[Editor's Note: Part I of this series was published Tuesday. Part III will be from the vantage point of the subscription providers.]
The vehicle subscription market is still in its relative infancy, so perhaps it is appropriate that the segment has some eyeing the potential for massive growth and others with questions about its challenges.
But when it comes to weighing the pros and cos of subscriptions, Jennifer Reid of Equifax approaches it from the vantage point of, “Who’s the right fit?”
The benefits and drawbacks of subscriptions will depend on the customer using the product.
“I think the pros obviously are for the customer that is looking for something that they can have flexibility with, somebody who’s lifestyle’s changing, somebody that doesn’t want to have the long-term buying experience and what goes with that, things like maintenance; this is just a great option,” said Reid, who is a vice president with Equifax, in a phone interview.
“And I’ll tell you quite frankly, I’m one of those people,” she said. “I turn my cars over quite frequently. You know, I’ve been accused of turning my cars over more than my shoes.
“But when you think about it, what do those people typically fall into financially, right? If you’re not paying cash, you fall into an inequity position, and you get to own all the depreciation,” Reid said. “So, from a standpoint of those types of buyers that want to have a more frequent vehicle change pattern, I think it just gives a lot of safety, security and flexibility, and should be fairly stress-free.”
During the Automotive Intelligence Summit this summer in Raleigh, N.C., industry consultant Maryann Keller mentioned several concerns she believes need to be addressed by providers, starting with automakers.
Among the concerns she has with new-car subscriptions is that perhaps someone paying high figures to subscribe to a luxury car isn’t going to want one that has any mileage on it; they want something brand new, she suggested.
So, given that, what will happen to these cars when their time in subscription is up, she asks?
“They’re going to have to sell them. Who’s going to buy them from them? I guess their dealers are going to have to purchase these cars and sell them,” said Keller, who is the who is the principal at Auto Intel Council-member Maryann Keller & Advisors. “Is there going to be a bias on the part of the potential owners against the car that may have had 10 drivers? There’s a bias against rental cars.”
She points to the requirement in certain states like California to disclose to prospective buyers that a used car has been in a rental fleet.
“And it will sell in the auction for less, simply because of that, even if it’s a perfectly good car,” she said. “And so, if it’s in a mobility fleet or when you have numerous owners, is that going to be another element of bias that affects value? Possibly.”
Looking at the used-car subscription model, Keller highlights important considerations like the ideal number of turns before a car is sold, the potential post-subscription buyer of the vehicle and the “optimum utilization.”
Many dealers are eyeing used-car subscriptions, she said, “because it seems to be another avenue for them to generate revenues.”
Keller added: “Is there a way for them, since they’re in the used-car business, to take a portion of that used-car inventory and actually provide it as a subscription service to their customers?” Several dealers Keller knows, one of which she described as “a very large dealer,” looked into this model and found that “it was not worth it,” she said.
“And the reason why it was not worth it, when they looked at the variables — including the fact that the dealer had to have like $30 million in debt to purchase those cars, because you can’t rent a car that’s on your floorplan, you have to actually own the car — and all the maintenance and the administration that went along with it, they could actually manage that,” Keller said. “The one factor that they couldn’t manage, and even by a small amount, the number was 4 percent. If they missed on the residual calculation by 4 percent, they’d lose money.
“The assumption always has been, ‘Well, I’m renting a used car, therefore the big curl of depreciation is not there,’” Keller said.
“It’s still there,” she said, “because the condition of the car when it comes back is still an issue.”
Keller also likened the model to the rental industry, meaning car dealers would have to have same fleet management “sophistication and discipline” as rental fleets.
“Somebody goes through a speed camera or goes through a toll on a bridge and doesn’t pay it. Or has parking tickets,” she said. “Guess who gets those? The owner of the car, not the driver of the car.”
Dealers who want to get into this space will have to keep this in mind, Keller said. Not that some won’t succeed; it just might be too challenging to be profitable, she said.
Pricing will eventually 'align'
On the consumers side, one potential drawback is that the user is often “paying for convenience,” Reid said. And often, those monthly subscription fees — particularly for some of the luxury automaker programs — can be steep.
