BET ON DEALERS AS WINNING DOG

IN 1995, WHEN THE COBALT GROUP INC. HIT THE scene, its founders bet on who'd be the major players in future automotive retailing.

Automotive e-commerce was young back then, and a lot of people were predicting that the Internet would turn auto dealers into an endangered species.

Those seers foresaw a world in which Internet car-buying services would turn dealers into little more than deliverers of vehicles sold online by someone else.

And if a potential car-buyer wanted information on a particular product, well, he or she could click right over to a manufacturer's website for that — and more.

Cobalt didn't see things playing out that way.

“We made a bet six years ago on the traditional players in the industry — the dealers,” says John Holt, Cobalt's president and chief executive officer.

Some thought Cobalt was in Jurassic Park dancing with dinosaurs. “But we didn't see it that way,” says Mr. Holt.

He's not gloating today. But he is the head of a company that does $55 million a year in business because a good bet paid off.

Cobalt started out designing and maintaining websites for dealers. Dealership websites are common now. But few dealers had their own websites until fairly recently.

Manufacturers and lead referral services had them. It led to a lot of speculation that those well-funded third-parties represented the new way to retail cars.

That scared a lot of dealers. They worried about getting black-jacked behind the ear by a new technology. Then they reckoned, “If others try to retail cars on websites, why can't we? After all, we're the retailers.”

Dealers are pretty comfortable with the Internet these days after that period of uncertainty. They see it as a great tool not only to sell cars, but to build customer loyalty. Few customers actually “buy” vehicles online. But a lot of them shop online. Dealership websites help lubricate that process.

NADA's annual survey of Internet utilization found that 89% of new-car dealerships maintain websites — up from 82% last year, 74% in 1999 and 47% in 1997.

Of the current sites, 98% are interactive, with most allowing car shoppers to view stock and MSRPs, fill out finance forms, and schedule sales and service appointments.

“Dealers increasingly recognize the web as a key element of their business,” says NADA Chief Economist Paul Taylor.

Cobalt played a big role in why and how dealers got in on the Internet action. Cobalt early on began designing and maintaining dealership websites. The company has since expanded into many other dealership areas — e-commerce applications, Internet-based customer relationship management applications, data management, best practices training and consulting.

But it started out basically by convincing dealers that they should maintain their own websites, then showing them how.

“Whether we were lucky or smart, we bet on the dealers as the winning dog,” says Mr. Holt. “We're not invincible. We're not unbeatable. But we do have a big head start.”

As they say, a good beginning is half the work.

Cobalt is the overwhelming leader in hosting services for dealership websites, holding 20% of the market.

“The average person thinks of Cobalt as a website company, but we've undergone something of a metamorphosis,” says Mr. Holt.

Part of that involves keeping up with changing times. Part involves looking for new business opportunities as the company's growth pace slows down.

“We're not seeing the growth we did two years ago when it was 70%-80%,” says Mr. Holt. “Now we're at 15%-20%.”

Cobalt's latest product is Nitra, a software platform that's intended to foster dealership-manufacturer marketing programs as well as focus on business-to-business activities. (See story on page 35.)

Two years ago Cobalt became a publicly held company. Last month, it went back to being a private firm. It cost $48 million to do that through a merger with an affiliate of Warburg Pincus LLC, a global private equity firm.

“We'll go back to the safe world of being private,” quips Mr. Holt.

So far, it's been a good run for a company founded on St. Patrick's Day in 1995. But Mr. Holt tries to keep it in perspective.

“In this industry, six-and-a-half years is a very short time … and a very long time,” he says.

Steve Finlay is editor of Ward's Dealer Business. His e-mail address is: [email protected]