Is the Carvana online car buying model dead?

The headlines for online car buying platform Carvana ( CVNA ) have not been good lately. And whether the company will remain a public legal entity is now in doubt.

In fact, Yahoo Finance named Carvana the “Worst Company of the Year” after polling over 5,000 readers’ suggestions.

Despite the stock’s 98% decline this year, concerns about its debt load and whether management has the know-how to fix the business, it seems one thing may have some traction — the trend to buy used cars online.

MIAMI, FLORIDA – DECEMBER 09: Carvana used car ‘automatic’ showcases vehicles on December 09, 2022 in Miami, Florida. The online used car retailer is reportedly on the verge of running out of cash, with its stock ending the day at $5.05, down from a record high of $361 in August 2021. (Photo by Joe Raedle/Getty Images)

What online platforms like Carvana, Vroom (VRM) and even CarMax (KMX) offer is to avoid the hassle of going to the dealership, negotiating with the salesperson, and spending hours at the sales office waiting for paperwork and financing. .

However, from a business perspective, an online car buying and selling business can be very expensive and labor intensive. Locating and purchasing a used car, repairing it, listing it for sale on the website, delivering it, and then processing all the paperwork is costly.

12/22/2019 Orlando FL - delivery truck with Smart car on board

12/22/2019 Orlando FL – delivery truck with Smart car on board

This is where Carvana gets into a lot of trouble. Carvana reportedly delivered cars to buyers in less than ideal shape, requiring costly repairs.

Ken Stromsland, managing director of The Detail Doctor, a high-end auto detailing company in Shrewsbury, New Jersey, told Yahoo Finance that he and his clients have firsthand experience with such issues.

“Many destinations [we’ve had] it was the customers who took delivery and the condition of the car was not as described, so Carvana allowed the customer to get an estimate (from us) for any scratches or detailing they needed,” Stromsland said. “Carvana didn’t blink an eye and did whatever it took to make the customer happy paid off; I think it’s a great thing for customer satisfaction, but it’s costly for Carvana.”

The Detail Doctor also holds a dealer’s license and in the process of sourcing used cars to sell, he saw how Carvana was vacuuming up the supply of used cars, and that too at a cost.

“We looked at Galvez when we were trying to buy a car [used car data provider]and Mannheim [used car auction house] For values, our customers were telling us they would check out Carvana to buy their car, and Carvana was paying ridiculously high. [prices] for used cars,” said Stromsland. “We lost a few deals because Carvana was paying too much [prices] for cars; “I’m talking $5,000 to $10,000 per car, not a few hundred or grand here or there.”

Carvana has been taking delivery of cars by the fistful to meet increased demand from buyers who only want to travel by car during the pandemic and are interested in buying cars when new car supplies are reduced due to parts shortages and plant shutdowns due to COVID.

Eventually, Stromsland says, Carvana stopped paying the prices and did a “complete 180” because they now pay tolls for cars listed in Manheim. Stromsland has also been seeing fewer and fewer Carvana cars coming into his shop lately.

In addition to the high cost of repairs, paying for substandard cars, and then overpaying for a dwindling supply of used cars during the pandemic, Carvana has run into a slew of problems with numerous local secretaries of state and DMVs. because Carvana did not prepare the necessary documents to register the cars.

Most car dealerships will help buyers register their car where they live. Carvana’s failure to keep up with paperwork led to the suspension of its dealer license in several states.

Even Carvana’s online car-buying competitor Vroom has had its dealer license revoked over delays in vehicle registrations and has even been sued for deceptive trading practices over those delays.

Will online-only car buying survive?

COLMA, CALIFORNIA - SEPTEMBER 24: View of CarMax superstore on September 24, 2020 in Colma, California.  CarMax reported better-than-expected 28 percent growth in second-quarter revenue of $5.37 billion.  (Photo by Justin Sullivan/Getty Images)

COLMA, CALIFORNIA – SEPTEMBER 24: View of CarMax superstore on September 24, 2020 in Colma, California. CarMax reported better-than-expected 28 percent growth in second-quarter revenue of $5.37 billion. (Photo by Justin Sullivan/Getty Images)

The big question now for the Carvanas and Vrooms of the world is whether the online car-buying business model is sustainable. While the service is still popular, it can cost too much to be profitable.

Competitors AutoNation and CarMax have different business models. These two nationwide car dealerships offer customers the ability to buy completely online, as well as brick-and-mortar dealerships that allow customers to transact in person. These two operators also offer a cost-effective model where there is no “negotiation” on price, and companies have a larger sales and operations staff to handle paperwork and registration.

In addition, AutoNation and CarMax not only make money from the cars they sell through their dealerships, but also have service centers that are a strong money maker for the companies. AutoNation’s parts and services business grew 9.4% last quarter, while revenue grew just 4%.

While AutoNation and CarMax offer a more sustainable business model, the fact is that they and other used car dealers are seeing profitability decline as interest rates rise and prices fall.

But with 78% of respondents finding buying a car online to be a “highly satisfying experience,” according to data from auto insurer Progressive, online car buying isn’t going away anytime soon, especially if dealers can make the digital experience both enjoyable and enjoyable. profitable.

Pras Subramanian is a correspondent for Yahoo Finance. You can follow it Twitter and continues Instagram.

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