CarGurus COO: CarOffer digital wholesale platform remains solid

Editor’s note: CarGurus said it has the right to buy the rest of CarOffer but has not made a final decision to do so. An earlier version of this story said the company planned to move ahead with that transaction.

CarGurus Inc., which acquired a majority stake in CarOffer in 2021, might proceed with plans to buy the rest of the wholesale digital trading platform, a move that could be a show of confidence for the struggling division.

And CarGurus COO Sam Zales said CarOffer is poised to break even or become profitable in the second quarter because of the steps taken to retool it.

CarGurus, a Cambridge, Mass., vehicle listings company, is evaluating its option to buy the remaining 49 percent of the company, a process that would formally begin by mid-2024.

CarGurus paid $140 million in cash and stock for a 51 percent stake of CarOffer in early 2021, investing in a company founded by auto retail tech entrepreneur Bruce Thompson. He remains CEO, according to the company’s website.

The digital wholesale business has struggled since mid-2022but Zales said CarOffer has gotten past the worst of it.

“We’ve retooled [CarOffer] to be able to work through any downturn in the industry,” Zales said.

CarGurus booked $64.8 million in digital wholesale revenue in the first quarter, a huge drop from $267.3 million a year earlier. The segment reported an $11.2 million operating loss in the first quarter compared to a $2.1 million operating loss a year earlier.

Its digital wholesale segment includes dealer-to-dealer and Instant Max Cash Offer services and products sold via CarOffer.

CEO Jason Trevisan said during the company’s May 9 earnings call that CarGurus was continuing efforts to reverse financial troubles for CarOffer, including plans to “intentionally reduce volumes sequentially,” upgrading inspection capabilities and establishing policies and procedures to boost quality and reduce “non-revenue generating costs.”

The action was necessary when wholesale vehicle prices started plunging in the second half of 2022, Zales said.

“For every company in the digital wholesale business in the second half of 2022 there was a precipitous downturn in prices, which led to an incredibly volatile industry impact,” Zales said.

CarOffer changes included adding mechanical inspections for vehicles sold through the platform to allow for a more detailed look at everything from exteriors to electrical systems. Improved inspections also helped reduce arbitration cases by 70 percent from their peak in the fourth quarter, the company said. In arbitration, CarOffer investigates and resolves claims from acquiring dealers.

Industry analysts expressed optimism about the progress CarGurus has made so far in restructuring operations.

“We are starting to see green shoots” or early signs that CarGurus has addressed some operational challenges and processes, Tom White, managing director with DA Davidson Cos., told Automotive News. “It’s an ongoing thing, but they seem to have made some solid progress there.”

Marvin Fong, e-commerce analyst for BTIG, agreed progress has been made, noting in a May 9 analyst note that the company saw improvements in arbitration cases, inspection requirements and reduction in rematched trades.

“The progress at CarOffer is encouraging,” Fong wrote, though he cautioned the second quarter might challenge that momentum because wholesale prices are softening, “which tends to correlate with transaction activity.”

Despite CarOffer’s struggles in recent months, it remains a solid investment for CarGurus, White said.

“CarGurus’ timing, when it acquired CarOffer, was pretty spectacular” when new cars were scarce and dealers wanted as much used-car inventory as possible, White said. He added that market volatility and the end of used-car price hikes in recent quarters isn’t necessarily a bad thing.

“There is a sort of normalization, if you will — a reset of CarOffer as a result of that,” White said. “Ideally it would be making money [but] we think it’s a business that structurally can be profitable.”

CarGurus believes the answer is “yes” amid the steps it has taken.

“When you improve inspections and your rematch process, your transportation process, and you fail more vehicles [via inspection] that shouldn’t be going through it, customers get more confident in your platform, and you can run a profitable business even at lower volumes,” Zales said. “And now we can scale that up over time.”