I think that is a business that will continue to grow. I don't see any reason why you can't have a Carmax in a lot of towns way beyond what they're talking about right now. I think being the number one dealer, and having the number one market share in used car arena gives you great information on what transaction prices are. Then you work on the process to be as quick and as cost efficient in fixing the car and getting it sold, and have the confidence from customers when you offer warranties on the products. Those factors create a virtuous cycle. The more you do, the more you can do, the better the pricing is, the more the customers like you, the more your brand matters. The company will be around for a good long time. The management has done a very good job of creating the system and executing it.CarMax was formed as a unit of Circuit City in 1993 and was spun off in 2002. Used-car sales account for about 80% of revenue. Competitors include, but certainly are not limited to, AutoNation (AN) and America's Car-Mart (CRMT) as well as private party sellers.
Five Forces Model Analysis
Threat of New Entrants: High fixed costs for inventory and access to channels of distribution are the largest barriers to entry for the industry. Economies of scale benefit the firm's competence but do not inhibit new entrants.
Intensity of Competition: From individual car owners to established car dealers, the industry is extremely competitive and customers are price-sensitive.
Bargaining Power of Suppliers: Suppliers have the potential capability to integrate forward in order to directly sell to customers.
Bargaining Power of Buyers: Customers are price sensitive, there are no switching costs, and options abound.
Threat of Substitutes: Alternatives exist but most people simply need a car.
Value Chain Analysis
Even though the used car industry is extremely competitive and price sensitive, CarMax does well because it has huge economies of scale. With large inventory, the company can spread its operating costs consistently across individual dealerships. CarMax adds value in five categories.
Acquiring Cars - Most of the cars are acquired through trade ins. This creates a high-quality inventory. CarMax offers a "while you wait" appraisal and gives you an offer that is valid for seven days. They also acquire cars through dealership relationships such as with auction houses.
Managing Inventory - This is the company's real competitive advantage. All inventory goes through a standardized internal inspection process. Cars are separated into "CarMax" and "Valumax" categories and sold through channels focusing on different categories of quality and price.
Operating Stores - Management policies guarantee a consistent customer experience across the company and inventory is shared nationwide.
Marketing and Selling - Website searching, "no haggle" price policy, and inspection guarantee are the key components of the companies value added strategy.
Services - The company differentiates itself from smaller dealers by offering financing, appraising, repairs, guarantees and warranties for every sale.
The process of inspecting and guaranteeing the quality of the cars CarMax re‐sells adds considerable value to the company's brand. This type of service is not likely to be found in other dealerships. The amount of resources that go into the value‐chain activity of managing and sorting CarMax's inventory is difficult to implement, and hard to imitate. While CARFAX Reports offer the same assurances of quality, they cannot offer the other benefits such as auto service and repairs, warranties and financing.
- Strengths - High quality vehicles, large inventory, no haggle prices, customer friendly sales
- Weaknesses - High Prices
- Opportunities - Nationwide expansion, improved customer service, backwards integration to the supplier level
- Threats - Overhead costs rise with each new store, poor economy, competition
While a poor economy hurts sales, this cuts both ways. In a truly robust market consumers might choose to purchase new cars, while a moderately slow economy encourages customers to trade down to used cars.
The biggest threat to this company is the "Best Buy" (NYSE:BBY) problem. CarMax's website and transparent appraisal process make it an excellent place to go kick the tires and make an informed purchasing decision. The problem is that many customers will be making that purchase online from a lower-cost provider. Although CarMax's customer-centric shopping environment and service offerings provide some differentiation, I'm not convinced that price-sensitive customers will be willing to pay for the value-added services that CarMax provides.
According to this report, CarMax cars cost on average $2,000 more than the same car from a private party. The loan services, 7-day money back guarantee, 30-day warranty and guaranteed services after purchase are nice. Will customers continue to pay up for them?
At 2.5% market share CarMax is more than twice as large as the next closest competitor in the used car sales industry. With only 107 stores, CarMax is an enticing regional to national growth story with years of growth still ahead of it. On the downside, CarMax is the Best Buy of used cars — the place you go for a product demo before you buy online for less.
CarMax is a great growth story and it benefits from a network effect. CarMax offers the largest selection of used cars in the country. As this model attracts new purchasers, more of them sell their old cars to the company, which enhances the selection further and leads to still more customers. Longer term I think the price gap between CarMax and private parties will shrink as economies of scale take effect, thus strengthening the value added proposition.
CarMax has a compelling business model and should be able to grow by adding new stores.