CarMax Inc. is Austin Ligon's baby. Ligon, the company's CEO, was present in 1993 when Circuit City created the publicly traded chain of large used-vehicle stores. He refused to give up on the business model, even when industry leader AutoNation Inc. abandoned its used-car stores in 1999.
Ligon, 55, guided CarMax from its money-losing beginnings to the No. 19 spot on Automotive News' 2006 list of the top 100 U.S. dealership groups. CarMax operates 67 used-car stores and seven new-vehicle franchises in 31 markets. The Richmond, Va., company plans to open 11 stores during its 2007 fiscal year, which began March 1.
Ligon plans to retire from CarMax this year. He spoke with Staff Reporter Arlena Sawyers last month about the company's growth prospects and his own plans.
How's business?
We're in the late part of our (fiscal) fourth quarter, so we can't talk about business now. We had a great earnings quarter in December. The first three quarters, as everybody knows, were pretty volatile for the entire industry. We had a good start last spring, then a slowdown, and a real boom during the employee pricing period - which is a paradox, since we overwhelmingly sell used cars.
We saw some of the same slowdown in the fall that everybody else did. It is pretty clear that Ford and General Motors, and the competition with everybody else, sucked a lot of business from the fall into the summer, certainly on the new-car side.
We've managed to generate pretty attractive earnings, but it continues to be an extremely volatile environment.
Why does your business model work?
We have our focus: It's used cars. It gives us the flexibility to do what the consumer wants, where the consumer wants. That's why it's been so successful for us.
You plan to open stores in Hartford and New Haven, Conn., in your 2007 fiscal year. With the exception of Chicago, CarMax stores are in the Sun Belt. Are you starting to expand outside warm-climate areas?
Chicago is our biggest market, so it's a pretty big exception. But your broad point is right. We're mainly from Washington (D.C.) down to Florida, across to Texas and over to California. If you look at the pattern of every big-box retailer, they all grow in the Sun Belt first because that is where the population growth is. One, it's usually easier to find land there. And two, the population growth puts wind behind your sails.
We've always said that we expect CarMax ultimately to be in all the markets in the United States. Because we use heavy television advertising, it's important to have an economy of scale in any television market that we go into.
Why are we entering Hartford/New Haven? Those are mid-sized (metropolitan communities), very similar to what we've focused on the last four or five years. We found what we think is a very good site in Hartford. We said, "OK, we have one of the two cities in the television market. Let's go look at the other one."
We fortuitously found a good site in New Haven. It's got good demographics, and the weather is no worse than Kenosha (Wis., part of the Chicago market). Probably better. Sometimes we find real estate available right now; sometimes we don't. In this case, we did. So we'll be opening Hartford in April and New Haven in the fall.
What role does the acquisition of real estate play in your expansion plans?
You want to put your stores where consumers want to shop. One of the fundamental problems if you're a (franchised) car dealer is that you have no control over that. That's all controlled by the franchise laws in each state: the number of existing franchises, who owns them, the manufacturer's desires.
One of the great things about the used-car business is that we're not constrained by that. We go in and analyze a market the same way that Kohl's or Home Depot or Lowe's or Costco would. What are the shopping patterns for automobiles? What are the shopping patterns in terms of big-box stores? Where are the big malls?
At any given time, we're looking at 20 or 25 markets. We know that some of those markets will have real estate that we want; in some there are opportunities, but we will have to work on it; and some we'll have to come back later.
We've got 11 stores that we will open for sure (in fiscal 2007). We've said our growth will be 15 to 20 percent of our base, so next year we'll probably need to do somewhere between 12 and 15 stores, and the next year somewhere between 13 and 16.
CarMax was spun off as a separate publicly held company in 2002. What are the pros and cons of that?
I don't think there are any cons. That's how we set it up from Day One. If CarMax was successful, we always expected it to become a separate company.
As a public company, you have access to public capital. CarMax has been profitable enough that we've only had to raise equity once. We've never had to go back and raise it again and don't expect we'll have to. The business generates enough capital and enough debt capacity to support its own growth.
Your main focus is used vehicles, but you have seven new-car franchises. Are there franchises you'd like to acquire and some you'd like to get rid of?
For our method of operation, with fixed low prices, selling new vehicles only works if we're very high-volume. When we run a new-car store, it runs at substantially lower margins than a traditional dealership. We put all of our prices out there. There is no negotiation - which means, particularly in the new-car business, there has to be very sharp pricing to be competitive.
We have Chrysler-Jeep-Dodge dealerships in three locations. We have one Nissan, two Toyotas and one Chevrolet. We maintain these franchises because we want to keep an exposure to the new-car business, and we want to keep our relationship with some of the new-car companies.
If, 10 or 15 years from now, it makes sense to us to go into the new-car business, once we've finished our growth plan in used cars, we have that option. Right now, we're pretty happy with the franchises we have.
Last year CarMax was not making money in Los Angeles. Is that market profitable now?
In the Los Angeles market, we have five stores. We've announced that we're going to open two more stores this year, in Torrance and Burbank. It's got very heavy advertising costs. But as we add more stores, we will move to a point where we realize a nice profit and a good return. We're quite pleased with the way the market has been going.
How many CarMax stores would you like to have in the United States?
Given the market-share penetration we get and the market analysis we've done, we think we should be able to build at least 250 to 300 CarMax stores nationwide. The time frame for that, at the rate we are growing, is eight to 10 years.
If we're able, over time, to achieve market shares as high as the trade-area market shares of our oldest, most successful markets, we hope someday that we might be able to achieve 400, 500 or even 600 stores. But that is speculative at this point.
How many stores do you need in a market to make it work?
Every market is different. There are 290 million people in the United States. On average, we need about one store per million people.
In some of our more mature, high-share markets like Richmond (Va.), we have one store per half-million people. That, simplistically, is how you get to the numbers I'm talking about.
What will you do when you retire?
My first goal is to take a year, or a year and a half, and do some of the things that I've wanted to do for the last 25 years and haven't been able to do.
I'd like to go to some pretty exotic places. High on my list is West Africa. I promised my daughter that I will take her to Timbuktu. It's where the Niger River meets the Sahara, and it is one of the great capitals of ancient Africa.
I want to go to Bhutan in the Himalayas. My wife and I planned to get married there, but we weren't able to go. We got married in Nepal. I want to go back to Bolivia, a country I like a lot.
I have two kids in college. I hope to be able to travel with them. I have a 14-year-old who is a competitive equestrian. I have not had nearly enough time to see her compete. I look forward to that.
You may e-mail Arlena Sawyers at [email protected]
