How Far Can Online Car Seller Carvana Go?

“Our goal is to deliver as many cars to as many people possible,” says Carvana CEO Eddie Garcia III.

Steve Finlay, Contributing Editor

May 20, 2024

6 Min Read
One of Carvana’s 40 vending machines.
One of Carvana’s 40 vending machines.

NOVI, MI – Carvana CEO Ernie Garcia III isn’t out to transform the used-car market into an entirely e-commerce business modeled after his company.

But he does want to sell a lot of cars online.

“Our goal is to deliver as many cars to as many people possible,” he tells WardsAuto during a Motor City visit. “We want to deliver an awesome experience to consumers.”

He’s not unique in that regard, at “with customer experience” a mantra in the traditional brick-and-mortar franchised auto dealer world.

But Carvana, founded in 2012, is markedly different from that. It has no dealerships nor sales staffers to assist people through the car buying procedure.

The whole buying, trading and financing process is online. Buyers have their cars delivered (for a fee) to their homes or pick them up at one of Carvana’s multi-storied car “vending machines” across the country.

“It’s a different retail model,” Garcia (pictured, below left) understatedly says during what was billed as a fireside chat during an Automotive Press Assn. appearance here near one of the car vending machines.

During the presentation, Garcia talks, among other things, about the company’s ups and downs. Carvana came out strong, flush with stockholder money after going public in 2017, but early this decade the company took a couple of hits.  

One was an undersupply of used cars that jacked up prices. Two was higher interest rates. That one-two punch put Carvana on the ropes for a few rounds.

“It was a really tough time,” Garcia says. “The staff had been used to hearing about how great Carvana was.” Then they started hearing things weren’t so great.

In some states, Carvana was temporarily suspended from doing business because of delays in getting ownership titles to buyers. Garcia says that was mainly because some states couldn’t handle the vast paperwork involved with a company selling lots of cars nationwide.    

Actions such as bondholder debt forbearance and a January restructuring have put Carvana on firmer footing.

Last year and this year combined will “probably be the best period in the company’s life,” Garcia predicts. In 2024’s first quarter, it sold 90,000 vehicles. “We’re the most profitable (auto) retailer based on margin. That’s a milestone we’re proud of.”

How Far Can Carvana Go?

Some auto industry people contend the Carvana business model can only go so far.

“It’s an interesting concept and obviously endorsed by a segment of consumers,” auto analyst Tim Burke tells WardsAuto. “But a lot of other car buyers – myself included – want to see and touch a vehicle at a dealership.”    

Mike Rossman, a consultant and retired vice president-sales at AutoNation, recalls when the country’s largest dealer group leaned heavily into digital about a decade ago in preparation for what it expected to be a pivot of consumers buying cars online.

“Online was a big pursuit for AutoNation,” he says at a recent American International Auto Dealers Assn. webinar.

It turns out that only a small minority of auto shoppers fully utilized AutoNation’s digital buying tools. Some tools, yes. Others, which would virtually complete the entire transaction online, no.  

Citing Cox Automotive data, Rossman says walk-ins comprise 52% of consumers’ initial contact with dealerships, followed by phone calls at 28% (usually to confirm a desired vehicle is in stock). But nearly all of those people have done online vehicle shopping and researching before contacting the dealership. 

It doesn’t hurt for a dealership to offer shoppers several website tools, even though many of them probably won’t use all of them, says Sam D’Arc, chief operating officer of the 41-store Ziegler Auto Group based in Kalamazoo, MI.

“For a long time, there’s been this idea out there that technology will completely replace people going to dealerships,” D’Arc tells WardsAuto. “Carvana proved that’s not true. So did COVID.”

 The Ziegler group, which sells vehicles in four Midwest states, invested in expanding its digital auto retailing during the pandemic.

“We geared up. We were ready for a wave of totally online car buyers,” D’Arc says. “It never happened. Car buying typically is a human-to-human experience.”

He adds: “An investor may look at Carvana as an exciting proposition, but the car-buying experience is much more complicated, and many customers have a lot of questions.”  

Franchised dealers sold 12.7 million used vehicles last year, representing 36.7% of their overall car sales, according to Patrick Manzi, chief economist for the National Automobile Dealers Assn.

The average pre-owned vehicle price sold by franchised dealers was $29,308 in 2023 and a record $30,736 in 2022, years in which demand for both new and used vehicles outpaced supply.

Because it doesn’t carry the overhead of owning dealerships, Carvana can price vehicles lower, Garcia says.

It obtains much of its inventory from people selling their cars to buy another one. There are about 270 million used cars on U.S. roads. That’s a big potential acquisition base, Garcia says.

In 2022, Carvana acquired Kar Global’s Adesa U.S. auction subsidiary for $2.2 billion in cash. Garcia says the acquisition adds an inventory pipeline as well as expanded reconditioning facilities.

Carvana offers a 7-day return policy on purchases and has a nationwide network of reconditioning centers that operate something like assembly lines. Garcia touts that what Carvana sells aren’t trouble-prone as-is cars.              

The U.S. used-vehicle market is vast. Compared to around 16 million new cars sold annually, nearly 40 million pre-owned vehicles are sold each year.

Automotive E-Commerce Is Tough

Carvana has about a 1% market share of those sales. Garcia hopes to double that soon, but he acknowledges using e-commerce to sell cars isn’t easy.

“It’s a hard business,” he says. “At least 20 companies have tried.” Many have failed, such as Vroom. Carvana ended up buying some of its inventory.

Many franchised dealers are not fans of Carvana. What does Garcia think about franchised dealers?

“Many of them do business with Adesa, so we consider them partners,” Garcia says. “We also do reconditioning work for some dealerships.”

What have dealers learned from Carvana?

“That most customers don’t want to go to a vending machine for a car,” D’Arc says. “But franchised dealers are good at adapting. We’ve learned from our customers that they want a balance of technology and brick-and-mortar.”

Coast-to-coast, Carvana has 40 of those giant vending machines, designed by a German company. The largest, at nine stories, is in Tempe, AZ, Carvana’s home base. All cars in the structures are spoken for and not for sale.

The vending machines began as attention-getters, Garcia says. “More likely than not, we’ll build more. But they’re not the main focal point of our operation.”    

He is from an automotive family that thinks big.  

His father, Ernest Garcia II, founded DriveTime Automotive Group, a used-car chain primarily serving the subprime market. Carvana began as a DriveTime subsidiary.

The son holds an engineering degree from Stanford University.

About 25 years ago, a group of Stanford graduates created the first online vehicle auction that became Open Lane.

The idea of auctioning cars online was lambasted when it was first presented at an NADA convention media conference. Skeptics said dealers wouldn’t buy wholesale vehicles on the internet.

Today, several major auto auctions, including industry leader Manheim, offer online bidding and selling.  

It prompts a question: If dealers buy vehicles online, why shouldn’t their retail customers?         

About the Author(s)

Steve Finlay

Contributing Editor, WardsAuto

Steven Finlay is a former longtime editor for WardsAuto. He writes about a range of topics including automotive dealers and issues that impact their business.

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