Why Carvana Will Fail (and How They Might Succeed)
(This is an updated and edited version of my two-part series originally posted on the 3 Birds Marketing blog.)
Before we dive into why Carvana will fail (and how it might succeed), I want to make sure we’re all up to speed on the used car market, in general. Unless you just don’t pay attention to such things, you likely already know about February’s $150 million flameout formerly known as Beepi.
Beepi, for the uninitiated, was an ambitious (aren’t they all) startup that was going to revolutionize the used car market for the benefit of consumers. As Beepi saw it (and apparently the press, as this TechCrunch article inferred), they would be “bypassing the costly overhead and commission structure of car dealerships” on their way to liberating the poor consumer from the clutches of dastardly retail automobile dealers.
Beepi, when it was founded a few years ago, described its benevolent mission thusly: “Beepi is a … company offering an online peer-to-peer marketplace for buying and selling used cars … The Internet has changed everything. Well, not quite. Buying and selling used cars, unfortunately, hasn’t changed for decades. Now that painful world is waking up…”
The painful world woke up all right. The painful world of overvalued startups trying to solve a problem that simply does not exist woke up and spanked Beepi and its investors to the tune of one-hundred fifty million dollars. Apparently, they were all unaware of this little website called eBay that had already been relatively successful at providing “an online peer-to-peer marketplace for buying and selling used cars” for well over a decade. Though certainly not for everyone, millions of vehicles had been sold through eBay Motors before Beepi ever raised its first dollar.
So, there was already a Beepi (of sorts); though more than that – and this is the biggest reason Carvana will also fail – the used car market in America is already highly efficient. This means there isn’t a profit windfall waiting for those who can do little more than tweak the mousetrap. (And, as we know from a recent Fortune article issued after this post was originally published with 3 Birds, Carvana isn’t likely to turn a profit in this efficient market any time soon.)
How efficient is the used car market in America?
For starters, about 9 million used units are sold at dealer auctions each year (a little Economics 101 for the geniuses in Silicon Valley: there is no more efficient market than an auction where there are ample buyers and sellers). Add that to the more than 30 million total used units that are sold by franchised and independent dealers to consumers every year and you’ve got a heck of a lot of transactions… and a heck of a lot of data.
Data (more precisely, the availability of data from millions of transactions) and pricing transparency (brought on by the internet) has ensured that dealers make no more than a fair profit on their used units. (According to NADA data, the “fair” profit, aka the retail net profit per used vehicle sold at franchised dealers in 2015 was a whopping $132 per unit. Some sellers might argue that’s far from fair.)
Just how much more than $132 per unit did Beepi expect to make after they stripped out “the costly overhead and commission structure” of traditional dealers? (Oh, and added in their own costly overheard, bloated Silicon Valley salaries and ridiculous executive perks?) I doubt the Beepi founders were touting just $132 per unit profit to their potential investors. It seems unlikely one could enjoy multi-billion dollar valuations at that level.
To every potential startup who wants to “revolutionize” used car sales, it’s important to understand that there is no more efficient resale market in America than automobiles. There are too many transactions, too many units for sale, too many sellers and too many B2B, B2C and C2C online and offline marketplaces for the average dealer (or startup) to consistently sell for more than the market will bear.
But what if we cut out the Middleman?
Ah… yes, the dreaded Middleman; that mythical beast that makes all the money and provides none of the value. Yes, by all means, let’s cut out the Middleman.
Oh, wait, not dealing with Middlemen has always been an option. Today it’s called Craigslist; and before that it was called the newspaper classifieds; and before that it was called the town square. For any human wishing to buy a used vehicle directly from the vehicle’s owner with no Middleman, the option has been there since the day after the wheel was invented.
Clearly, with all the online options available, there is basically nothing stopping anyone from cutting out the Middleman today. Oh, except for that whole not-wanting-to-get-scammed-or-killed philosophy some of us have. More than that, even buying a vehicle from an honest, non-murderous Craigslist seller means any vehicle inspection, repair or reconditioning costs fall on the new owner, along with the process of licensing, titling, setting up any financing and paying any sales or other taxes (and all this without a warranty).
