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An Informative Convergence at Two Different Public Companies

Two public companies with distinctly different business models are learning they have similar strategic priorities.

The two companies are CarMax and Carvana. The former’s been a longtime competitor and player for dealers in used vehicles. They are arguably the first to turn the idea of buying inventory from customers into an operational advantage across their nationwide network of big retail stores.

Meanwhile, Carvana has also been impressive on the customer vehicle acquisition front. The company has used its digital platform to acquire an ever-growing share of inventory from customers to feed its ever-growing pace of digitally driven retail sales.

But now, it seems, each company seems to realize that their business would benefit by taking a page from the other’s playbook.

In the case of CarMax, the company is stepping up its digital capabilities to appraise and acquire more customer inventory online and shore up its inventory supplies. In addition, the company is working harder to build out digital capabilities that enable a larger share of its customers to complete at least part of the sale or purchase of a vehicle online if they choose to do so.

During a September 30 earnings call to discuss the second quarter of its 2022 fiscal year, CarMax president and CEO Bill Nash told analysts: “We’ve intentionally built our omnichannel platforms to give every customer the ability to progress to a sale or a buy regardless of how they shop with us. We found that most customers don’t want to shop for a car in a way that is tied solely to an in-store or digital experience. While we provide the ability for customers to buy a car 100% in-store or 100% online, our omnichannel capabilities really differentiate CarMax by enabling our customers to personalize their experience with a mix of digital and physical interactions to meet their needs.”

Meanwhile, Carvana executives aren’t worried about their digital capabilities as much as they are about efficiently managing the vehicles once they own them. The company is learning successfully buying cars directly from customers only goes so far if you don’t have the physical capacity to recondition the vehicles and get them ready for retail sale.

In a November 5 earnings call to discuss the third quarter of 2021, Carvana chief financial officer Mark Jenkins shared how constraints on the company’s ability to inspect and recondition vehicles forced a purposeful slowdown of retail sales activity: “The explosive growth in buying cars and customers we experienced in the past two quarters also placed significant constraints throughout our system in Q3. To ease the pressure on our system, we began metering both retail units and cars bought from customers mid-quarter to allow our operational capacity to catch up to demand. Most notably, to manage retail sales volume, we reduced the number of vehicles shown to customers in search results, which limited the benefits of higher immediately available inventory on retail units sold. We expect to increase our operational capacity in Q4 with an eye toward 2022.”

Cox Automotive analyst Jeremy Robb calls the latest moves by CarMax and Carvana “a rather uncanny juxtaposition of the two companies. One that started off very ‘digital’ and one that was very ‘physical’—yet both are moving to the center now.”

I’d have to agree with Robb’s astute observation, and I also believe the experiences of CarMax and Carvana point to two strategic priorities dealers should strongly consider for the coming year.

The first strategic priority rests with your digital capability. I appreciate how CarMax connects (and distinguishes) the dots between customers looking to sell their car and customers who have a car to sell/trade as part of a vehicle purchase. On the vehicle acquisition side, the company says its roll-out of an online appraisal tool is working; they’ve been able to acquire about 50 percent of their customer-acquired vehicles from appraisals that customers initiated online. Meanwhile, the company says about 9 percent of its retail sales came from “online transactions,” where customers completed all four elements of making a deal—reserving a vehicle, financing, trading a car (or opting out) and completing a sales order. The company says about half of its customers can complete all four stages online and they plan to expand the capability in the months ahead.

The company’s performance suggests a digital capability imperative for every dealer—you’ve got to find a way to enable customers to do what they want to do online or they’ll find someone else who will.

The second priority sits in reconditioning capacity and efficiency. I’d venture that many, if not most, dealers encountered reconditioning issues that crimped their retail sales activity, much like Carvana experienced, in the past year. Carvana is investing more in its ability to inspect and recondition vehicles faster, even if they’re customer-acquired vehicles that require more work. It’s a priority that every dealer should regard as an imperative, especially as analysts forecast that the current low-supply, strong demand used vehicle environment will likely carry over into at least the front half of 2022. It’d be a shame if dealers had to revisit the lesson many learned years ago when they transitioned to market-based pricing and turn-and-earn sales strategies—you can’t sell cars if they aren’t ready, and you won’t make the front-end gross you expect if you’ve spent it in your service department.

I was struck by another take-away from the CarMax/Carvana convergence: If nothing else, it’s helping dealers understand that despite the operational and physical differences between private and public retailers, the keys to success are increasingly the same.

The post An Informative Convergence at Two Different Public Companies appeared first on Dale Pollak.

About the Author

Dale Pollak serves as executive vice president for Cox Automotive, a position he’s held since the company he founded, vAuto, became part of the Cox family in 2010. At Cox, Dale helps drive integrated innovation across the company’s auction, media and software divisions to help dealers increase efficiencies, sales volumes and profitability. The latest innovation, Provision ProfitTime™, debuted at the 2019 NADA convention, helping dealers embrace an investment value–based used vehicle management methodology. Prior to Cox, Dale led vAuto to become the premier inventory management solution provider for franchise and independent dealers. Dale pioneered the Velocity Method of Management®, which has been adopted by thousands of dealers. Dale has written five books, the latest of which, “Gross Deception,” was released in 2019.

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