Topics in this section: - CarMax vulnerable as Carvana, rivals catch on to fat-margin mojo - Pre-owned solitude challenged in-store, online - Carvana virtual model needs real cost savings - Full-line dealers have scale advantage
CarMax's 48% share of the $36 billion in annual used-auto sales by publicly traded dealers is threatened by the competitive advantages of both full-line dealerships and Carvana's nascent online-only strategy. With a gross margin more than 2x Carvana's and well-above top rivals, CarMax is motivating dealers to challenge more directly.
Pre-owned solitude challenged in-store, online
CarMax's position as the only publicly traded pure-play used-vehicle dealer group is being challenged on all fronts, as full-line brick-and-mortar and online-only dealerships recognize the profit and margin potential of de-emphasizing new vehicles in favor of pre-owned. Large dealer groups pushing deeper into the pre-owned market have considerable and instant competitive advantages, the most notable of which may be having the first chance to acquire late-model, low-mileage off-lease units when consumers return the vehicles.
During the post-recession recovery from 10 million new-vehicle sales in 2009, auto dealers watched the volume of new units peak at 17.5 million in 2016, while gross margin compressed to an all-time low at 5%, while CarMax sped along at 11%.
Carvana virtual model needs real cost savings
Carvana's position as the first publicly traded, online and pre-owned-only dealer has given it momentum, aided by a business model that relieves consumers of having to interact with salespeople and the company of prohibitive operating expenses common to selling used vehicles. Carvana's rapid expansion and growing brand awareness pose a rising threat to CarMax. Yet the cost of entering new markets has bloated SG&A -- to 22% of revenue in 4Q. Reducing that to about 10%, CarMax's long-term average, would have meant $355 million in additional operating income since 1Q17.
Gross profit per unit at Carvana was above $800 in every quarter of 2018, with 2Q and 3Q above $1,100. Expansion into new markets will hinder the push to match CarMax's $2,000 retail gross profit per vehicle near term.
Full-line dealers have scale advantage
Established dealer groups have the brand equity, regional presence and scale -- with the core business generating cash to fund a market share grab in pre-owned autos -- making them the larger threat to CarMax's used vehicle-only business model than the nascent online retailers. AutoNation, the largest publicly traded dealer group, has generated $1.8 billion in free cash flow since 2009, enabling the company to diversify and pare its dependence on new-vehicle sales by focusing on higher-margin parts and service and used-vehicle sales. AutoNation has increased used-vehicle volume by 2.6% annually since 2014, while unit sales of new vehicles fell 0.6%.
CarMax lacks the low-margin, but high revenue contribution, from new-vehicle sales, and misses out on the parts and service business that averaged 56.5% gross margins in 2018.
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