Of course, whether or not you want to remove the Middleman from the transaction is immaterial to why Beepi failed (and why Carvana will too). You see, they are also Middlemen; they just represent themselves as something else to the consumer. They get in between buyers and sellers and they add costs; and in the case of Beepi, apparently not enough value.
Interestingly, because Beepi tried to be “Craigslist Plus” by adding in an inspection, marketing the vehicle on sites like CarGurus, handling the paperwork, helping arrange financing, transporting the vehicle and providing a 10-day money-back guarantee, in many instances they incurred higher costs than the average dealer (not including repair and reconditioning, which were the burden of the buyer should anything go wrong after ten days).
Adding Unnecessary Costs
Can you imagine the cost of sending a team of inspectors out to inspect vehicles for sale by owner (many of which fail inspection and are ultimately not even offered for sale)? Of picking up and delivering the same vehicle more than once? How about storing and reselling a car that gets returned within the guaranteed 10 days? For Carvana, their gimmicky vehicle “vending machines” make for great marketing and PR, while adding unnecessary costs to the vehicle transaction.
Of course, studies show most people will truly pay more for a great experience, but does this include a car vending machine? Seriously, let’s contain ourselves for a moment; after all, this is a used car we’re talking about, not a Caribbean cruise. How much more is the question? (Remember, the used car marketplace is pretty stinking efficient already.)
Plus, adding the experience of buying 100% online is available right now for any dealer who wants to provide this functionality to their website visitors. There are robust and easy-to-implement tools from great providers like AutoFi that give today’s new and used car dealers all of the advantage Carvana claims to have… oh, except for that vending machine. (Yes, dealers are really selling new and used cars 100% online with to-the-penny calculations thanks to partners like AutoFi. You can learn more about how this creates a great buying experience for consumers by viewing our How To Create The Best Car Buying Experience Ever video.)
Beepi also wholly misunderstood what consumers actually wanted fixed; that’s why they were solving for the wrong problem. Consumers overwhelmingly dislike the dealership experience, not necessarily the dealership visit. A car is a very personal item to most consumers; so they want to explore it and touch it and compare it… even when they already have their minds made up. Bringing them a single car on a flatbed to test drive might avoid the dealership experience, but it also avoids the dealership visit.
In the words of Jurassic Park’s Dr. Alan Grant, “T-Rex doesn’t want to be fed. He wants to hunt.”
But, why will Carvana fail?
Carvana is basically Beepi with a vending machine; though without the peer-to-peer, anti-establishment allure of the latter. Carvana will fail because they too are solving for the wrong issue. Carvana is helping consumers avoid the dealership experience by completely bypassing the dealership visit. They bring consumers one car at a time to “test own” – pretty much like Beepi did.
While customers who live near a vending machine can pick up their vehicles themselves (saving Carvana the cost of delivery), in those instances where a customer lives too far from a vending machine, but still wants to enjoy this novel delivery experience, Carvana will pay up to $200 of their travel costs and “arrange white glove transportation” to pick them up at the airport and bring them to the vending machine. (Hmm, sounds like there are some unnecessary costs eating into that $132 profit.)
Moreover, Carvana will fail because they source their vehicles just like the rest of the dealer world. Then they have to inspect them, repair them and recondition them just like the rest of the industry. While the current batch of startups may employ better processes than the average dealer that allow them to complete many of these tasks faster and cheaper, they still need to market, sell, transact business and pay for cool vending machines.
Oh, and for the Carvanas of the world who don’t understand what actually drives dealer profitability, they forgo offering parts, maintenance and repair. Thus relinquishing those potential profit centers and the customer loyalty these can drive. (The Carvana founders, of course, have dealership roots; which makes it that much more odd that they chose to omit fixed operations from their plans so far.)
But Carvana saves consumers $1,889 per vehicle versus a dealer, right?
Um, yeah, no.
Despite Carvana’s website touting a savings of $1,889 per vehicle over a traditional dealer, they apparently aren’t passing these “savings” on to their customers. (As one would expect from a benevolent tech startup hell bent on revolutionizing the car buying experience, right?)
I randomly grabbed a dozen vehicles from the Carvana website and easily beat the price of each one of them within a few minutes just browsing dealer listings on sites like Autotrader, Cars and CarGurus. Carvana’s price was always beat by at least half of the comparable vehicles, including those with fewer miles (even after adding in the dealer fees).
