December 2, 2023

Car Auto Finance

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Is the Carvana online car buying model dead?

The headlines for online-car buying platform Carvana (CVNA) haven’t been good recently. And whether the company will remain a public entity is now in doubt.

In fact, Yahoo Finance dubbed Carvana “Worst Company of the Year” after polling more than 5,000 readers on their suggestions.

Despite a stock down 98% this year, concerns over its debt load, and whether management has the know-how to right the business, it seems one thing may have some staying power — the trend of buying used cars online.

MIAMI, FLORIDA - DECEMBER 09:  A Carvana used car

MIAMI, FLORIDA – DECEMBER 09: A Carvana used car “vending machine” displays vehicles on December 09, 2022 in Miami, Florida. The online used car seller is reported to be on the cusp of running out of cash, with its stock ending the day at $5.05, having dropped from a record high of $361 in August 2021. (Photo by Joe Raedle/Getty Images)

What online platforms like Carvana, Vroom (VRM), and even CarMax (KMX) offer is the ability to avoid the hassle of going to dealership, negotiating with a salesperson, and spending hours at a sales office waiting for paperwork and financing to go through.

From a business standpoint, however, the online car buying business can be very expensive — and labor intensive. The process of locating and buying a used car, reconditioning it, merchandising it on the website, delivering it, and then processing all the paperwork, is a big expense.

12/22/2019 Orlando FL- delivery truck with Smart car on deck

12/22/2019 Orlando FL- delivery truck with Smart car on deck

And this is where Carvana has gotten into a lot of trouble. Carvana reportedly has delivered cars to buyers in less than ideal shape, which then required expensive remediation.

Ken Stromsland, managing director of high-end auto detailer The Detail Doctor in Shrewsbury, New Jersey, told Yahoo Finance that he and his clients have first-hand experience with such issues.

“Many of the appointments [we’ve had] were customers who took delivery and the condition of the vehicle was not as described so Carvana let the customer get an estimate (from us) to do whatever scratch removal or detailing that it needed,” Stromsland says. “Carvana didn’t blink and paid for whatever was needed to make the customer happy; while I think that’s a great customer satisfaction thing to do, it’s expensive for Carvana.”

The Detail Doctor also has a dealer license, and in the process of acquiring used cars to sell, saw how Carvana was vacuuming up the supply of used cars, and expensively at that.

“As we were trying to buy cars, and looked at Galves [used car data provider], and Manheim [used car auction house] for values, we had customers telling us they would check Carvana to buy their car, and Carvana was paying ridiculously high [prices] for used cars,” Stromsland said. “We lost several deals because Carvana was paying super high [prices] for cars; I’m talking $5K-$10K on a car, not a few hundred or a grand here or there.”

Carvana was buying cars hand over fist during the pandemic to meet rising demand from buyers who wanted to travel exclusively by car and were interested in buying cars when new car supply was dwindling due to parts shortages and COVID-related factory shutdowns.

Stromsland says that eventually Carvana stopped paying prices and it has done “a complete 180” because they are paying way under Manheim-listed values for vehicles now. Stromsland is also seeing fewer and fewer Carvana vehicles coming to his shop in recent times.

On top of the high cost of reconditioning, paying for cars that were delivered in sub-par condition, and then overpaying for a dwindling supply of used cars during the pandemic, Carvana got into a heap of trouble with numerous local secretaries of states and DMVs because Carvana wasn’t processing the necessary paperwork to get the cars registered.

Most car dealerships will help buyers register their cars where they reside. The fact that Carvana couldn’t keep up with the paperwork led it to have its dealer license suspended in a number of states.

Even Carvana’s online car buying rival Vroom has has its dealer license revoked for delays in registering cars, and is even been sued for deceptive trade practices regarding those delays.

Will online-only car buying survive?

COLMA, CALIFORNIA - SEPTEMBER 24: A view of a CarMax superstore on September 24, 2020 in Colma, California. CarMax reported a better-than-expected 28 percent surge in second quarter earnings with revenues of $5.37 billion. (Photo by Justin Sullivan/Getty Images)

COLMA, CALIFORNIA – SEPTEMBER 24: A view of a CarMax superstore on September 24, 2020 in Colma, California. CarMax reported a better-than-expected 28 percent surge in second quarter earnings with revenues of $5.37 billion. (Photo by Justin Sullivan/Getty Images)

The big question now is for the Carvana and Vrooms of the world is whether the online car-buying business model is sustainable. Even though the service is still popular, it could just be too cost intensive to become profitable.

Competitors AutoNation and CarMax have different business models. These two nationwide car dealers offer customers the ability to buy fully online as well as physical dealerships that allow customers to transact in person. These two operators also offer a one-price model where there is no “haggling” over price, and the companies have a larger sales and operation staff to handle processing paperwork and registrations.

In addition, AutoNation and CarMax not only make money on cars they sell through the dealerships, they also have the service centers, which are strong money makers for the companies. AutoNation’s parts and services business rose 9.4% in the latest quarter, while its revenue rose only 4%.

While AutoNation and CarMax offer a more sustainable business model, the fact remains they and other used car dealers are seeing profitability slump as interest rates rise and prices ease.

But with data from car insurer Progressive showing a whopping 78% of respondents found buying a car online a “highly satisfying experience,” online car buying isn’t going away anytime soon, especially if dealers are able to make the digital experience both pleasant and profitable.

Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.

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