well as available finance incentives.
“I’m looking for the best SUV deal out there. And maybe the best deal is the used one; maybe it’s the new one. There is a manufacturer willing to offer me an incentive, and there is a captive finance company that has zero percent APR,” said Nguyen, describing TrueCar’s vision. “And when I boil it down to my monthly payment, my new vehicle is so much more affordable than that used vehicle.”
This wasn’t the first time a representative of TrueCar has talked about moving beyond new-car transactions. In the company’s April 2014 registration statement, filed with the Securities and Exchange Commission (SEC) a month before its May 2014 initial public offering, TrueCar listed a number of products and services it planned to add.
“We are in the early stages of pursuing our mission to transform car buying for consumers and dealers,” the filing stated, in part. But it also acknowledged possible roadblocks standing in the way of that goal.
“If car dealers perceive us in a negative light, or our relationships with them suffer harm, our ability to grow and our financial performance may be damaged.”
‘Over My Dead Body’
TrueCar and AutoNation had been engaged in contract negotiations several months prior to the expiration of their prior agreement in March. A key sticking point was data: TrueCar reportedly requested data covering all the group’s finalized sales records. But despite reports that AutoNation CEO Mike Jackson said “Over my dead body!” in response to TrueCar’s request, negotiations were far less dramatic than the war of words that played out in news reports following the July 9 divorce — at least according to Marc Cannon, AutoNation’s CMO.
“I’ve heard from other people now that the conversations got nasty and heated. They never got nasty and heated. I was there,” Cannon says. “[TrueCar CEO Scott Painter] was crystal clear that [access to transaction data] was unconditional, and we didn’t agree to that.”
TrueCar declined interview requests for this article, but, according to a May 23 letter summarizing the now-infamous meeting, TrueCar wanted the names, addresses, phone numbers and email addresses of all buyers and co-buyers and VINs, stock numbers and the year, make, model and trim of every vehicle, as well as sales dates, deal numbers, deal status, the salesperson’s name and dealership ID.
The letter, signed by TrueCar President John Krafcik and Senior Vice President of Dealer Development Mike Timmons, stated that the sales data was needed for the company’s pay-per-sale billing system — $299 for every new vehicle sold and $399 for every used vehicle sold. “The data is necessary to power our sales-matching system, which is the basis for identifying sales in pay-per-sale billing,” the letter read.
TrueCar even offered an additional 10% discount off its service fees if more than 90% of AutoNation’s stores used its platform. The firm was also prepared to make exceptions to its write-off policy, noting in its May memo that it would “provide limited partial credits under clearly defined rules.” The firm, which claimed its channel delivered 7% of the 78,560 new units AutoNation sold in the first quarter, also said its platform could represent more than 10% of the group’s new-vehicle sales by the end of 2015.
The letter also noted that TrueCar suspended more than 300 dealers “who did not meet marketplace or customer requirements,” and said the company was prepared to take similar action if AutoNation didn’t agree to its terms.
Cannon’s response: “We are not interested in sharing our data on our customers with anybody else. And why should we?”
Cannon talked to F&I and Showroom five days after the announced split. By then, the two companies had squared off in media reports — AutoNation’s Jackson called TrueCar’s demands “onerous” and “unprecedented.” TrueCar’s Painter responded by calling AutoNation’s decision a choice for consumers: TrueCar’s “truth, transparency [and] upfront price” or AutoNation’s “traditional manner” of doing business.
The two companies even fought over who fired whom.
AutoNation’s Jackson told the Los Angeles Times the dealer group took a hard line to protect its customers’ information. “For all we know, they are selling it to other parties,” he charged.
Painter responded in a letter to the editor published by Automotive News on July 20. “We have never sold the data. We do not use the data for marketing,” it read, in part. “Suggestions that TrueCar may misuse data are untrue and misleading.”
Painter further claimed that AutoNation was underreporting sales attributed to TrueCar. Cannon disagrees.
“This argument over disputed sales, that’s garbage. It’s exactly what we said it was, 3% [of the group’s 550,000 annual sales],” Cannon says. “Quite frankly, I don’t understand why TrueCar responded to us the way they did. Why would you get into this contest?”
