Carvana encounters same hurdle as dealers

Despite its web-based, asset-light approach to used-vehicle sales, Carvana is in many ways similar to a traditional brick-and-mortar store. Obviously, both sell cars and trucks, and both are subject to broader macroeconomics affecting such sales.

And, like dealers, Carvana is keen on sourcing more cars from customers.

Vehicle trade-ins coming from consumers are more profitable, company executives have said recently, and they are seen as an integral way for Carvana to increase its gross profit per unit as it strives toward so-far-elusive profitability.

In Carvana's most recent quarterly earnings call, CEO Ernie Garcia said the company more than tripled the number of units it bought from customers through the year. "Some of those flowed through wholesale, some of those flowed through to retail sales, and in either case, there's a profit opportunity there," he said.

Still, just 17 percent of the cars Carvana was retailing in the fourth quarter were bought from customers. It was at 16 percent in the third quarter, up from 11 percent in the second quarter and 6 percent in the first, CFO Mark Jenkins said in outlining Carvana's profit strategies at an investor presentation near the end of last year. "That still leaves us significantly behind the used-car industry leader in terms of customer sourcing," Jenkins said.

That leader, measured by sales volume, is CarMax, which says in a 2018 filing that its "self-sufficiency ratio" ranged from 38 to 52 percent over the past decade. "The self-sufficiency ratio represents the percent of our retail units sourced directly from consumers," a spokeswoman said.

On the wholesale side, Carvana's Jenkins said, a little more than 15 percent of the cars the 6-year-old company wholesaled were sourced from customers in the third quarter, compared with about 55 to 65 percent for the industry leader.

Carvana figures customer-sourced cars can generate $500 to $1,000 more profit per unit than those acquired at auction.

Like other online car-buying platforms as well as some dealers, Carvana has a web-based form where customers can give details of their trade-in. Its algorithms then value the vehicle and generate an offer. If a transaction goes through, Carvana sends a truck from its delivery network to the customer's house to pick up the car.

The company has been touting the process in an advertising campaign. "Whether it's a few years old or dinosaur old, we want to buy your car," one TV ad says. It directs sellers to the Carvana website, where they'll need to enter their license plate information and answer a few questions to get the transaction underway.

Garcia said Carvana thinks about used-vehicle transactions as consumers switching cars with one another, "and that switch happens through this extremely complex mechanism of a trade-in and a dealer and then transport through an auction and then an auction fee and then transports to another dealer and then sales to the customer." There is a lot of cost in that chain, Garcia said.

Would Carvana want to control more of that chain by operating its own auctions at some point? "Unlikely," Garcia said.

"I think we feel like we can grow very, very fast, and it's not clear that we want to be taking on more operational complexity that will slow us down over time," he said.

Carvana sold 94,108 retail units in 2018, more than double its 2017 sales.

Garcia has said the company ultimately aims to sell 2 million used vehicles annually, which would easily make it the largest such retailer in the U.S.