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CARMAX (KMX)Stock (Auto Dealerships Industry, Consumer Products Industry, Retail Industry, Transportation Industry)
 CarMax, Inc. (CarMax) is the country's largest retailer of used cars, selling over 335,000 used vehicles through 77 superstores in fiscal 2007. [1] Though the biggest player in the industry (AutoNation (AN) is its main competitor), CarMax operates in a highly fragmented market with a market share below 1%[2]; most used cars are sold through independent mom-and-pop outlets. CarMax has used the advantage of its size to create scales of efficiency, notably through its rigorous computer-based tracking systems and no-haggle pricing strategy. Most cars the company sells range in 1 to 6 years of age, giving it a natural buffer from recessions, as a consumer who may have considered a 1-year-old used car could buy a less expensive 3-year-old vehicle in a tougher economic climate. This buffer notwithstanding, cars are still a large ticket purchase and CarMax may see a spillover from the subprime lending crisis into the auto lending business. Two seemingly unrelated drivers of the business are airline travel and hurricanes. CarMax sold over 200,000 wholesale vehicles to rental car companies such as Hertz Global Holdings (HTZ) and Avis Budget Group (CAR), which thrive on increased airline travel. In addition, hurricanes tend to destroy cars, thus temporarily driving up the prices that CarMax can charge for its vehicles. In 2006, an active hurricane season contributed to 6% growth in pricing for the company's sales.
[edit] Company OverviewCarMax was spun out of Circuit City Stores (CC), which became the industry leader by introducing no-haggle pricing on used cars. In its early years, KMX entered a fierce competition with AutoNation (AN) as both spent cash to build retail outlets. When AutoNation 'ran out of gas' and nearly went bankrupt, KMX was set to grow unencumbered. In recent years, the company has benefited from significant megastore openings as its growth in the used car market has outpaced competitors by a significant margin. [edit] How It WorksKMX competes with used car companies, which typically has four ways to make money on a deal:
Many used car salesmen are trained to tailor one of these four levers to a particular customer's concerns. Generally, profit conceded in one area is recouped in another area. For example, if a customer is concerned about his trade-in value, a salesman may agree to pay increase the trade value and then charge a higher price, increase the financing rate or charge for a warranty. CarMax operates under a no haggle policy and is known to make an offer to purchase the trade-in car even if the customer does not purchase from them. [edit] FinancialsBelow are charts of revenue breakdown and unit sales for KMX over the previous three fiscal years. KMX has increased its store count from 61 to 81 over the period while dramatically increasing unit sales, revenue, and operating profit.   [edit] Industry Trends and Risks[edit] Advantages in a Highly Fragmented and Mature MarketThe automotive retail industry is highly competitive, very fragmented, and mature. Nonetheless, the market for autos has seen steadily, albeit modestly, increasing demand. In the U.S., increases in the number and age of vehicles, number of miles driven annually, licensed drivers, and total number of light trucks (which generally require greater upkeep) provide for a relatively steady and growing automotive market.[5] The market, however, is mature and unlikely to experience significantly higher rates of growth. [edit] Economies of ScaleThat the automotive retail market is so fragmented is both a challenge and an opportunity for CarMax. The fragmentation makes for intense price competition for all dealers. However, the company's comparatively large size and store network allows CarMax a cost advantage over competitors, both in share of mind to individuals seeking to sell their used car and to wholesalers who earn volume business when CarMax builds inventory. Furthermore, though barriers to selling used cars are low, KMX's has developed a "big-box"-type scale that would not be easily duplicated by competitors. [edit] Technology Driving High EfficiencyAnother main competitive advantage for KMX on the customer service end is their computer system that governs what mechanics are working on. The KMX computer tracks the status of cars in the service line and what needs to be done to each car. It will, for example, allow a mechanic with some spare time to work on a car that has a small job that takes 15 minutes. KMX therefore enjoys greater efficiency from its mechanics, who work 24 hours a day, allowing the company to process more cars in 1 