The dealer group feared it would arm a budding competitor if it turned over its transaction data, Cannon adds, noting a recent decision by TrueCar to begin withholding contact information for leads the site directs to dealers. “We don’t like the branding mechanism that they’re putting in place with how they cloak emails,” he says. “No one remembers this, but that was the key thing with this whole data issue.”
Asked about TrueCar’s F&I aspirations, Cannon doesn’t mince words. “If you’re a dealer and you have a third party that’s now getting in between you and the customer one more time, is it in your best interest as the dealer?”
‘A Death Spiral’
Jackson’s comments in the coverage of the group’s breakup with TrueCar caused Steve Kalafer, founding chairman of New Jersey’s Flemington Car and Truck Family of Dealerships, to dig into the operation’s sales records. He discovered that 91% of sales attributable to TrueCar since 2006 were made to customers who were either previous customers or within his operation’s designated or adjacent trade areas.
“What does that tell you? Those people would have come to see us anyway,” says Kalafer, who cut ties with TrueCar on July 10, the day after AutoNation announced its split. “It’s not that they want to buy through TrueCar, but if it’s free to check, people will do it. But TrueCar is counting these people.’”
In a now-infamous December 2011 speech, AutoNation’s Jackson described TrueCar’s upfront pricing as “a death spiral” for dealers, words that would be repeated throughout the 2012 dealer revolt that nearly put the site out of business. Fueled by Painter’s statements in the press and his company’s advertising, which played on outdated and largely negative stereotypes, dealers raised questions about data security and customer privacy. They claimed the site was using its DMS access to build a marketing database. They also questioned the company’s compliance with state advertising laws and prohibitions on brokering, pulling dealer associations into the fray. The concerted effort even reached the offices of state regulators.[PAGEBREAK]
In the first four months of 2012, TrueCar’s dealer count fell from 4,916 to 3,734 stores, with Houston-based Group 1 Automotive being the first major dealer group to cut ties with the site. Honda also warned its dealers that marketing dollars would be withheld if they advertised Hondas below dealer invoice and Acuras below MSRP on TrueCar. When the dust settled, TrueCar had lost more than $40 million in the first six months of 2012.
By the end of the year, the marketing channel’s dealer count had rebounded to 5,306, but only after Painter spent the better half of 2012 making amends with dealers across the country. The company formed a dealer council, changed its controversial pricing curve and altered its advertising.
“It was an expensive correction,” Painter told F&I and Showroom in early 2013.
Surprised But Not Surprised
One of the men hired to pull TrueCar out of its own death spiral was Ken Potter. He joined the firm in March 2012 as vice president of dealer development after an 11-year stint with Internet Brands, where he ran CarsDirect.com.
“I was worried initially. I knew why TrueCar wanted me,” Potter told F&I and Showroom just before he was officially named vice president of sales for The Appraisal Lane, a two-year-old firm that offers an online, used-car trade network and communication platform. “They wanted my reputation, and they assured me they were on the right path and could make changes. And we did.”
As for the split between TrueCar and AutoNation, he says, “I don’t look for things like that, so I wouldn’t have seen it coming.”
Potter helped grow TrueCar’s dealer count to more than 10,000 before departing in June, when he penned an open letter to the automotive industry that found its way onto dealer forums and social media groups. He thanked his team at TrueCar and touted their accomplishments, but he also offered a warning many thought was directed at his former employer.
“Dealers are the lifeblood, the salespeople are the soul. You cannot simply get in the middle of the customer and dealer with a great tech product and think you will be great for the industry,” the letter read, in part. “If you receive revenue or profit from a dealer, you should be accountable to them on their terms.”
Potter says the warning was directed at a new crop of well-funded tech firms entering the automotive space. “I don’t want to mention names,” he says, “but all these new companies that believe they can cut the dealer out and go direct to the consumer. None of that’s going to work, so I wanted to caution them.”
About 10 days after TrueCar and AutoNation cut ties, Vroom, a New York-based startup that bills itself as a used-car “etailer” that aims to, as CEO Allon Bloch told Fortune, “create the opposite experience of going to a dealership,” announced it had raised $54 million through Series B funding.
“I don’t think we ever positioned ourselves as anti-car dealer. I think dealers probably do that enough for us,” says Scott Chesrown, a sales executive with the company.
