The CarMax Effect: The New Reality at Auction

September 3rd, 2019 by

By Jasen Rice, Founder of LotPop

I’m hearing a lot of hesitation on buying at auction. I was on a call with a dealer and he said, “Man, these guys from CarMax and Carvana are standing in the lane with their hands up buying everything.” I get that you just aren’t able to buy cars for what you want to be buying them for, but what’s your choice? You just don’t buy anything at all? I understand this isn’t my money, it’s yours, but unless you can fulfill all your needs through trades, you still have to buy stuff.
I understand the limitations at the lane, but these CarMaxes, AutoNations and Carvanas are not going anywhere. There’s not going to be a time when they are not at the market driving up costs. They have multiple locations. They might be buying in Texas and they might not even have a place in Texas. But they are shipping it off to another market, here in Kansas City or wherever. They can pay up at that local lane, wherever you are located, even though they might not be physically present. They can be buying up at the local lane and driving those cars to other locations where they are needed.
So first you have to realize that what you pay at the lane doesn’t defend or justify what’s going on in the retail market. They are two different worlds. You have to realize that the lane is a national buying center for a national or even global market. On the East coast and West coast you can get international buyers shipping them out. So, the wholesale market is a national (if not global market) and your retail market is local or regional at best. There might be some cars that folks will drive four or five hours to get their hands on, but that’s a rarity, so best bet its local. Whatever’s going on in your local lane does not mean it’s going on in your local market. You have to adjust to that simple disconnect.
Since these guys aren’t going away, you can do one of few things. You can step up and still buy these cars and realize it’s a depreciating asset that you paid too much for and get off it quick. Then try to do that as many times as possible. It’s a way to survive, just stay disciplined. This dealer wanted to hold out on a lot of these cars that are 15-21 days old. They took too much time to turn them around, get them serviced, and get them online. They want to hold out at 15-21 days because they can’t even go to the lane and replace those cars for what they have in it.
Well, your pricing strategy can’t compensate for or override your turnaround time problems. That’s dealing with the symptoms - not the problem. You’ve got to still stick to your program. Get the cars moving and fix your turnaround problem. This dealer is very hesitant, so they are bleeding through. That’s what happens when you sit on your hands and wait. You can’t price it up high and hope someone isn’t smart enough or doesn’t realize that they are paying too much. You have to try to move that car, sell it, and do it again. If you don’t, you’re going to have an aging problem.
You’ve got to be at the lane, unless you are getting enough trades in. You have to be buying cars. You can’t go home empty handed. You’ve got to have inventory. You have to be making these sales. If anything, you have to look beyond your front-end deal. Maybe you can only make $100 or $200 because you stepped up and had to buy some cars. But if you are capturing a good percentage of your recon money and you can buy a late model again because that’s a little bit easier to buy. You’ve got minimal turn around time, because recon’s probably not too much. You also get a decent trade, maybe 2011 or 2012 and a later model is higher dollars for finance, so you look at all these opportunities across your dealership.
Buy that car and price it to sell in 20-30 days. Get off of it quick. Get the few bucks that you can off the front. Make the bucks in the back on the service. Try to grab a trade. Try to grab F&I. Do it again. If anything, the worst case scenario is that you have a satisfied customer, get a good review. That good review drives other traffic that might lead to a trade, might lead to F&I and so forth. You can’t just use national buyers as an excuse. You can’t go home empty handed. You can’t sit on your hands and do nothing. Buy as best you can, get off of it quick, and get as much out of it everywhere else in the dealership.
Now for franchise dealers, I think there are two more things you can do to overcome this. One is a short term scenario, one is long-term. The short-term is CPO. I think Certified Pre-Owned is a great alternative because it’s a huge driver of profitability for the whole store. One obviously you’re going to be reconning that car a little bit better. There’s your recon profit. CPO has special interest rates and a special program if you can get your team to understand it and sell it. It’s a lead-in car and a switch car. Lead-in car meaning a customer buys CPO, likes it and maybe buys into a newer version of that car. It’s a switch car for someone who wanted a new car, but maybe it was a little too high of a payment, then you can switch them to a Certified Pre-Owned vehicle. Not only that, but after they buy the car where are they going to service it? If it’s a Ford certified car they have to bring it back to a Ford certified dealer. So again, you get that local business coming back to your store. For that overall profit, CPO can be pretty quick. You can start doing a CPO program today.
The long-term goal would be more leasing to ease your dependence on the lane. I know it’s trickier in some markets than others, and it also means educating your salespeople on how to sell leasing. I love leasing. If you can lease 30% of your cars, you know the term of those leases. You are going to get that first shot of getting them in that car and getting them into their next car as well. You get your shot at it before the OEM takes it to auction. Four years down the road if you got again CPO late model, you could get the trades. You could get the F&I more times than not. Then you start leasing so again 3-4 years down the road, you have an abundance of inventory naturally coming to you.
It’s tougher out there. AutoNation, CarMax, Carvana, and other national and frankly international players can pay up at that local lane, driving those wholesale costs well above what they used to be. You don’t have a choice on buying, but you do have a choice on setting up your dealership to succeed in this new world.
Jasen Rice is the owner and founder of LotPop, which provides staffing and system guidance and ongoing consistent review of dealership inventory processes to build sustained results over time. You can contact Jasen at jrice@lotpop.com. LotPop and MAXDigital announced a service partnership in May 2019.