Carvana set out to improve upon what many consumers describe as the “worst shopping experience of their lives.”
Consumers dislike the car-buying process because they say it takes too long, has too many layers, and lacks transparency. Add in record vehicle transaction prices and inventorys short ages , and it becomes clear how a new entrant could squeeze its way into the auto retail business, which is exactly what Carvana did.
Now massive vending machines holding automobiles instead of snacks dot the landscape in major cities. The vending machines belong to Carvana, an innovative used-car retailer that set out to “change the way people buy cars.”
Carvana’s auto-buying process appears easy and stress-free. Consumers search for cars, take virtual 360-degree tours, get financing through Carvana or a third-party, and complete the entire purchase process from the comfort of their homes. Later, they can pick up their vehicle at a Carvana site or have Carvana deliver it to them.
“You can literally buy a car in your pajamas if you wanted to,” says Michael Tamas, divisional vice president of sales for Assurant. “You don’t have to go to a dealership to do anything.”
The no-hassle experience attracted car buyers like moths to a flame. Tamas has researched the Arizona-headquartered startup disrupting the auto industry since it opened for business in 2012. “They sold a couple thousand vehicles in their first year of business. Last year, they sold a car every two minutes. That’s hundreds of thousands of cars across the country. They took that business away from traditional brick-and-mortar dealers,” he says.
Carvana exposed that the market is “one step away from Amazon being in the car business,” according to Tamas.
“They are disruptors. Many dealers think, ‘We are brick and mortar, they cannot touch us. They’re not in our market.’ I’m here to say that just because there is not a Carvana in your market doesn’t mean you will not have to compete against them or someone like them. Their reach surpasses that of a traditional store. What makes them so attractive is very dangerous to our traditional dealership model,” he says.
Carvana rose to fame with a winning business model. Consumers wanted to eliminate the hassle of buying a car and instead do their research online, and Carvana was positioned to deliver.
Carvana had everything in its favor. The pandemic shut down the auto retail business for months. Many dealerships had to change direction and add digital technologies to sell online, but Carvana had already arrived. Customers were already using its platform to shop for used vehicles online.
Consumers had completed their journey to digital transactions and had the money to buy vehicles. They stayed at home while the government sent them relief checks. With fewer expenses and an influx of cash, many buyers seized the opportunity to shop for a vehicle from home and have it delivered to their doorsteps.
Carvana took the lead by introducing touchless delivery and pickup in early 2020. TV and radio advertisements made it seem like the only game in town. The e-retailer pumped money into marketing and attracted buyers who couldn’t get vehicles anywhere else because of the pandemic-caused inventory shortage. Then new-car buyers began purchasing used vehicles because new vehicles were in short supply. Increased used vehicle sales pushed prices to record highs, which caused Carvana’s revenue to soar.
“DISHONEST BUSINESS PRACTICES, DELAYS AND INCOMPLETE PAPERWORK HAVE LED TO LAWSUITS THAT COULD DERAIL THE FUTURE OF A COMPANY THAT WAS ONCE THE DARLING OF THE MARKET.”
“If Carvana had played its cards correctly, it might have been a market monster comparable to Amazon in the U.S. or Alibaba in China,” writes Eugenia Akhim, in “The Rise and Fall of Carvana, the Amazon of Used Cars,”on Hotcars.com.
But instead, the e-retailer that once made the 2021 Fortune 500 list is in a free-fall.
CRACKS IN ITS ARMOR
Dishonest business practices, delays and incomplete paperwork have led to lawsuits that could derail the future of a company that was once the darling of the market.
Cracks in Carvana’s armor appeared when the online car retailer reportedly violated Florida state laws by failing to transfer titles to purchasers within 30 days. Akhim writes, “The allegations included multiple instances where Carvana forced customers to wait over 100 days, and in one instance, 253 days, to get a title.”
Residents of Pennsylvania and Maryland then reported similar issues, saying that sometimes they could not lawfully drive their vehicles. The temporary tags issued to buyers quickly became outdated.
Shareholders were equally upset. In October 2022, Schubert Jonckheer & Kolbe LLP announced that the firm was investigating claims filed by Carvana Co. Stockholders about alleged wrongdoings involving company officers and directors. This followed a 2020 Forbes report that Ernie Garcia II and his son, Ernie Garcia III, the leaders of the business, had been accused of insider trading in a shareholder lawsuit filed in Delaware.
Now states are suspending Carvana’s licenses. Michigan was the most recent state to take this step, pulling Carvana’s Novi location’s license after the company admitted to multiple violations of the Michigan Vehicle Code.