week than a typical dealership can process in 1 month. [edit] New Store OpeningsThe company is dependent on its ability to open megastores in demographically attractive areas and leverage its scale by using a large-store format. Opening new stores (it has 77 superstores as of fiscal year 2007) depends on attractive real estate terms, local vehicle profile, and population statistics among other factors. Since the used-car retail industry is largely saturated, the company faces significant competition in new markets, and depends upon the value-add of its selection and scale to grab local market share from competitors. [edit] Ability to offer attractive prices to sellersSince the company sources its inventory largely from appraising and purchasing cars from consumers, it must offer competitive pricing in order to continue attracting these sellers and maintaining its supplier base. Often, though, individuals will sell their car to CarMax at favorable prices given the convenience and "share of mind" the company offers. That is, an individual looking to sell their car knows that he or she will get an offer from CarMax, such that they need not shop for other buyers. Furthermore, wholesalers, rental-companies and other bulk sellers of used automobiles can sell in greater volume to CarMax than they can elsewhere, such that CarMax may also get favorable pricing on their vehicles. [edit] Internet BusinessNew and used car consumers have shifted information about invoice pricing in their favor largely by utilizing the Internet channel. CarMax's business uses its website, www.carmax.com, as a marketing and sales tool to allow customers to browse the extensive 25,000 car offering at its stores. On a more limited basis, it is also a sales channel for doing business with customers who prefer purchasing via the electronic interface. While the site has been in steady decline in terms of organic traffic, the company has been emphasizing cost-effective car sales via the internet by also listing its inventory on cars.com and AutoTrader.com. [6] [edit] Macro Trends and Drivers[edit] Travel & Hurricanes in the SouthIncreased travel and natural disasters like hurricanes can affect pricing for the company. When Americans travel more, rental companies like Hertz Global Holdings (HTZ) and Avis Budget Group (CAR) demand greater numbers of used-cars at CarMax's wholesale auctions, and bidding intensifies and prices rise. Similarly, hurricanes, such as those of the magnitude of Katrina and Rita, destroy large quantities of vehicles in the South, a key market for the company. When replacements are sought in mass, demand drives pricing to favorable levels. For instance, the company experienced 6%+ growth in pricing in 2006 due to both an unseasonable hurricane season and lack of supply to meet rental company demands.[7] [edit] Subprime Delinquencies on Auto LoansAs many auto buyers finance their purchases with loans, there exists a risk of spillover from the subprime lending crisis into the auto-loan business. As homeowners/car buyers struggle to pay both their mortgages and auto-loans, the company may assume losses due to loan delinquencies as well as hampered demand for auto loans going forward.[8] [edit] Weathering RecessionsCarMax deals in 1-6 year old vehicles. This means that when the economy is strong, people can buy a car that is a little better/newer than during a down economy. So those who would normally buy a 1-2 year old used car can now buy a new car. But people normally in the market for a 7-10 year old car can now afford a 5-6 year old car. Conversely when the economy is very bad, car buyers move down a year or two on their purchase. CarMax has a sort of natural buffer because of the age range of cars it sells. [edit] Rising Oil Prices [edit] Competition and Used Car Market ShareThe domestic industry for new vehicle retail is fragmented and includes approximately 21,500 franchised dealerships and 17 million units sold annually. Similarly, the used vehicle retail industry includes some 45,000 independent used car dealerships and 45 million units sold annually.[9][10] The used car market is highly fragmented, and most outlets are independently owned and operated, mom-and-pop type operations. While CarMax's 337,021 used car sale units was the highest of any company in the United States in 2006, it represents just 0.87% of the estimated 43 million units sold yearly in the country.[11] This compares to AutoNAtion's estimated 0.59% used-car market share. CarMax's largest used-car competitor is AutoNation (AN), which operates 331 retail stores in similar metropolitan markets and focuses on both the used and new car market instead of just the used vehicle market.
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