(To be fair, I’ve been contacted by dealerships who sell against a local Carvana location who’ve told me Carvana’s prices are “too low to touch.” This is likely an unsustainable pricing strategy used to generate interest/sales in new markets. Ultimately, the used car market is too efficient for any seller to maintain a cost advantage over any other seller – unless the seller acquires all of its vehicles directly from consumers via trades, which does not describe Carvana, of course.)
Of course, they’re selling some cars, so this begs the question: Will Carvana be able to continue to charge more for the same vehicles once the novelty of the car vending machine wears off? (I say no.)
How Carvana might succeed
With a multi-billion dollar IPO officially in the works, the founders of Carvana will likely “succeed” regardless of whether or not their creation proves sustainable for even the medium term.
Post IPO, if Carvana is able to take just half of their reported “savings” to their bottom line, they have a shot at surviving. (Does mere survival justify multi-billion dollar valuations? Probably not.) Of course, their current process of requiring consumers to buy before they touch (even with a 7-day return policy) appeals to just a small percentage of the population.
As eBay has discovered, a majority of consumers say they want to buy completely online, but only a small minority are willing (today) to do so. Add in the loss of impulse buyers and it’s definitely an uphill battle for them to expect anything more than to be acquired by a Berkshire or AutoNation in their current form. (When I was browsing their listings, Carvana promised to deliver the vehicles I was interested in to me in either five or seven days depending on the vehicle. Seven days; how many consumers are willing to wait for a week to get a car they’ve already selected and purchased?)
Instead of trying to out-eBay eBay, Carvana stands a better chance of long-term success by trying to become a national Texas Direct Auto that includes some fixed operations.
That is, give customers a place to browse inventory live. Add a service lane or two. You know, become CARite with a cool car vending machine. Of course, in order to do that, Carvana needs to keep from trying to grow faster than their systems and people can adjust. They are selling an experience and they cannot deliver on that experience if they grow too fast or try to do too much at once.
The bad news for Carvana is it looks like that’s exactly what’s happening today. Based on their online reviews, Carvana is currently providing no better customer experience than a below-average dealer. (CARite, by comparison, seems focused on improving the dealership experience by improving the dealership visit – among other things – and their growth appears to be less about the founders cashing out for billions and more about actually changing the way consumers buy, sell and service used vehicles.)
Any dealer can and will sell cars online!
Venture capitalists can be an odd bunch, and they may continue to put hundreds of millions into Carvana thinking there is some multi-billion dollar pot at the end of the rainbow. However, as already stated, any traditional dealer can already complete the entire deal online today simply by adding a robust partner like AutoFi to their website.
Moreover, when dealers actually add an AutoFi to their websites and include it in their marketing messages, where does this leave Carvana? Can those vending machines be converted into small parking garages for downtown condo complexes?
Beepi never learned this lesson, but there is a flaw in the logic of everyone who tries to out-dealer the car dealer on a grand scale: You can’t. Dealers ultimately adjust and crush you (or buy you). They have the name, the facilities, the loyal customers and the brand. If all you have is a cool car vending machine, my money is on the dealer.
Steve Stauning, creator of The Appointment Culture and a sought-after consultant for companies large and small interested in improving The Customer Experience and/or their Automotive Retail Sales. He is also an extremely popular keynote speaker and writer. Learn more about Steve at SteveStauning.com.
January 10, 2022 @ 9:46 AM
I followed the efforts to sell a car Carvana bought from me at 5000 over my original cost when new . It appears to have a buyer after 3 months and dropping the price 3 times at a list price of 300 more than they paid me and they moved it <1000 miles to do it. I subsequently bought the lastest upgraded model of that vehicle for 900 more than they paid me for a 2019 version.
I'm reminded of the story of the business that was losing money on every sale and thought they could make it up in volume.
