Post by thedenverpost on Apr 27, 2020 16:13:27 GMT
After the Quarantines, We May All Sell and Buy Used Cars The Carvana Way
According to Patrick Anderson, chief executive of Anderson Economic Group, a research and consulting firm in East Lansing, Michigan, "Many dealers make almost no money on a new car sale. They make money on incentive payments from the manufacturer, from service and from a variety of auxiliary charges like financing, extended warranties, etc." (Crain's New York Business, April 23, 2018).
In general, the three main customer-derived revenue sources are 1) trade-ins (selling used cars), 2) service (parts, labor, technology upgrades) and 3) extra charges (financing, warranties, insurance). The coronavirus is causing an upheaval in this three-pronged revenue stream, especially when it comes to used cars. Used vehicles are a huge profit center but now the used car data are ominous. The values of used cars are declining rapidly. The Mannheim Used Vehicle Index – an important benchmark for automotive industry pricing – is down 11% in April 2020 from March 2020 and down approximately 10% year-over-year.
It is also becoming more difficult to estimate value of used cars. Without a lot of used car sales, the worth of used vehicles is anyone’s best guess. According to Barron’s, the situation with used cars is dire affecting the entire automotive industry. (“Used Car Prices Cratered. Here’s What That Means for the Auto Universe” April 22, 2020.) “Used car prices impact new car prices, rental car companies and dealer profits as well as lease residual values.”
But, even more than the decline and confusion in value of used cars, is the impact of one small disrupter. This disrupter is turning the used car business on its head and in doing so has the potential to utterly change the way car dealers do business. This disrupter has already shone a light on the potential of pure online car buying-selling that is way ahead of what current dealerships are able to offer. This disrupter has shot up to #4 in the latest ranking of used car businesses, ahead of Lithia and Sonic. Last year, it was #8. This disrupter is Carvana.
You may know Carvana from its advertisements touting its used car vending machines and its contactless used car approach to purchasing and selling used cars. But, as Mike Maroone, former CEO of AutoNation and now head of the Maroone Auto Group with dealerships in two states (Colorado and Florida) and a Board member at Carvana told Automotive News, “It’s a totally different business model. They’ve built a tremendous technology platform. It’s nonnegotiable. You can get finance approved in a minute; you can get your trade approved in a minute. They deliver your car to your office or home.”
More than the technology, however, a critical relevant differentiator of Carvana is a completely new process. Car dealers will not just need to learn new technology, they will have to learn a new sales system. According to Maroone, “You’ve got to price in a different way. It can’t be a negotiated price. People do not go online to negotiate. It’s a transformation in technology and business processes.” And here was Mr. Maroone’s most profound observation: right now, traditional car dealerships are trying to replicate the current familiar car sales practices online, basically recreating the dealership experience. This is a huge mistake.
Making the process easy and quick requires a different mindset. Nonnegotiable prices, speeding up the time for loans and trades, delivery to your home and its vending machines are key differentiators to Carvana’s success. But, Carvana has created its business with another element that allows the brand to reduce costs and plow money into high quality revenue growth. There are no dealerships. Carvana has its vending machines and it has seven – soon to be eight - reconditioning centers (speed of reconditioning is key for moving cars and trucks to new customers). Other than these “assets,” the majority of Carvana’s business is its web presence. CarMax, the largest used car purveyor, has physical stores, each with about 40 employees. It is the same with Penske, the international transportation company selling automotive and commercial vehicles and AutoNation, which owns new and used car dealerships. Carvana is the only web-based, contactless buyer and seller of used cars with a truly nonnegotiable approach to pricing.
The Carvana approach to used cars - trades and sales – generated revenue of $3.94 billion in 2019. Carvana nearly doubled the vehicles it moved in 2019 to 177,549 from 94,108 vehicles in 2018. And, the enterprise continues to increase its gross profit per vehicle.
There are many discussions about how our world will change post-pandemic. We learn about new customer behaviors, new hygienic must-haves and all sorts of psychological shifts. Most of these discussions focus on shopping and cleaning and social distancing. But, based on Carvana’s approach to buying and selling used vehicles, the whole concept and operational approach of the car dealership may also change. Buying a car will be a totally different experience. Just replicating the current dealership online will not be the winning way to enduring profitable growth. As with Uber, Tesla, Airbnb, Amazon and other disrupters that forced established brands to change, Carvana is causing a sea change in one of the most ubiquitous industries in the US.
