A New Way to Buy A Car?
A new way to buy a car? Did you know there was a new way to buy a car?
If you pay attention to television commercials, you may have noticed the latest anti-dealer spot from Carvana (NYSE: CVNA) where even the lowliest dealership employee – in this case, the Wavy Arm Guy – forgoes the dealership experience in search of a new way to buy a car.
(This commercial, for those who want an historically accurate post, seems to be an update of Carvana’s previous Wavy Arm Guy ad that called the company “a better way to buy a car.” Changing the message to “a new way to buy a car” earned the ad a rebirth, I surmise.)
Basically, the ad is telling us we can buy a used car without visiting a dealership… and even have it delivered right to our home.
Wait? You mean… I can buy a used car 100% online and have it delivered just like I could for more than a decade via eBay Motors? Or, just like I can at hundreds of traditional dealerships across the country right now? This, you say, is a new way to buy a car?
Of course, what the commercial doesn’t tell you is that the Wavy Arm Guy’s way of avoiding the dealer – that is, his new way to buy a car – is to buy his car from a dealer. (Albeit, a dealer who delivers the car to the Wavy Arm household on an expensive flatbed.)
Carvana is a Car Dealer
Carvana, I’m sorry to have to tell you, is a car dealer. Moreover, they’re not just a car dealer; Carvana is a used car dealer.
Carvana, for all those who look at their vending machine as some sort of Silicon Valley savior meant to free the world from the chains of the nasty car dealers, was founded in 2012 as a subsidiary of DriveTime (a chain of buy-here/pay-here used car dealerships that was previously called Ugly Duckling). Carvana’s CEO is the son of the DriveTime CEO.
None of this makes Carvana bad, of course; it’s just important that consumers understand that a dealer is a dealer. There are good dealers and bad dealers. (Some dealers, you’ll learn later in this post, even have lousy reviews online.)
It’s also important that consumers understand that hundreds of dealerships (and more every day) allow you to complete the purchase fully online right on their website. Of course, if you read Carvana’s site you’ll be told that “Carvana is the only place where you can buy a used car online and have it delivered to your home.”
Am I allowed to call bullshit here?
Used Car Realities
Car buyers likely don’t know this, but the retail net profit that the average dealer makes on a used car is under $200. Understanding this, it’s hard to see how removing the cost of the salesperson, but adding the costs of home delivery, 7-day returns and a vending machine can be a long-term venture if the goal is to turn a profit.
The reality in 2018 is that used cars are priced-to-market at nearly every dealership in the country. This means they are priced at or near their expected selling price. Gone are the days of haggling away for hours to knock $2,500 off the price.
In 2018, if the average dealer has an extra $250 to give you on a used car, it’s because the unit is aged and will likely go to the auction next week. If you truly want to avoid the haggles and hassles of buying a used car, go to a site like UsedCars.com, find the online price of a vehicle you like and send the dealer a note confirming availability. Then, show up, test drive and buy it.
The days of haggling and hassling over the price of a used car are long gone at most dealerships. The primary reason it still happens today is that consumers were taught for a hundred years that they had to haggle.
Looking for a New Way to Buy a Car?
As I wrote, there are hundreds of traditional dealers that allow you to buy online today. Of course, including Carvana, Tesla, eBay Motors and every other online sales outlet for vehicles, only about eight tenths of one percent of all vehicles purchased in the U.S. in 2017 were done so via an online transaction. (That’s about one in every 125 vehicles sold. This, after more than a decade of eBay and Tesla.)
If most used cars are priced-to-market and lots of dealers allow you to buy fully online, the key really is: Where are you going to find the best deals on the most reliable cars?
To sell you a used car, a dealer needs to first buy a used car. This fact includes dealers who try to act like they’re not dealers, like Carvana. Carvana, just like your local Ford dealer, must acquire inventory to offer for sale to the public.
Unlike your local Ford dealer, Carvana cannot rely on trade-ins from new car sales (they don’t sell new cars) and the typical trade-in for a three-year-old vehicle priced at $20,000 isn’t something Carvana (or your local Ford dealer) is likely to recondition, stock and offer for sale.
Additionally, when the Ford Motor Company holds a sale of vehicles coming back from rental and other fleets, they typically only invite Ford dealers. (This is called a closed sale; and used car dealers like Carvana aren’t invited.)
This leaves dealer auctions as the primary place for Carvana and the other used car dealers to acquire most of their inventory. Auctions, by the way, that offer vehicles rejected by other dealers. This means that dealers who only sell used cars often sell those vehicles that other dealers have decided they didn’t want to sell.
Auction fees and the cost of transporting vehicles from the auction make this endeavor a whole lot more expensive than acquiring an in-market trade-in from a consumer.
Is a Vending Machine Better?
Of course, the bottom line in Carvana’s marketing to the masses is that they provide a better customer experience by allowing consumers to bypass the traditional dealership experience and buy online from Carvana.
This begs the question: Does Carvana really provide a better experience?
Hmmm… I wish I knew the answer to that question, but I do not. I’ve never bought a vehicle from them. They have a slick website and cool commercials, but according to the customer reviews I’ve read on sites like highya.com, their “experience” leaves a lot to be desired. (As of this writing, Carvana enjoyed a 2.7 out of 5 stars rating after 112 reviews on highya; with only 40% of reviewers willing to recommend Carvana to a friend.)
No Test Drive? Is this the New Way to Buy a Car?
Finally, Carvana’s 7-day return policy is a nice carrot, but a lot of people won’t send back a bowl of cold soup in a restaurant let alone a $40,000 car that feels “odd.” Barring damage or misrepresentation, most everyone would simply live with their purchase rather than seem petty by returning it to Carvana.
This is why about 96% of millennials said it’s important to test drive a vehicle before buying (Source: adage).
I don’t know about you, but I’d like to test drive a few models before buying my next vehicle – especially when we’re talking about a used car. To me, this new way to buy a car seems pretty silly, especially given all I (and now you) know about the car business.
The bottom line on the new way to buy a car? Do your homework on a site like UsedCars.com; contact the dealer in advance to check availability; schedule a test drive; show up; drive it and buy it.
That’s the new way to buy a car!