Shift eyes captive financier, acquires marketplace assets from Fair Technologies

Shift is the latest digital retailer to eye a captive financier as the company looks to expand its reach — and revenue — through the acquisition of Fair Technologies ’ dealer marketplace assets. The digital retailer is looking to start planning its captive toward the end of the year as the company scales its revenue, Shift Chief Financial Officer Oded Shein said Tuesday on the company’s earnings call. In fact, Shein estimates that a captive finance business could add at least $700 in profit per unit sold. In Q4 2021, Other gross profit per unit (GPU), which includes finance and insurance (F&I) revenue, clocked in at $1,137, up 53% year over year from $743, according to the earnings presentation. “A captive was always in our plans for the future,” Shein said. “The question about a captive is usually of scale, because in order to finance the captive, you have to be active in the [asset-backed securities] market and a repeat issuer. “We need to have some kind of scale — before we talked about the scale of at least $1 billion in revenue — and as you’ve seen from our guidance, we’ll be able to get there by the end of this year, which means that we can start planning and see the timing of when we’re going to launch” the captive, he said. Shift estimates it will be able to hit $1 billion in revenue by the end of 2022 and sell somewhere in the ballpark of 34,000 and 38,000 vehicles. In Q4 2021, revenue clocked in at $196 million, an increase of 167% YoY, and more revenue than the company generated in the entirety of 2020, according to the earnings supplement. E-commerce sales, too, jumped 95% YoY in Q4 to 6,441 units, bringing 2021’s total to 23,251 units, a 145% increase YoY. Shift sourced 94% of its e-commerce units from customers and partners. “We don't have specific plans of when and what form [a captive is] going to take,” Shein said. “Look at our competitors and other possibilities, you know that you can basically double that F&I contribution [with a captive]. So, the premise here that we're going to start slow and build it up from there. The good news is that it gives us opportunity to grow the GPU even above the $3,800 to $4,000 [level] with additional captive money.” Fair acquisition In line with the company’s growth efforts, Shift announced the acquisition of Fair Technologies’ dealer listing marketplace in a $15 million cash and 2.5% equity deal, which will be funded through a $20 million debt facility with a 6% coupon from SoftBank , a major investor in Fair. The acquisition is expected to close in Q2. Shift will acquire Fair's marketplace assets, tech stack, domain — Fair.com — and several patents, Fair Chief Executive Brad Stewart told Auto Finance News . Employees from Fair's product management team, design team, engineering team, and "many folks involved who are focused on building the commercial relationships, the supplier relationships, etc., that will essentially allow the digital marketplace to function, are even being considered for employment at Shift," he said, noting that it is still undecided which team members will move to Shift. "I think this is an amplification play," Stewart said. "Historically, Shift has been what what I would refer to as kind of a 1P, or vertically integrated ecommerce business, where every car that that they sell is a car that they've acquired either from an auction or from a consumer trade-in. And then that car is fixed up, refurbished — it's owned by them. And ultimately, they profit on the spread between what they purchase the car plus what they fixed it for, and what they sold it plus the attach rate of lending and F&I products. "The Fair platform, what we bring in terms of a 3P market place — third party inventory — dramatically expands their [total addressable market] and dramatically expands their ability to put inventory on the platform. It allows them to be a service provider to dealers in terms of ecommerce capabilities," Stewart said. Access to third-party dealer inventory is expected to help scale revenue at Shift and eventually support the creation of the company’s captive, Shift Chief Executive George Arison said on the company’s earnings call. “For the last 18 months, Fair's engineer team has been developing a digital marketplace platform for third-party inventory, including a proprietary dealer-facing onboarding platform. Users can manage the entire transaction via this platform that is easily scheduled at-home delivery. It is the ideal solution for dealers to participate strategically in e-commerce, grow market share and develop long-term relationships with customers,” Arison said on the earnings call. Shift is expecting to launch its first alpha version of third-party listings on the platform at the end of Q2, which will allow the retailer to expand its “inventory assortment” and “drive margin expansion,” Arison said. “Obviously, if we are able to sell more cars with the help of a marketplace model than we had anticipated selling with the core shift on inventory, that will only help the captive business because captive really does require frequency of issuance in the ABS market,” Arison said. “So, if we're envisioning 100,000 units in a few years and now with the marketplace we end up doing 20,000 or 30,000 more, that will just create an opportunity for the captive.” The announcement comes on the heels of market expansion in 2021. Shift converted Texas markets, including Austin, Dallas, Fort Worth and San Antonio, to its full omni-channel offering. Auto Finance Risk Summit, the premier event for risk and compliance management in auto finance, returns April 25-26 in San Diego. This event is the central resource for education and networking focused on best practices in risk management and will prepare your team for the dynamics of the evolving auto finance market. To learn more about the 2022 event and register, visit www.AutoFinanceRiskSummit.com .

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