Carvana stock values have collapsed amid the concerns. In fact, Forbes recently put Carvana among the Top 10 most shorted stocks of 2022.
Carvana stock plunged 97% last year to $8 a share after hitting $376.83 per share in August 2021. Morgan Stanley Analyst Adam Jones expects values to drop further, predicting that Carvana stock will land at $1 a share.
Carvana laid off 8% of its workforce, or 1,500 employees, because of its financial challenges. To be fair, similar challenges have led to layoffs at Meta, Amazon and other companies in recent months.
Ernie Garcia, in an internal message titled “Today is a Hard Day,” blamed a poor economy for Carvana’s problems. CNBC reported that the email blamed “economic headwinds and heightened financial costs” for the struggles. But, “reduced funding and market capitalization must also be contributing,” says “The Rise and Fall…? Of Carvana.”
“Executives at Carvana may believe cost-cutting measures will prevent the company from going bankrupt, but in reality, economic headwinds will likely deal the company a death blow,” writes Akhim.
Also, the company reportedly did little to regain customer trust by failing to address paperwork problems, title delays and other dishonest practices.
“Never-ending scandals have resulted in major reputational disaster,” Akhim writes, stressing that investors remain unconvinced that the company can turn things around to meet its financial goals. “Carvana has succeeded in enraging and grating shareholders, customers, the government and investors.”
PLUMMETING PRICES, DEMAND
Now recessionary fears are reducing demand for used cars, hitting Carvana where it hurts. Consumers are cutting back on spending for big-ticket items because of inflation and higher interest rates.
“Profit has to be above what is spent on buying and improving a vehicle. If you sell below that figure too many times, you will be out of business,” stresses an auto industry professional who asked not to be identified. “Carvana and other businesses like it need to raise their revenue number as high as they can. When more competitors enter this field, it changes the game.”
Carvana faces increased competition from Vroom, Car-Max, AutoTrader and tech savvy dealerships. It is also up against forces that are out of its control, such as rising interest rates, record vehicle prices, and soaring inflation, all of which may discourage consumers from buying vehicles.
The company made its meteoric rise as used-vehicle prices skyrocketed. Now used-vehicle prices are plummeting. Cox Automotive reported its Manheim Used Vehicle Value Index dropped 15% to 219.3, or an unadjusted 13% decrease, in 2022.
It noted it was the biggest annual decline in the series’ history but emphasized the market was readjusting toward normalcy.
“These last three years have been extremely volatile for the market, and these declines follow record increases. In December 2021, we were up 47% year over year. The pre-pandemic levels will probably never return, but all indicators point to reaching equilibrium in the second half of 2023,” Cox Automotive Chief Economist Jonathan Smoke noted in a press release.
Still, Edmunds research puts the average price of a used car purchase in December 2022 at $29,533, down nearly $1,600 from the record high of $31,095 in April 2022. Prices for late-model used cars are down 5% from their peak, but the price of used cars 5 years or older has fallen 15% or more from its peak early in 2022, according to Edmunds.
“You could buy a car today, and tomorrow it might be down 10%,” says an anonymous industry expert. “I think that is going to be a critical concern coming up. Carvana needs to find the right inventory at the right price. It will be vital that they make good buying decisions moving forward.”
Demand is also cooling. CarMax warns high interest rates and record prices have created an affordability problem for many buyers. Now Cox Automotive data shows used-vehicle sales are already declining. Retail sales fell 1% in November and were down 10% for the year.
All of this could cause the death of Carvana. The company’s entire business model rests on offering top-dollar cash offers to vehicle owners, then selling them to consumers at a slight markup.
“Each day that the inventory sits without being sold presents risk of the vehicle’s depreciation and collective market normalization pushing market value under the company’s purchase price,” notes “The Rise and Fall…? Of Carvana.”
Carvana can no longer pay top-dollar for used vehicles amid declining market values. The e-retailer must reinvent itself to survive the challenges ahead by changing how it handles direct-to-consumer sales of used inventory.
Recent moves make it clear the company has no plans to go down without a fight. Carvana recently adopted a “poison pill” to limit shareholders from raising their stakes and entered an agreement with Ally Bank and Ally Financial to buy $4 billion in auto loans. Selling off the loans will inject needed capital into the business to restore its financial health and give Carvana funding and time to restructure its business.
Ronnie Wendt is an editor for F&I and Showroom.
Originally posted on F&I and Showroom