Copart – The Monopoly You’ve Never Heard Of
“Think of [Copart] like the local sewer system. We’re a utility. Nothing can get rid of us – nothing. … We are like the septic tanks of the sewer system. You can’t have the system without us.” – Willis Johnson, Founder of Copart
Company
Copart is the largest player in the market for processing and reselling salvage cars. These vehicles are damaged enough to be written off as a total loss by auto insurers as well as discarded cars still in decent condition, meaning they still have significant value for resale or parts. Copart facilitates the resale and remarketing of used, wholesale and salvage title vehicles for a variety of sellers or sides of their platform. Insurance companies, rental car companies, local municipalities, financial institutions, and charities all use Copart to sell their cars and car parts to dismantlers, body shops, salvage buyers, dealers and individual consumers. It then auctions them off on the Internet — either to dismantlers who want them for parts or to buyers who repair them to use as drivable cars, particularly in overseas markets with looser auto-safety rules.
Value Creation and Capture
Copart creates and captures value for a variety of players through a variety of means – connecting buyers and sellers and facilitating their transactions.
Copart connects sellers who have cars they don’t want, usually insurance companies to a variety of buyers. A large part of Copart’s buyers are international purchasers who are looking to arbitrage repair costs. The definition of a totaled car varies per country, so a US “totaled car” can be more economical for a buyer in another country to buy and repair a lower cost. Dismantlers, who buy, dismantle, and sell parts, also benefit by being able to create value from turning a whole wreck into many pieces of profit.
For each transaction, Copart takes a 10% commission based on the price of the car sale. Additionally, Copart offers a set of other services, such as welling access to their sales data to potential buyers, or selling the technology that is used to bid at the auctions. A foreign buyer who is a heavy market participant may want to have a price monitor or algorithmic trading mechanism and may be willing to pay for access to create their robot. Furthermore, Copart does inspection or handling the title as well as transferring the car and closing out the car loan. They offer forms of financing such as automatically paying back the car loan once the proceeds have cleared from the sale of the car. All of these services are focused on making the process more convenient to buyers and sellers, enabling a higher volume of transactions which Copart takes profits from.
Scalability and sustainability
Copart has a significant advantage compared to its peers. Not only was it the first to have an online platform for car bidding, but the barrier to entry in the salvage car auction industry is high. In the US, there are approximately 150 permitted salvage yards. Salvage yards are industrial and undesirable, and it can lengthy and costly to build a new yard. Smaller cities generally only support one salvage yard and larger cities do not want to have more than one yard. Thus, Copart creates a local monopoly once a salvage yard is set in place. Copart’s global reach enhances this advantage by allowing buyers from anywhere in the world to shop at a salvage yard that would otherwise only have local buyers.
Additionally, a company must have relationships with insurance companies to be their scrapped vehicles, which can take years to develop. On the other hand, buyers will only be interested if sellers are there. Therefore, the bidding process introduces a strong network effect – in order to continue to a company needs to have scale of buyers logging in and bidding on the cars. Sellers join the market because there are buyers, and buyers join the market because there are sellers.
Counterintuitively, newer technologies designed to reduce crashes are good news for junkyards. While fewer accidents may occur, scrapped vehicles are in better condition, while simultaneously the price to replace the new sensors and equipment makes newer cars expensive and harder to fix. This means insurance companies are more likely to scrap cars for more minor accidents. As car values also increase, Copart benefits because its commission is based on the price of the car sold. Their incentives are therefore aligned with their platform partners. Even during the pandemic, Copart benefitted! Fewer people drove, meaning fewer accidents, leading to insurers selling fewer totaled cars. This led to Copart having fewer, more expensive cars to sell, but the higher prices also meant that Copart made more money per transaction. They seem to be unable to lose!
Sources:
https://mastersinvest.com/newblog/2020/5/15/vx2cta5bfjuwtwlfwzwqtt07tk9ay4
https://seekingalpha.com/article/4373322-copart-moat-and-pandemic-proof-business-model