August 24, 2021 @ 11:15 AM
Nice article. You have really put a good debate between CARVANA v the rest of the industry. As a smaller Independent car dealer, I see the points that you make in buying from both CARVANA and a franchise dealer. What you fail to mention is the creation of the new boutique independent dealer that has formed from the ashes of the franchise/vending machine fight (another interesting article you might tackle at some point). People are sick of the old school tactics, but at the same time will not over pay drastically for convenience (CARVANAS high high prices) bc they can do their research instantly online and find that independents can give them a very easy, non-traditional experience, but yet save the customer money bc we dont have astronomical fees added from every direction. Not to mention the totally disregard of market value CARVANA shows when buying cars. I witness during auction they routinely over pay way above fair auction pricing for cars and let the customer pay for it, which in turn hurts the whole auto industry. It seems that they are buying everything they can at whatever prices they want, then try to make their own values. It doesn’t work that way….banks only loan so much. At some point people are just gonna say enough and stop buying from them.
CARVANA is the new way…..NOT the only way. If they want to stay relevant they must understand that the new generation of car buyers is much smarter and resourceful then ever before and they will ultimately shop the vehicle to find the best DEAL!! Franchise dealers must change. CARVANA must change (from buying strategy to selling price). If not, look out for the little guy….we will gladly step in and provide a better service for a more attractive price!
August 3, 2020 @ 3:04 PM
I had a car reserved on Carvana. It was through their partner program where dealerships can participate similar to Fulfillment by *mazon. The pictures were blurry, the price was at the upper end of KBB’s retail range (so at least a couple thousand $ higher than I could probably negotiate at a dealership), and the financing offer, at 5.5%, was far higher than I could qualify for with a new car. The seats had obvious stains that nobody had bothered to clean even though the vehicle had barely 10,000 miles on it. Basically I would have paid an extra $2500 in interest over a 4-year loan on top of getting screwed on the price, and if I needed to return it, my credit (> 800) still would have taken a hit from opening the loan, making it more difficult to qualify for another. I cancelled the reservation so the next guy could take the risk. Too many things were wrong with the deal.
FWIW, the in-house Carvana listings seem much more comprehensive, with much better photos of inevitable defects, but their pricing is still anything but competitive.
March 14, 2020 @ 2:18 PM
Interesting article and the mix of reviews. I was told years ago , 1/3 – 1/3-1/3.. This can be applied here, 3 out of 10 will buy site unseen online, and 3 won’t, the middle group can potentially be swayed 1 way or the other. I’ve been 40 years in the car business, mostly in F&I the first 20 and self employed since. After the 2008 crash when inventory prices went crazy followed by rising fees plus online auction purchases that provided a platform for Carvana types, I have pitched online buying. I believe there is a market and a percentage of the consumer who will act as their own salesman yet I have yet to see a platform where this can be scaled. For this reason, I survive only by long hours and wearing many hats yet a high percentage (There is always that 1 you can never make happy) of my clients are thrilled with the process and the savings we provide. As in any business honesty and transparency go a long way thus the reason my clients continue to honor with their business and refer us.
May 6, 2020 @ 6:19 PM
Amazingly accurate article. As the owner of a used car dealership, I can tell you that Carvana is and has always been a big joke amongst dealers since the day we first heard all about them. They’ve never been a threat in any way, shape or form and yes they will be gone as quickly as they appeared on the used car market. They literally do everything wrong from beginning to end, front to back, and there are zero ways to fix what they’re trying to do unless they just flat out turn into a regular old used car lot. And that won’t happen without filing BK and completely restructuring everything but what would be the point of that? Anyone can start a used car lot if they have capital and experience in the industry. But even that doesn’t do much to guarantee you’ll stick around for long. I own my land, my building, and my entire inventory, I have zero liabilities (which is unheard of for a used car dealer or any business) and I’m still fearful of what’s to come for the used car market. It’s already ugly and it’s only going to get worse for a very long time. That should tell you all you need to know about what Carvana is up against. But uh… yeah, good luck Carvana.
New Carvana Buyer
January 12, 2020 @ 2:12 AM
Just completed my first car-buying experience with Carvana after dealing for weeks with frustratingly shady dealership tactics. Put simply, I will never buy again from a brick and mortar dealership. I was given $1,275 more for my trade-in than the average offered by the dealerships I was shopping; my vehicle was priced $2,500 below market; and my financing rate was 150 bps lower than what the dealership could achieve through their lender partners. I started the process on Tuesday morning and took delivery of the vehicle at home the following afternoon. The experience was unbelievably simple, transparent, fast, and ultimately satisfying. I’m still in disbelief over how easy the process was.
