#10- Why I would not invest in 4W servicing startups?
Sharing my understanding of the 4W servicing industry, and learnings from a failed startup in this space
Learning from the wisdom of the crowd, and especially from its failure is important. It not only makes us wiser, but also prevents us from committing the same set of mistakes.
In today’s post, I will share why I would not invest in 4W servicing startups, and showcase the story of a failed 4W servicing startup.
My understanding of the 4W servicing industry is as follows -
Industry structure does not favor 4W servicing startups
Car aftersales is a segment at most dealerships, along with multi-brand service centers, and franchisee outlets of lubricant brands like Shell, Mobile, Gulf Oil, etc. This is an industry where there can be no 100% assurance on quality, hence most brands compete on pricing, and end-users switch at even 5% discounts implying no brand loyalty. Additionally, a trend witnessed in cars that cost upwards of a million rupees, owners prefer getting their car serviced from company authorized workshops.
B2B is large, but not an attractive business
B2B in terms of fleet management (Uber, Ola, Zoom, etc) is a large addressable market. According to my understanding, the opportunity is upwards of Rs 400 cr annually and is ripe for grasp for anyone willing to dabble in this piece. Most 4W servicing startups are excited about this piece because it can give a very good growth.
But there is a catch. All these ride-share companies like Uber & Ola have an in-house fleet management team with a very strong automobile background, and are hard taskmasters. Achieving upwards of 7-8% gross margins while maintaining high service quality is next to impossible. After all, why would they let vendors earn high margins?
Lastly in the B2B piece, cab owners are unwilling to shell higher for quality parts and prefer local aftermarket spares, thereby further reducing margins. Not to mention lower service quality.
B2C is a challenging market
While startups in the 4W space will show promising revenues (not sustainable, however) in B2B piece, the B2C piece will continue to remain a challenging market. About 65% of the market is cornered by authorized dealer workshops, and the remaining is split between the startups, the unorganized market, multi-brand outlets, and lubricant franchisee outlets.
Here, the stiffest competition faced by startups is from authorized dealer workshops. With vehicle sale margins falling to low single digits, even negative during times of steep discounts, dealerships make almost 90% of their profits from the workshop business. They implement several strategies like multi-year warranties, telematics, and free limited-period repairs to lock-in the customers for a considerable time.
Other issues surrounding this business are startups being split between the ‘asset-light franchisee model’ and ‘company-owned outlet model’. Franchisee model is asset-light, quick to set up but has low service quality compared to the high fixed cost company owned and operated model. Many startups also on-board mechanics on a fixed pay which quietly increase costs, and backfires during times of low business. Another key issue faced is mechanic-attrition and the costs associated with training them.
The story of Autto.in, a 4W doorstep car servicing startup
“Autto.in was an on-demand doorstep car service provider (in India), created by Deepak in 2017. Soon after launching, a co-founder joined him and they started marketing the startup, spending a lot of money on customer acquisition. As money burnt, they decided to reach investors, who put them pressure in growing fast. After some months, they decided to shut down.”
You can read their detailed story here.
What led to the failure of Autto.in?
Lack of a clear strategy- There was no fixed strategy for customer acquisition. They went from unsuccessfully distributing flyers & leaflets to setting up auto servicing camps in housing societies which shot up their CAC to $12/user (~Rs 850).
No clear roadmap to positive unit economics - This industry has an average servicing ticket size of up to Rs 5000, and gross margins of 15-20%. By having a CAC of Rs 850/user, it is likely they never made money on a service.
Adjacency gone wrong - They entered an adjacency of washing cars in addition to servicing them (the core biz) with a view to converting customers for servicing eventually. But they had to compete with widely available local carwashers and eventually ended up competing on prices, with negative unit economics per car wash. Neither did they make money on carwashing, nor did the customers convert to servicing.
Fixed labor costs and churn - Hiring and training quality mechanics was a challenge for the company. High attrition is a recurring phenomenon in this industry. This meant the company was always spending time and money hiring and training mechanics. And also paying the mechanics (on company payroll) their wages even in case of no business!
Closing comments
Our family office categorically avoids investing in 4W startups because we do not believe this is a space where incumbents or insurgents can create a profitable business.
There are many startups like Pitstop, GoMechanic that have grown their topline in this industry. But we are yet to see how this space turns up for the majority of the lot when the question of profitability is asked!
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