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How Carvana Is Gaining Ground in the Used Car Market

Carvana (NYSE: CVNA) is a rapidly growing online retailer of used cars. After launching in Atlanta in 2013, the company is now live in 146 markets with about 67% of the U.S. population in its coverage area. The company has grown revenue at a rate of over 100% in each quarter since its founding, and is now the third-largest retailer of used cars nationwide. The company's completely different approach seems to be enabling a better customer experience. Whether this model is the future of used car retailing depends on whether these perks are enough to make enough consumers comfortable buying used cars sight unseen.

A completely different model

Rather than build out a large number of local dealerships around the country like Carmax has, Carvana sells used cars completely online. Shoppers browse a selection that is now at more than 23,000 vehicles and can place an order online without ever stepping foot into a dealership or talking to a salesperson. They can even get approved for financing with a few clicks.

The vehicle is then delivered to the buyer's home and the customer has seven days to decide if they want to keep or return the car. Alternatively, customers in some markets can pick up their car from one of Carvana's patented vehicle vending machines for a unique experience.

Image source: Getty Images.

Better customer experience

Carvana's nationwide inventory, which is now at more than 23,000 vehicles, provides a wider and deeper breadth of inventory for consumers compared to traditional used car dealers, which generally carry no more than a couple hundred cars due to space constraints. This inventory advantage seems especially effective in smaller markets where there are fewer dealerships.

Further, the entirely online experience lets customers avoid the notoriously unpleasant experience of traditional used car shopping. In today's economy, more consumers have come to expect seamless, easy, and instant buying experiences. This is a phenomenon that Zillow Group's Rich Barton calls "uberized" consumers -- those who've been trained to expect instant, on-demand experiences like a car showing up after a few clicks on a smartphone. Carvana's cars don't show up quite as instantly as Uber's -- generally within days or up to five to 15 days if the customer is outside one of the company's markets -- but that should decrease over time as the company builds out more inspection centers and gets closer to more customers.

Food delivery apps are training consumers to expect food to show up at their doors almost instantly, while music-streaming services train customers to think they can play virtually any song ever made instantly. And, of course, Amazon has been training us to expect super-fast delivery, now down to one-day in some cases.

Carvana made the calculated bet that consumers were ready for online car shopping, and so far that bet has been paying off in a big way. Management expects the company to sell about 175,000 cars online this year, up from 2,105 in 2014. At its current trajectory, Carvana could reasonably sell 250,000 to 300,000 cars next year as the company expands into more markets and existing markets mature.

While the company remains unprofitable, it is rapidly approaching breakeven as it sells more cars through its existing infrastructure. If Carvana's model is the future of used car retailing, the company should sell far more cars in the future and make loads of money.

Long runway to grow in a fragmented market

Carvana has been growing at a rapid rate, but it could still have a long way to go. The used car industry is highly fragmented with the largest retailer, Carmax, selling less than 2% of used cars nationwide. The top 100 retailers combined account for about 7% the market while the rest of the market is made up of smaller retailers and private sales. Carvana's nationwide market share is only about 0.4%, so if its model is indeed the future of used car retailing, there should be plenty more growth to come. In fact, its market share in its oldest market, Atlanta, was about 1.9% at the end of last year, and is surely higher today. Even if Atlanta's growth stopped, Carvana's retail used vehicle sales would increase by over four times this year's level if its market share in the rest of the country were to simply catch up to its market share in Atlanta.

But Carvana's largest competitor hasn't been sitting still. Carmax has been transforming its business into an "omnichannel" model that includes an online buying experience for those customers that prefer that. But given the highly fragmented nature of the market, there appears to be room for both companies to gain market share at the expense of smaller dealers over time.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Andrew Tseng owns shares of Amazon, Carvana Co., and Zillow Group (A shares). The Motley Fool owns shares of and recommends Amazon, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends CarMax and Uber Technologies. The Motley Fool has a disclosure policy.


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