March 4, 2019 @ 9:16 PM
I have purchased vehicles professionally for dealers since the 80’s. Because most leads/sales are generated via the internet, most dealers must keep their pricing in line with the market or consumers go elsewhere. Pure and simple. This said, I have witnessed Carvana’s reckless purchasing habits countless times. They are a joke in the industry. So here’s their dilemma: If they price their vehicle higher to make up for overpaying for the unit, they screw the consumer. If they adjust their pricing to market pricing, like most dealers do, they are losing money & screwing their investors. Either way, it’s is not a sustainable business model.
March 31, 2020 @ 9:36 PM
Carvana is disappointing, look at the actually consumer reviews and not the curated ones on carvana. The barely inspect the cars they purchase, they have and still do sell cars that have not been cleaned and inspected. They only make up for 0.4% of all used cars within the US. They bleed money and haven’t made a profit EVER. They had a good foundation and but unfortunately the company messed it all up. They don’t have the customer service as in the some dealerships and Carmax.
Due to the coronavirus, used car sales are down 80-90 and will be lower for the time being. They cancelled all appointments to buy vehicles and realize the need to churn with what they have. A car purchase is a large and significant purchase for many people. Don’t waste your money on these lemons.
August 24, 2021 @ 11:19 AM
Well put John. Hopefully people learn sooner then later. Higher prices, Higher interest rates, and less quality control. Hmmm, sounds like an automated franchise dealer. Ha ha ha.
October 21, 2018 @ 8:45 AM
I would be willing to pay a couple hundred dollar premium for not having to put with dealership’s archaic sales tactics. They are the ones who are going to go extinct.
October 16, 2018 @ 12:52 PM
I quit buying from dealerships over 20 years ago because of the way they try to RIP you a new one if you have a trade. “Retail for my new(er) car, but less than wholesale for your trade”. How can dealers fail to become wealthy with that kind of business model?? I hate the dealership experience you claim many people like, and with a minimum charge of $100 to $150 just to look at your car if you have a problem, I avoid dealers like the plague. Really they are STEALERSHIPS would be a better term for how they operate.
June 20, 2018 @ 12:39 PM
I just purchased a vehicle from Carvana and the experience was nothing short of excellent. I made my choice, provided my personal information, made the financial transaction all online and the vehicle was delivered to my home 3 days later. Truly a seamless no hassle experience and no, I’m not a millennial, but a boomer.
In the article you mentioned more than once that any dealership can sell online, in my recent experience I could not find a dealership that would complete a sell online, in fact I could not find one that would even provide a firm price online. All the dealerships I was in contact with all wanted to talk in person or at least via phone and that is not what i wanted .
A previous comment from a dealership employee is correct, I too worked in the industry for 35+ years (fixed operations) and can tell you that most dealerships really aren’t willing to make the change.
November 29, 2017 @ 10:16 AM
Sorry, but you do not understand the auto sales industry.
I work for one of the nations largest owner of dealerships, and it’s a total mess. Dealership managers are operating as if it is still 2007, and corporate execs are focused on anything and everything EXCEPT efficiently selling vehicles (and/or improving the customer experience). Furthermore, the dreaded F&I experience is being pushed to the max since it is the last remaining retail department producing revenues and profits.
CARVANA fixes every last problem/ issue we experience with lack or unhappy customers. And while you’re right that better deals can be sought, CARVANA delivers an amazing customer experience. I watched countless millenial testimonies on youtube, and I watched their excitement and pleasure with purchasing at CARVANA. At my store, we see one or two millenials a month, and they rarely buy. Back at CARVANA, 30% of these millenials are completing the entire transaction on their phones.
So yes, traditional dealerships “can” change. Santa Claus can also be real.
Until corporate execs and “old school” dealership managers are replaced, it ain’t happening. They’re going to milk the current failing system (ie customers) for every penny, and repeat customers will dwindle further and further.
New Carvana Buyer
January 12, 2020 @ 2:14 AM
May 9, 2017 @ 7:31 PM
Very good article.
May 9, 2017 @ 7:35 PM