The Business Of

Cars | AutoNation | Used Car Special

Morning All!

TGIF! The weekend is so close! But before we get there, we’ve got one final newsletter to round off The Business Of AutoNation. Let’s have a quick recap of some of the fun, surprising things we’ve learnt about the car dealership industry this week…

• Largest Shareholder - AutoNation has many shareholders. But the biggest shareholder is none other than Bill Gates - who owns ~25% of the company!

• Largest Share Of Sales - AutoNation sells many different car brands. But the brand that AutoNation sell most of is Toyota! 21% of new cars sold are Toyota!

• Largest Share Returns - AutoNation’s shares have returned an incredible ~27% CAGR since 2010. However, Lithia Motors has returned ~45% CAGR!

Okay so for today, we’re going to end the week with a special on the used car market! We’ve seen this week that whilst AutoNation sold ~230k new cars in 2022, they actually sold ~300k used cars in the same year. Well today, we’re going to look at 3 other companies that operate in the used car space. I had never heard of these companies before I researched this industry - but we’re about to explore 3 really interesting business models!

But first, let’s just very quickly touch on what the future of dealerships looks like. Because things are changing…!

Do Dealerships Need To Worry About Their Futures?

So this week, we’ve gone through The Business Of AutoNation. And we’ve seen some really positive things. Growth has been steady. Margins have been consistent. Cash return has been phenomenal. And share returns have been stellar. However, the future is looking slightly more uncertain!

Why? Well, many car manufacturers in recent years have been thinking a similar thought - ‘do we really need dealerships to sell our cars for us? Why don’t we sell directly to our customers?’ And these thoughts have led to some massive changes. In the UK, Mercedes-Benz have completely stopped selling their cars to dealerships and now operate what’s called an agency model. And in the US, Ford are also wanting to completely restructure their dealership model to help their EV sales.

Now, this shift to a direct to consumer (DTC) model isn’t uncommon in other industries. Nike have been very vocal in wanting to reduce the number of middlemen between them and their consumers. And similar questions are being asked in the car industry. In a world where cars are increasingly being bought online, do we really need dealerships?

Well, in 2 weeks’ time when we look at The Business Of Tesla, we’ll dig into why these questions are coming up now. And what role Elon Musk and his troops have had in disrupting the dealership market! But for those of us who want a bit of a headstart, feel free to check out this article!

People Would Give Up Facebook And Sex Rather Than Haggle!

Alrighty, let’s crack on with the main topic of the day. And to kick us off, we’re going to look at an absolute heavyweight of the used car industry. It’s the company that sells the most used cars in America. It’s CarMax!

So, what do CarMax do? Well, there’s not a whole lot to say here. Because CarMax pretty much do what AutoNation does… but ONLY for used cars. CarMax don’t sell any new cars. The chart below shows us that whilst AutoNation sold ~300k used vehicles in 2022. CarMax sold a whopping ~924k used vehicles in the same period!

Now, what’s interesting is that despite selling ~3x more used vehicles than AutoNation, CarMax actually have less locations! In 2022, CarMax had 230 locations where they sell their cars from. Compared to the 247 locations we saw AutoNation have.

But how does that work? How can CarMax sell so many more cars from less locations? Well, the answer is because their locations are much bigger! CarMax actually calls their locations superstores, rather than dealerships. Because the average CarMax superstore has between 300-400 used cars for sale vs ~90 for the average car dealer (like AutoNation)!

CarMax’s stores are absolutely huge compared to normal car dealership stores!

Okay so, we’ve seen CarMax sell used cars. And AutoNation sell used cars. But I have a question - why would I choose to shop at CarMax over AutoNation? What are the differences between the two apart from their dealership sizes?

Well, the first difference between the two is their approaches to haggling! In AutoNation’s dealerships, potential customers can come in and haggle with the dealership’s salesperson to try and get a reduced price. However, for the more introverted of us, that sounds like a nightmare! And haggling is actually one of the worst things about the dealership experience, according to this survey!

However, at CarMax, there is no room for haggling! The company operates a strict no-haggle policy. There’s one fixed price and if you don’t like it, you can go elsewhere!

