Carvana CEO sees no ceiling on buying from customers

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As Carvana grows rapidly in size and scope, the number of vehicles the online used-car retailer buys from consumers has skyrocketed — and CEO Ernie Garcia expects that growth to continue.

“Logically, there’s no natural ceiling on how big it can be,” Garcia said this month at an investor conference in New York.

Whereas traditional trade-ins are restricted to the number of customers buying from Carvana who also have a vehicle to sell, buying from consumers in general, regardless of whether they intend to purchase, is an almost limitless proposition.

It’s an avenue many retailers, including franchised dealers, have increasingly pursued amid a hot used-vehicle market. Compared with acquiring vehicles at wholesale auctions, buying from consumers saves time, steps in the process and money that would otherwise be spent on auction fees.

It’s why Garcia views the opportunity as “really, really big.”

“When you’re buying cars from customers that don’t have an associated purchase, that’s effectively an unbounded market until you get very large relative to the broader market,” Garcia said.

In the second quarter, the number of vehicles Carvana bought from customers nearly tripled compared with the prior-year quarter. That growth rate easily outpaced the company’s total vehicle sales, which nearly doubled to 44,000 vehicles for the period, and revenue, which more than doubled to $986.2 million.

During the second quarter, 17 percent of vehicles Carvana retailed were sourced from customers, up from 11 percent in the year-earlier period, the company said. That puts the number of retailed vehicles sourced from customers at about 7,480 during the second quarter.

Even with that progress, Carvana significantly lags used-car industry leader CarMax. In a 2018 regulatory filing, CarMax said the share of vehicles it retailed that were sourced directly from consumers ranged from 38 to 52 percent over the previous decade.

Boosting customer-sourced inventory, Garcia said, helps on the retail side for what he called Carvana’s strategy of “collapsing more of the system.” That includes replacing many of traditional dealerships’ variable costs with the fixed costs of an online sales platform or lower variable costs.

For instance, if Carvana buys a car from one customer and then sells it to another customer, it replaces almost all of the costs traditional dealerships incur when they take a vehicle on trade-in, transport it to auction and sell it through the auction. Then there is the cost to transport that vehicle to another dealership and the expenses linked to retailing that car to a new customer, Garcia said.

“So you’re just collapsing more of the system,” Garcia said. “And so we think that’s just a really important, fundamental progression.”

But Carvana has physical assets. When asked about competitors selling vehicles online, Garcia pointed to those assets.

“We got a real business with real operations,” he said, noting Carvana’s seven reconditioning centers that put about $1,000 in parts and labor into each vehicle the company sells.

“Those are big facilities around the country,” Garcia said. “They’re 40 to 75 acres in size with thousands of cars on the ground and hundreds of employees.”

There is also the company’s logistics network and its attention-grabbing vending machines, which total 21 in 12 states.

On the software side, the company has built an online interface that is “more complicated than most e-commerce interfaces” because it handles trade-ins, financing, contracts and various regulatory requirements, Garcia said.

“All the things that make our business difficult are the same things that make it difficult to replicate,” he said. “So I think we’ve got a lot of significant barriers to entry to create a value proposition like ours.”

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