When my oldest son, Brian, started high school at Brophy I told him if he got straight A’s I would buy him a car when he turned 16. After his sophomore year he’d “made grades,” so his hunt for a car began.
This was before the Internet was mainstream, so Brian searched newspaper ads and the best source for used cars back then…Auto Trader magazine.
He finally found it…a tricked out Nissan Pathfinder with a lifted suspension, off road tires, custom paint, and a very LOUD sound system. I called the owner, negotiated a deal (subject to seeing the vehicle) and took a taxi to his home in Buckeye (over an hour from Scottsdale) to pick it up.
Surprising Brian with that truck on his 16th birthday was among my most enjoyable moments as a dad. But it wasn’t long before the joy was gone.
Within a few days, the truck was in the shop with alignment issues. A few weeks later, there was a problem with the custom exhaust system. A month after that the engine started lurching. We finally traded it (for a lot less than I paid) to a dealership for a car that was reliable.
Nirvana is defined as “A state of perfect happiness.” Brian’s experience with that truck was closer to misery than nirvana.
The name Carvana is a portmanteau of the words “car” and “nirvana.” The company’s tagline touts “a higher state of car buying.”
Now, whenever I drive by Carvana’s nine story vehicle vending machine off the 202 in Tempe I reflect back on Brian’s truck ordeal. The used car business was ripe for disruption, and the Internet was the perfect catalyst.
Now you can browse thousands of used cars at Carvana.com, buy one online, and have it delivered to your door. Sure beats paying for a taxi and a long drive to Buckeye.
The company also has a 7 Day Test To Own policy, promising “7 days to see if your car fits into your life. If it doesn’t, simply return it.” I wish I’d had a “test to own” guarantee on Brian’s defective truck.
In addition, Carvana boasts the “highest quality cars,” vouching that “Every vehicle goes through a 150 point inspection and is brought up to our highest standards.” The guy who sold me Brian’s truck said he was a mechanic and assured me it was in pristine condition. Did he do a 150 point inspection? I think not. Was he really a mechanic? I doubt it.
This Tempe based company also assures that “Every car comes standard with a 100 Day Worry Free Guarantee. If something should happen, we’ll take care of it.” In the first 100 days Brian had the truck it probably cost me more in repairs than it was worth.
But this article isn’t really about the Carvana experience. It’s about something much bigger…disruption. Amazon, Uber, Apple, and now…Carvana?
The company was founded in 2012, went public in 2017, has been the fastest growing used car dealer since 2018…but still has yet to turn a profit. Auto industry experts say the company is bordering on breakeven, expected to post its final loss in 2022, and will turn a profit of $119 million in 2023. But that projection may be modest.
In April 2020 Forbes posted an article entitled: After The Quarantines, We All May Buy And Sell Used Cars The Carvana Way.
And just a few months ago the Wall Street Journal posted the headline: Carvana to Boost Capacity: The used car dealer is building 10 new inspection centers and ramping up hiring to meet a surge in demand.
But a great business model like Carvana comes with great risk. If established dealerships are smart (and most are), they’re working on “Carvana like” models right now. I know the owners of one major dealership personally. Tex Earnhardt was one of my best friends for 30 years until his passing in 2020.
The Earnhardt family is savvy, forward thinking, and committed to a superior customer experience. Tex instilled this philosophy in his sons and grandsons, and he would be proud of how they’ve carried it forward. So you can bet they’re working on a model similar to Carvana…and probably a better one.
One huge advantage is that mega-dealerships like Earnhardt sell new cars (Carvana does not), and the best source of pre-owned cars is people trading up for a new car. So while Carvana has to go out and find used cars, Earnhardt and other big dealers have people bringing in cars to trade every day.
Established dealers like Earnhardt also have a tax advantage (in Arizona) that helps them acquire pre-owned cars because you only pay sales tax on the difference between the price of the new car and what they give you for your used car. This tax advantage enables new car dealers to acquire pre-owned cars less expensively because customers can take less for their trade as a result of the tax savings.
Another major advantage is that Earnhardt already has a massive client base built on 70 years of trust and loyalty. With that kind of longevity and stellar reputation, the only way Earnhardt will be disrupted is if they let it happen…and they won’t, which is the point of this article.
Disruption is improvement. But innovators don’t always disrupt. Sometimes they give established giants an idea, and get disrupted before they really get going. What will happen in the pre-owned car industry?
Only time will tell, but to me one of the most fascinating aspects of business is who aggressively acts, who passively reacts, and who simply sits back. In other words…
Will the disruptor disrupt, or will the big guys wake up?