The second main difference between CarMax and AutoNation is to do with services. We’ve seen this week that AutoNation not only sells cars, but they do a lot with repairs and services. In fact, we saw that this segment is actually their biggest contributor of profits! But with CarMax, there is no services arm. They only sell cars. So, if a car buyer really wanted to get their car serviced at the dealership they bought it from… CarMax probably isn’t the best option!

Why Go To A Dealership When I Can Buy My Car Online?!

Okay, so that’s CarMax - the biggest used car retailer in America. Now, let’s introduce another company in the used car space - and this one is Carvana!

So, Carvana also sells a huge number of used vehicles (~400k in 2022). But there’s a slight difference in their business model compared to CarMax and AutoNation’s. Carvana don’t have any physical locations! They only sell used cars online!

Now, this online business model has seen a huge amount of success in recent years. People who buy cars online can avoid haggling for prices - they see just one fixed price. They can get their car delivered right to their door. And online shopping - well, it’s just the easiest option these days isn’t it! The chart below illustrates how popular this online business model has been - the number of used cars sold by Carvana has grown from just ~2k in 2014 to an astonishing ~412k in 2022!

Now, some of us may be thinking - ‘this is amazing. A company that can sell cars online and doesn’t need to buy or lease any physical dealership locations. They must be doing great!’

Well, that’s exactly what I thought too when I first read about Carvana. But unfortunately for the company, that’s not quite been the case! Over the last couple of years, Carvana’s growth has been stunted as the demand for used cars has slowed. The rise in interest rates has made paying back their debt a huge challenge. And the company has still yet to make an annual profit! On the back of all these struggles, the stock price has collapsed ~90% from its peak price in 2021!

So, can Carvana turn things around? Will they be able to manage their debt levels? Can they finally become profitable? Time will tell!

Selling Written Off Cars Is A Very, VERY Big Business!

Okay, so the third and final company we’ll mention today is one of the most interesting and unique companies I’ve ever read about. It’s name is Copart!

Okay, so what do Copart do in the used vehicle industry? Well, you know how AutoNation, CarMax and Carvana will buy used cars from individuals and from vehicle auctions. And then sell those used cars through their dealerships, superstores, and websites.

Well, Copart does something slightly different. They don’t really buy used cars at all. They’re basically just an online vehicle auction platform that CONNECT buyers and sellers of used cars! And they then take a fee whenever a sale happens. Oh and like we saw in The Business Of Airbnb, the fee for buyers on the platform (6%) is higher than the fee for the sellers (2%)!

The other slight difference is that when AutoNation, CarMax and Carvana talk about ‘used cars’ - they mean cars that have been driven for 1-10 years but are still in pretty decent shape. Remember, the average used car that AutoNation sells is still worth ~$30k.

But for Copart, the term ‘used car’ takes on a whole different meaning. A lot of the vehicles that get sold and bought through Copart’s platform are damaged vehicles! Most of them have been in accidents, and been written off!

So, a couple of questions - who’s selling these damaged cars? And even crazier - who’s buying these cars?! Well, ~80% of the cars sold on Copart’s platform, come from insurance companies! How does this work? Well, when someone gets into an accident and their car is really damaged, what options do the drivers’ insurance company have? Well, they could pay to fix the car - but this is becoming super expensive. OR they could just sell the car on Copart!

But I know what you’re thinking - who on Earth would pay for these damaged cars? Well, actually, quite a few people! The majority of buyers are people and businesses ALL OVER THE WORLD who want to either (i) fix up the cars and sell them, or (ii) dismantle the cars and sell the car parts! As an example of this, have a look at the headline below. Damaged Teslas in America are put on Copart by insurance companies. And these Teslas are being bought by mechanics in Ukraine who repair the cars and sell them to Ukrainian citizens! You can read more about this story in this article!

Quite unbelievably, ~2 million cars are sold through Copart’s platform globally every year! The company has an astonishing EBIT Margin of ~40%. And Copart is currently valued at ~$45 billion! How have I never heard of this company before this series?!

Now, there is so much to explore about Copart which we don’t have time for today. But for those of us who are interested in learning more, I really recommend the podcast - Business Breakdowns. They do a great episode on Copart. And to be honest, all their episodes are a great listen for those of you wanting to learn about even more companies!

19th Jan 2024

Nigel Jacob CFA