Shortly after AutoNation threw in the towel on its used-car superstores last week, archrival CarMax said it's in the game for keeps.
Some critics chortled that the used-car superstore concept was doomed from the start and AutoNation's bloodletting last week was inevitable. But CarMax plans to capitalize on AutoNation's failure and said the big box used-car superstore game is far from over. CarMax even plans to open two used-car superstores in February - one in Dallas, where AutoNation closed a store, the other in Houston, where AutoNation closed two stores and integrated the third with an AutoNation new-car franchise.
Nonetheless, if the used-car superstore era isn't over yet, the concept is clearly in trouble.
Rising overhead costs, the inability to get volume discounts on used vehicles and competition from affordable new vehicles hastened the demise of AutoNation's used-car superstores.
Still, a confident CarMax President Austin Ligon said his company will survive because its business model focuses on developing processes, systems and people that help the company contain costs.
CarMax operates in 38 locations, which include 20 new-car franchises and 32 used-car superstores.
For example, CarMax went to a satellite/hub store concept. While the satellite stores have as much inventory as hub stores, the satellites have less overhead because they do not have full reconditioning operations, purchasing and business office teams. They depend on their hub stores for those services.
CarMax knew from the start that it would take several years and a lot of upfront investment before it would be profitable, Ligon said. He boasted that most of the company's individual superstores are profitable and that the company is on the verge of profitability.
He said the CarMax concept works because its high sales volume - about 4,000 new and used vehicles per location, per year - and its policy of appraising and making offers to buy all customers' trade-ins helps the company supplement its used-car inventory. CarMax has conducted appraisals and made offers on 1.3 million vehicles since the company started. The company bought about 25 percent to 30 percent of those vehicles; of that number about half are sent to auctions, he added.
Ligon boasts that AutoNation's failure in used-car superstores is a victory for CarMax and its concept.'We have been very focused in the development of this concept - achieving and learning and building toward profitability,' he said. 'It was always our view that AutoNation wouldn't succeed at it.'
George Hoffer, an economics professor at Virginia Commonwealth University, in Richmond, Va., agrees that CarMax runs a 'leaner' used-vehicle operation than does AutoNation.
But the used-car superstore model is 'fatally flawed,' Hoffer said. In order to survive, CarMax needs a new-car franchise at each of its used-car superstore sites to lower the vehicle selling price and to spread the overhead costs among the dealership operations.
'The (current) concept has been able to sell cars, but it can't make any money,' Hoffer said.
CarMax, owned by retailer Circuit City Stores Inc. of Richmond, took the retail auto industry by storm in 1993, when it announced that it was going into the late-model used-vehicle business. CarMax was quickly followed and overshadowed by AutoNation, headed by H. Wayne Huizenga.
The companies ushered in a new approach to auto retailing that featured huge late-model vehicle inventories, computer kiosks in showrooms, no-haggle prices and young, fresh-faced college-educated sales consultants.
Consumers like the high-tech, soft-sell approach, but making money at it has proved difficult.
CarMax lost $23.5 million on sales of $1.47 billion at its new- and used-vehicle stores for the fiscal year ending Feb. 28, 1999.
Wall Street still balks at the concept. Last week, CarMax's stock prices hovered below $3 per share; its 52-week high was $7.13 and its 52-week low was $1.75.
Even after dumping its used-car stores last week, AutoNation stock continued to float around $9 per share, about half of its 52-week high of $18.38 and well below its high of $44 in January 1997.
For CarMax, total sales rose 41 percent in the third quarter that ended Nov. 30, to $489 million from $345.9 million in the third quarter of last year. CarMax reported a net loss of $3.1 million in this year's third quarter compared with a net loss of $7.3 million in the third quarter of 1998.
Total sales for the first nine months of the company's fiscal year grew 38 percent to $1.51 billion, up from $1.09 billion the same period last year. The company reported net earnings of $2.8 million in the first nine months of this year , a loss of $13.5 million in the same period last year.
While Ligon predicts that CarMax will be profitable in its next fiscal year, he said it will finish its current fiscal year in February at the break-even point or at a modest loss. Ligon said the company's new- and used-car stores average about 4,000 units per store, per year, and that most of the used-car stores are profitable.
Mike Jackson, who left Mercedes-Benz USA Inc. in October to join AutoNation, told analysts and reporters during a Dec. 13 phone-in press conference that its used-car superstores were capital- and time-intensive but contributed little in the way of revenues. The company attributed its fourth-quarter earnings shortfall to the poor performance at its used-car superstores. He said earnings per share would be 10 cents, about half of the 19 cents per share forecast.
SHORT ON SAVINGS
Analysts agreed that the used-car superstore concept is flawed.
All other so-called category killers owe their success to economies of scale and lower inventory costs analysts said. For instance, Circuit City can wring volume discounts out of appliance companies. Those savings offset the high selling expenses and help the company compete with local appliance stores, which have lower selling expenses.
However, when a used-car superstore goes to auction to buy vehicles, it must bid against small dealers who want the same vehicle.
Those perceived economies-of-scale savings were missing from the AutoNation business model.
Used-car superstores have higher selling costs because the stores are larger, have the latest in whizz-bang technology and elaborate play areas for children. Smaller dealers with whom they compete have the same inventory but lower selling costs.
That created a cost spiral that spun out of control. Huge inventories created big inventory costs, which meant AutoNation could not compete on price. That meant the company could not turn vehicles fast enough, which contributed to high inventories, and so on.
Making life tougher for the superstores were heavy incentives and special lease programs on new vehicles, which made new vehicles more affordable and late-model, used vehicles less attractive.