FACT:
Carvana grossly overpays for cars.
But most people have no idea how it does it (including most car dealers)!
Here's a simple breakdown of Carvana’s operations:
First, let's understand how Carvana operates.
The company was built on the backbone of DriveTime:
A nationwide, vertically-integrated, traditional dealer group.
Similar to DriveTime, Carvana was built as a vertically-integrated auto retailer.
Let's define vertical integration in normal-people terms:
Carvana does a sh*t load of stuff in-house, as opposed to outsourcing.
This enables them to maximize the value they capture across the value chain.
But why does this all matter?
It matters because Carvana has more ways of making money than traditional dealerships!
The average used car dealer performs 3 activities in-house:
Buy cars. Fix cars. Sell cars.
Simple.
Now, let's take a look at Carvana.
Carvana performs these 3 activities plus many more:
Buy cars. Transport cars. Fix cars. Finance cars. Sell cars. Warranty cars.
And more.
So, unlike a traditional dealership:
Carvana can make a lot more money and outcompete the competition.
But CDG, what's Carvana's most important lever?
Undoubtedly:
In-house financing.
The ultimate competitive advantage.
Here's why:
Carvana sells auto loans to its consumers.
And it can increase/decrease interest rates on those auto loans.
This gives Carvana a magical way of increasing/decreasing their profits.
Whenever. It. Wants.
The craziest part: Wall Street loves it.
Here's how this actually plays out.
Scenario 1 (current US-market conditions):
Carvana needs cars but the market supply is tight.
Carvana's solution:
Pay more for cars + increase its interest rates.
Result:
- Preserve profits.
- Offer consumers the largest assortment of cars.
- Outcompete the competition.
Scenario 2:
Carvana needs cars but the market supply is abundant.
Carvana's solution:
Pay less for cars + decrease interest rates.
Result:
- Preserve profits.
- Offer consumers the most competitive financing terms.
- Outcompete the competition.
But there’s even more!
Carvana is valued by Wall Street as a “Growth” company.
And it’s frothy valuation is driven by its ability to continue growing fast and capturing market share.
This means Carvana is even more incentivized to overpay for your car.
Even if it comes at the expense of profits.
Because if growth stalls, its valuation will get crushed.
And that's a wrap! If you enjoyed this thread, retweet, like, and follow me @GuyDealership for many more insights into the used car industry! Stay tuned for many more car buying and selling insights, tips, tricks and hacks.