Carmax
Carmax is one of the leading car resale platforms that allows buyers and sellers to seamlessly exchange cars.
Overview
Carmax makes buying and selling cars easy and hassle free. It is just one of many used car exchanges and resellers that have popped up on the internet in the recent several decades. It seems like an obvious application, some people wish to sell their used car and others want to buy a used car. However, the execution of such an idea is where things get tricky. Along with Shift, Autotrader, Vroom and Cargurus, Carmax attempts to steal marketshare in a seemingly “race to the bottom” industry.
Process
So how does it work? Carmax facilitates a two sided marketplace of buyers and sellers to trade used automobiles on. It purchases used cars and holds them until a buyer is ready, keeping transactions liquid and efficient for both parties.
Selling:
A seller will go on Carmax’s online platform and put in some information about their vehicle. They then drive the car to one of the super-store locations and get an immediate appraisal with the option to be paid or trade-in same day. Other services like Shift will come to the seller’s house to appraise the vehicle, but this service is likely expensive and would cut into margins.
Figure 1: Carmax Selling Platform
Buying:
To facilitate liquidity in the marketplace, Carmax will purchase the used car for the seller and store it until a buyer is interested in the purchase. They hold thousands of vehicles in inventory ready for members of the second side of the marketplace to come and execute a buy. To buy a car, prospective customers can use an online catalogue to browse over 50,000 automobiles currently owned by Carmax. There are also Carmax super-stores where this inventory is on display and prospective purchasers can come and look at options. Once someone finds a car they are interested in, they can schedule a test drive and decide on financing.
Figure 2: Buy-Side Process
Differentiation
Carmax makes money through pricing arbitrage. They purchase the cars from the sellers at a lower price than the price they sell it to the buyers to.
There are several features to Carmax that makes it interesting to prospective customers and somewhat differentiated [1]:
- Carmax claims to be the biggest used car reseller and with scale comes efficiency.
- There is a Carmax quality certification which involves a 125+ point inspection.
- You can return a car within 5 days if you experience buyers remorse.
- There’s no negotiating of pricing which keeps things straightforward.
- Carmax offers flexible financing to customers.
- Appraisals happen almost immediately when selling a vehicle.
Summary
Looking forward, it will be interesting to see how this network ecosystem continues to grow. There are obvious direct network effects at work here, the more cars on the site the more buyers are attracted, which then draws in more sellers to sell their cars to Carmax. It will also be fascinating to see how targeted algorithms facilitate more efficient identification of buyers and sellers. One question that pops-up is given the infrequency of car purchases per-person, how could Carmax expand into new verticals to capture more value out of ever customer. Regardless, this company is a perfect example of an innovative platform capturing value as a marketplace.
[1] LiveAbout. (2019). 10 Facts You Need to Know About CarMax. [online] Available at: https://www.liveabout.com/facts-you-need-to-know-about-carmax-3308431 [Accessed 17 Oct. 2019].
This is one of the applications where I am skeptical that the introduction of a “platform” concept creates outsized value. The company essentially tries to remove the timing mismatch and information asymmetry between buyer and seller. However, a car sale typically involves a visual inspection, perhaps some testing, transportation, etc. – so many manual tasks. Additionally, there are some geographic restrictions in the sense that sellers only drive so far for delivering the car. I believe that this together leads to somewhat lower scale effects than one might expect. The financing of used cars requires a large working capital which needs to be financed. Finally, as you mentioned, this is not a “winner takes it all” market but there are many of these “platforms” which compete with each other in terms of the margin. Do you believe we see some consolidation among car dealer platforms in the near future?
How could Carmax increase cross-side network effects by becoming even more of a platform than it is now? In other words, how can it open its platform up to developers or community members in order to leverage innovation and knowledge sharing? Is there any reason for me to spend time on Carmax’s digital properties other than simply buying and selling my car? For example, do they post editorial content or foster discussion and thought-leadership? Do they (help) provide tools that customers or even dealerships or mechanics could use? What about car maintenance or accessories, for example?
On a side note, as Peter mentioned above, I am curious as to whether Carmax allows me to buy cars from anywhere in the country while facilitating shipping (no doubt still charging a fee, but maybe a very competitive one), as opposed to only being able to buy cars in my area. I imagine it is the former scenario, with effective logistics being one of the benefits of operating at scale, like you mentioned.