Why Carvana Will Fail (and How it Might Succeed): PART 1

written by: 3 Birds Marketing, LLC

By: Steve Stauning

Before we dive into why Carvana will fail (and how it might succeed), I want to make sure we’re all up to speed on the used car market in general. Unless you just don’t pay attention to such things, you likely already know about last month’s $150 million flameout formerly known as Beepi.

Beepi, for the uninitiated, was an ambitious (aren’t they all) startup that was going to revolutionize the used car market for the benefit of consumers. As Beepi saw it (and apparently the press, as this TechCrunch article inferred), they would be “bypassing the costly overhead and commission structure of car dealerships” on their way to liberating the poor consumer from the clutches of dastardly retail automobile dealers.

Beepi, when it was founded a few years ago, described its benevolent mission thusly: “Beepi is a … company offering an online peer-to-peer marketplace for buying and selling used cars … . … The Internet has changed everything. Well, not quite. Buying and selling used cars, unfortunately, hasn't changed for decades. Now that painful world is waking up.”

The painful world woke up all right. The painful world of overvalued startups trying to solve a problem that simply does not exist woke up and spanked Beepi and its investors to the tune of $150 million. Apparently, they were all unaware of this little website called eBay that had already been relatively successful at providing “an online peer-to-peer marketplace for buying and selling used cars” for well over a decade. Though certainly not for everyone, millions of vehicles had been sold through eBay Motors before Beepi ever raised its first dollar.

So, there was already a Beepi (of sorts); though more than that – and this is the biggest reason Carvana will also fail – the used car market in America is already highly efficient. (This means there isn’t a profit windfall waiting for those who can do little more than tweak the mousetrap.)

How efficient is the used car market in America?

For starters, about nine million used units are sold at dealer auctions each year (a little Economics 101 for the geniuses in Silicon Valley: there is no more efficient market than an auction where there are ample buyers and sellers). Add that to the roughly 30 million total used units that are sold by franchised and independent dealers to consumers every year and you’ve got a heck of a lot of transactions… and a heck of a lot of data.

Data (more precisely, the availability of data from millions of transactions) and pricing transparency (brought on by the internet) has ensured that dealers make no more than a fair profit on their used units. (According to NADA data, the “fair” profit, aka the retail net profit per used vehicle sold at franchised dealers in 2015 was a whopping $132 per unit. Some might argue that’s far from fair.)

Just how much more than $132 per unit did Beepi expect to make after they stripped out “the costly overhead and commission structure” of traditional dealers? (Oh, and added in their own costly overhead, bloated Silicon Valley salaries, and ridiculous executive perks?) I doubt the Beepi founders were touting just $132 per unit profit to their potential investors. It seems unlikely one could enjoy multi-billion dollar valuations at that level.

To every potential startup who wants to “revolutionize” used car sales, it’s important to understand that there is no more efficient resale market in America than automobiles. There are too many transactions, too many units for sale, too many sellers and too many B2B, B2C, and C2C online and offline marketplaces for the average dealer (or startup) to consistently sell for more than the market will bear.

But Steve, what if we cut out the Middleman?

Ah… yes, the dreaded Middleman; that mythical beast that makes all the money and provides none of the value. Yes, by all means, let’s cut out the Middleman.

Oh, wait, not dealing with Middlemen has always been an option. Today it’s called Craigslist; and before that it was called the newspaper classifieds; and before that it was called the town square. For any human wishing to buy a used vehicle directly from the vehicle’s owner with no Middleman, the option has been there since the day after the wheel was invented.

Clearly, with all the online options available, there is basically nothing stopping anyone from cutting out the Middleman today. Oh, except for that whole not-wanting-to-get-scammed-or-killed philosophy some of us have. More than that, even buying a vehicle from an honest, non-murderous Craigslist seller means any vehicle inspection, repair, or reconditioning costs fall on the new owner, along with the process of licensing, titling, setting up any financing, and paying any sales or other taxes (and all this without a warranty).

Of course, whether or not you want to remove the Middleman from the transaction is immaterial to why Beepi failed (and why Carvana will, too). You see, they are also Middlemen; they just present themselves as something else to the consumer. They get in between buyers and sellers and they add costs; and in the case of Beepi, apparently not enough value.

Interestingly, because Beepi tried to be “Craigslist Plus” by adding in an inspection, marketing the vehicle on sites like CarGurus, handling the paperwork, helping arrange financing, transporting the vehicle and providing a 10-day money-back guarantee, in many instances they incurred higher costs than the average dealer (not including repair and reconditioning, which were the burden of the buyer should anything go wrong after ten days).

Adding unnecessary costs

Can you imagine the cost of sending a team of inspectors out to inspect vehicles for sale by owner (many of which fail inspection and are ultimately not even offered for sale)? Of picking up and delivering the same vehicle more than once? How about storing and reselling a car that gets returned within the guaranteed 10 days? For Carvana, their gimmicky vehicle “vending machines” make for great marketing and PR while adding unnecessary costs to the vehicle transaction.

Of course, studies show most people will truly pay more for a great experience, but does this include a car vending machine? Seriously, let’s contain ourselves for a moment; after all, this is a used car we’re talking about, not a Caribbean cruise. How much more is the question? (Remember, the used car marketplace is pretty stinking efficient already.)

Beepi also wholly misunderstood what consumers actually wanted fixed; that’s why they were solving for the wrong problem. Consumers overwhelmingly dislike the dealership experience, not necessarily the dealership visit. A car is a very personal item to most consumers; so they want to explore it and touch it and compare it … even when they already have their minds made up. Bringing them a single car on a flatbed to test drive might avoid the dealership experience, but it also avoids the dealership visit.

In the words of Jurassic Park’s Dr. Alan Grant, “T-Rex doesn't want to be fed. He wants to hunt.”

Click here to read Part 2: “But, why will Carvana fail (and how might they succeed)?”

Steve Stauning is the host of Undeniable Advantage Live!, a monthly live video webcast and training provider for dealerships and other industries hosted at UndeniableAdvantage.com. He is also the founder of pladoogle, LLC, a leading training, mystery shop, ecommerce and automotive consulting firm providing cutting-edge products and in-store sales consultation to automotive dealers, industry vendors and media companies. Prior to his involvement with pladoogle, Stauning served in various automotive ecommerce leadership roles, including as the Asbury Automotive Group’s (NYSE: ABG) director of ecommerce, the director of the Web Solutions division of the Reynolds & Reynolds Company, and as general manager for Dealer Web Services at Dealer Specialties. Stauning is also an extremely popular leadership blogger (hosted at AskTheManager.com) and automotive industry speaker and writer; and he operates a free video training site at SteveStauning.com.