The company was founded as AutoAmerica in 2013 by former AutoNation executives Wayne Huizenga and Kevin Westfall, but changed its name to Vroom when Bloch, former CEO of Wix.com, and Executive Chairman Elie Wurtman joined the company one year ago.
“We’ve kind of been operating in stealth, just trying to make sure we have the model, the processes before we could scale,” Chesrown says, noting that the firm did nearly $20 million in sales in May. “We also have a lot of technology advances we want to bring forward. For example, in the next couple of months, you’re actually going to be able to complete the entire transaction on our website — everything from selecting back-end products to arranging your financing to signing your paperwork electronically.”
Chesrown says going direct to consumers was always the plan, mainly because he’s not sure the third-party model works. “I think the interesting thing for dealers — and probably why they have issues with companies like TrueCar, and this is where I agree with them 100% — is that TrueCar has kind of stepped in and is taking a piece of that margin away from them,” he says, noting that Vroom does source leads from TrueCar. “Their customer is the dealer, yet their model is really all, ‘Dealers are bad. Come to us and we can keep everything fair.’”
Defending Its Turf
In April 2014, AutoNation put third-party lead providers on notice, telling investors the company would put more than $100 million toward its own car-buying site, AutoNation Express, at the expense of underperforming vendors.
“… We looked at it and said, ‘They were increasing prices every year, and they are taking the money we are giving them and building their brand,’” President and Chairman Michael Maroone said at the time.
Maroone, who announced his retirement this past January, had served on TrueCar’s board of directors in 2011 and 2012.
“We felt we could help educate the dealer community about what TrueCar was trying to do,” Cannon says. “As you know, they were not embraced by dealers, and we discovered that maybe it was really more of an independent decision by each dealer. By that time, we had discovered where we were headed from a digital standpoint, and we moved forward.”
After the split, AutoNation executives told investors during the group’s second quarter investor call that it was accelerating the rollout of AutoNation Express, which, according to Jackson, now drives 20% of the group’s sales. The first phase, which executives said was completed six months ahead of schedule, allows consumers to select and reserve vehicles. The next phase, which is already being piloted at select AutoNation stores, will allow AutoNation to purchase cars from consumers. Executives said the group also plans to begin piloting an online financing tool by the end of 2015.
The value of TrueCar’s stock fell almost 9% the day its split with AutoNation was announced, but it rebounded the following day. Two weeks later, the site’s stock value dropped 35% after TrueCar executives warned investors the firm would miss second-quarter and full-year revenue expectations due to lower-than-expected user acquisition spending. However, the site’s stock value spiked again to close out July.
The split also comes at a time in which the site is facing multiple lawsuits filed by dealers, shareholders and the California New Car Dealers Association. The CNCDA alleges that TrueCar is not in compliance with certain sections of the California Vehicle Code relating to dealer licensing, brokering, advertising and disclosure — charges the company’s executives have denied.
In March, New York-based law firm Bellavia Blatt & Crossett filed a mass action lawsuit on behalf of 117 former subscribing dealers as well as nonsubscribers. The complaint, which now counts 200 dealer plaintiffs, claims dealers have been injured by TrueCar’s business practices. The law firm filed a second lawsuit on July 30 on behalf of 100 subscribing dealers. They are seeking a court order requiring TrueCar to openly disclose in its advertising and on its guaranteed savings certificates the fees it charges dealers and how they may impact the price of vehicles. TrueCar has called both suits “meritless.”
“We will also seek a declaration that TrueCar’s business model is illegal in most states as it is not properly licensed,” says Senior Partner Leonard Bellavia, who also weighed in on the split between the site and AutoNation.
“There is recurring evidence that they are in denial of the fact that dealers call the shots,” he adds. “Dealers gave TrueCar a second chance two years ago. If TrueCar wants to survive, it needs to pay close attention to what dealers want, as there are no third chances in this business.”
Potter says he spent three years on the road doing just that. “We did our best to make the product as great as we could. And there are tons and tons of dealers out there who like TrueCar, some that will say they even love TrueCar. And there’s plenty who say they hate it, but we genuinely tried to do the best we could.”
Asked why he left the firm, Potter says the company had grown too big for his liking. “I left because I wanted to continue to do things for dealers, but on a smaller level,” he says.
As for where he sees TrueCar headed, he says, “I’m sure TrueCar will be just fine, and I’m sure AutoNation will be just fine.”