Cars.com (NYSE:CARS) has been an independent, publicly traded company for a little over a year now, and the business is striving to maintain its position near the top of the automotive e-commerce space. In addition to improving traffic across its sites and courting new dealer partners, it's pursuing other, less-obvious growth initiatives. Chief among them, Cars.com has focused on converting unfavorable deals that were made long prior to its spinoff from Tegna to a more profitable model, and demonstrating that its platforms are responsible for a greater share of car purchases than is currently estimated.
These initiatives could have a big impact on its sales and profitability down the line, and I recently had the chance to ask the company's CEO Alex Vetter a few questions about them.
Out with old deals, in with the new
Vetter noted on the company's May 9 earnings call that Cars.com has converted nearly 2,600 affiliate businesses to its direct sales channel since November. Converting the remaining affiliate contracts to direct sales remains an important growth initiative for Cars.com. The business was hived off last year from Tegna (which itself was spun out in 2015 from Gannett), but some contracts formed when it was owned jointly by a half dozen major newspaper publishing companies were still in place.
I asked Vetter about the affiliate issue, and he summed up how the company sees the situation and the opportunity presented by switching affiliate markets to its direct sales channel:
When Cars.com went public last June, legacy affiliate agreements that were put in place by previous owners allowed affiliates to continue to sell Cars.com products to dealers at a wholesale rate, or 60% of our average retail rates, on an exclusive basis in certain markets. Those agreements lack appropriate performance obligations and incentives for growth, and therefore haven't been contributing to growth.
Cars.com has converted roughly 60% of its wholesale revenue in affiliate markets from two of its largest affiliates, media giants McClatchy and Tronc, to direct sales. The company still has efficiencies that can be realized in this area. Here's Vetter describing how these affiliate conversions have benefited the business:
These conversions gave us direct control of 30 markets, including Los Angeles and Chicago, which allows us to improve performance by having our own experienced and fully dedicated Cars.com salesforce. And most importantly, to bill at retail prices and pull forward the opportunity to recognize material revenue and profit uplift earlier than anticipated.
Accomplishing 60% of these conversions in less than one year speaks to the speed at which we are pursuing these opportunities as a stand-alone company.
Cars.com is working on making deals with its remaining four affiliate partners, and expects that converting these remaining markets will improve its pricing strength and create new efficiencies across its sales networks. The company expects that progress along these lines will result in significantly improved cash flows.
Cars.com's 2017 10-K cites a $37 billion annual figure for the overall automobile advertising market, and says that Cars.com captures about 2% of this spending. However, Cars estimates that it is actually responsible for a much higher portion of buyer-seller connections. A study the company commissioned that found roughly 33% of cars bought in the U.S. in 2015 were researched on Cars.com.
A big goal for the Cars.com team is improving attribution -- being able to illustrate to dealers that Cars.com was connected to or responsible for a sale. Here's Vetter on what improving attribution means for the business, and how it's utilizing tech assets to make it happen.
Sharing the most accurate data on attribution is an important part of our strategy. It is proof-of-concept of how we deliver on our value proposition to our dealer and OEM partners. We are proud to be the industry leader in the conversation around attribution, and an innovator with our patented Lot Insights technology, which uses geo-fencing to measure physical consumer presence on dealership lots and tracks what consumers are shopping for. We effectively are connecting digital advertising to a consumer's arrival at brick-and-mortar dealerships. As OEMs and dealers increase their digital sophistication, we can help them measure the online to offline impact of their investments.
The company's recent acquisitions also support those efforts to improve attribution -- integrating dealer review platforms as a data source, offering website creation and management as a service to dealers, and improving its position in mobile and artificial intelligence.
The automotive e-commerce market is already highly competitive, and looks to become even more so, but Cars.com is making some smart moves and has feasible avenues to growth if it can continue to execute its affiliate conversion and attribution initiatives, in conjunction with building support at the consumer and dealer levels.