“There probably are more cost-effective ways of owning, but I will caveat that with if you’re constantly dealing with negative equity, I think it all kind of nets out at the end,” Reid said.
In terms of price, these programs will eventually “align with the model that they need to be profitable,” she said.
The programs have been created with the aim of being easy to manage, Reid said. She contrasts their setup with that of an auto lender, where “you manage credit risk and then you do have some collateral risk, but it’s more of what the losses are. And that’s usually a very small percentage.”
Meanwhile a subscription company would likely have to manage the consumer, his or her driving behaviors and the collateral itself. “Most of these, what they’re going to need, is sort of an underlying model or analytics and insights that really drive what that financial model really looks like,” Reid said. “And because there’s not a ton of data there, they’re I think pricing it to be, ‘Hey, here’s my one price, keep it easy, and I’m going to start collecting that data,’ especially on the OEM programs …”
Reid also mentioned companies like Fair, which are “taking more of a technology approach in the enablement, but they’re promoting their analytics underneath it and they way that they get drivers into the vehicles.
“I think companies like that are going to get just more and more sophisticated, and you’re going to have a better line of sight into that vehicle management component of it,” Reid said. “So, I think you’ll see pricing strategies align to just a different form of a risk model, like you would have seen in the lender space.
“And they’ll just get smarter about it,” she said. “It’s just that people don’t have that data right now, so I think that’s the phase that they’re in. And if you look at most of these subscription programs, everybody’s talking about, ‘They’re testing … they’re testing these markets.’ Well, what they’re really doing is collecting data, so that they can refine those models and so they can scale them.”
Speaking of scale, there’s likely plenty of room for these models to grow — if current awareness and interest — small yet promising — is any indication.
According to the Cox Automotive study, 25 percent of consumers ages 18-64 are aware of vehicle subscription services. While 10 percent of overall consumers said they will subscribe the next time they need a car, 16 percent of millennials said they would go this route.
“While this form of mobility has only been around for a limited time, research shows that subscription is gaining traction among consumers, particularly those looking to forego traditional ownership,” said Isabelle Helms, Cox Automotive’s vice president of research & market intelligence.
She later added: “Now, despite only having been available for a short period of time, already one in four consumers tell us they’re aware of car subscription services. For comparison purposes, consider that just over half of consumers are aware of car-sharing services, which have been around nearly 20 years.
“With that in mind, 25 percent’s not such a bad number,” Helms said.
And beyond the numbers, Cox Automotive is no stranger to this space, either.
It recently formed a Mobility Solutions Group, owns the Clutch platform and is in a joint partnership with ARI for the Flexdrive platform.
And each of those are continuing to grow, as are platforms like Fair, whose founder and CEO Scott Painter was also keynote speaker at the Automotive Intelligence Summit.
Auto Remarketing caught up with Painter during the event to talk about Fair’s growth and more.
Fair’s growth certainly comes with its own opportunities and mandates. Including raising funds.
“Think of what a pain in the ass it is to go to the bank to get a car loan. We’re going to the bank to get a car loan for everybody. When a customer selects a vehicle in our app and then takes delivery of that car, we actually bought that car,” Painter said.
That type of operation at scale requires some major capital.
“For me, I’m a fundraiser and a company builder, this is the biggest fundraising challenge I’ve ever had,” Painter said during the July interview. “Right now, we’re having this amazing surge in growth where we’re nearly at 200 deals a day in our business. That’s about three-and-a-half million dollars’ worth of cars that we’re rolling every day.”
He added: “You extrapolate that out to a month, all of a sudden, I’m looking at, ‘I need $100 million.’”
In a way, fundraising then becomes the 9-to-5.
“That’s what I do. I’m raising capital, but I’m raising capital in the context of running the business,” he said. “I’ve got a phenomenal team around me. I think we’ve assembled the best auto finance and leasing team that’s ever been assembled.
“I’ve coupled that with a great group of engineers and UI/UX experts and data scientists and front- and back-end engineers that really understand how to take the subject matter expertise, code it and turn it into a wonderful customer experience. And so, putting those two things together is really the magic of the business.”