In general, the three main customer-derived revenue sources are 1) trade-ins (selling used cars), 2) service (parts, labor, technology upgrades) and 3) extra charges (financing, warranties, insurance). The coronavirus is causing an upheaval in this three-pronged revenue stream, especially when it comes to used cars. Used vehicles are a huge profit center but now the used car data are ominous. The values of used cars are declining rapidly. The Mannheim Used Vehicle Index – an important benchmark for automotive industry pricing – is down 11% in April 2020 from March 2020 and down approximately 10% year-over-year.
It is also becoming more difficult to estimate value of used cars. Without a lot of used car sales, the worth of used vehicles is anyone’s best guess. According to Barron’s, the situation with used cars is dire affecting the entire automotive industry. (“Used Car Prices Cratered. Here’s What That Means for the Auto Universe” April 22, 2020.) “Used car prices impact new car prices, rental car companies and dealer profits as well as lease residual values.”
But, even more than the decline and confusion in value of used cars, is the impact of one small disrupter. This disrupter is turning the used car business on its head and in doing so has the potential to utterly change the way car dealers do business. This disrupter has already shone a light on the potential of pure online car buying-selling that is way ahead of what current dealerships are able to offer. This disrupter has shot up to #4 in the latest ranking of used car businesses, ahead of Lithia and Sonic. Last year, it was #8. This disrupter is Carvana.
You may know Carvana from its advertisements touting its used car vending machines and its contactless used car approach to purchasing and selling used cars. But, as Mike Maroone, former CEO of AutoNation and now head of the Maroone Auto Group with dealerships in two states (Colorado and Florida) and a Board member at Carvana told Automotive News, “It’s a totally different business model. They’ve built a tremendous technology platform. It’s nonnegotiable. You can get finance approved in a minute; you can get your trade approved in a minute. They deliver your car to your office or home.”
More than the technology, however, a critical relevant differentiator of Carvana is a completely new process. Car dealers will not just need to learn new technology, they will have to learn a new sales system. According to Maroone, “You’ve got to price in a different way. It can’t be a negotiated price. People do not go online to negotiate. It’s a transformation in technology and business processes.” And here was Mr. Maroone’s most profound observation: right now, traditional car dealerships are trying to replicate the current familiar car sales practices online, basically recreating the dealership experience. This is a huge mistake.
Making the process easy and quick requires a different mindset. Nonnegotiable prices, speeding up the time for loans and trades, delivery to your home and its vending machines are key differentiators to Carvana’s success. But, Carvana has created its business with another element that allows the brand to reduce costs and plow money into high quality revenue growth. There are no dealerships. Carvana has its vending machines and it has seven – soon to be eight - reconditioning centers (speed of reconditioning is key for moving cars and trucks to new customers). Other than these “assets,” the majority of Carvana’s business is its web presence. CarMax, the largest used car purveyor, has physical stores, each with about 40 employees. It is the same with Penske, the international transportation company selling automotive and commercial vehicles and AutoNation, which owns new and used car dealerships. Carvana is the only web-based, contactless buyer and seller of used cars with a truly nonnegotiable approach to pricing.
The Carvana approach to used cars - trades and sales – generated revenue of $3.94 billion in 2019. Carvana nearly doubled the vehicles it moved in 2019 to 177,549 from 94,108 vehicles in 2018. And, the enterprise continues to increase its gross profit per vehicle.
There are many discussions about how our world will change post-pandemic. We learn about new customer behaviors, new hygienic must-haves and all sorts of psychological shifts. Most of these discussions focus on shopping and cleaning and social distancing. But, based on Carvana’s approach to buying and selling used vehicles, the whole concept and operational approach of the car dealership may also change. Buying a car will be a totally different experience. Just replicating the current dealership online will not be the winning way to enduring profitable growth. As with Uber, Tesla, Airbnb, Amazon and other disrupters that forced established brands to change, Carvana is causing a sea change in one of the most ubiquitous industries in the US.