The Decline of Carvana...What Happened?

foreign [Music] carvana has been one of the most eventful business stories of the past decade there's a lot to respect and a lot to criticize it seems like there's always something new and unexpected happening if you have not been following everything as it unfolds let me try to briefly catch you up because you're going to want to hear this carvana has been described by the company itself as the Amazon of used cars and I think that's a great way to put it they are an exclusively online retailer of used cars they were the first to do it in such a big way and many would tell you that they have disrupted their industry I think I'm safe in saying that the thing that they are most known for are their car vending machines and maybe you've seen these 10 story structures filled with dozens of used cars I have not personally used one but if you have a tell me about your experience because it sounds like fun it was all a unique enough concept that became really successful before falling tremendously I will look deeper into the figures but to get an idea of how things have been going all you have to do is look at the stock price holy cow in August of 2021 it was trading at more than 300 seventy five dollars a share that has since been reduced to less than ten dollars that is 58 billion dollars in value completely gone over the past year and a half over that time the founder and CEO of carvana Ernie Garcia III has seen his personal net worth fall 98 now sitting well below a billion dollars and there's been widespread speculation that carvana may have to file for bankruptcy that is concerning right not even two years ago they're one of the most successful fastest growing companies out there and now they're facing potential bankruptcy I hope it's clear at this point why I wanted to make this video talking about the unusual rise and fall of carvana back in 1990 Ernest Garcia II was a real estate developer involved in a major scandal with an institution called Lincoln savings and loan he admitted to committing a fraud that somehow it hid the ownership of a bunch of land outside of Phoenix obviously a complicated Scandal that led to not only the entire Bank collapsing but to Ernest Garcia the second being sentenced to three years probation during that probationary period he bought a bankrupt rental car company and used the assets of it to establish a used car dealership specializing in subprime loans for people who didn't qualify for traditional ones he renamed the new company Drive Time automotive and in the following decades it grew into the largest used car retailer of its kind operating over 100 dealerships across more than a dozen states selling around 50 000 used cars that total to about 1 billion dollars in sales each year even today they are still a significant chain of car dealerships that many of you have likely seen or even bought something from the reason I'm talking so much about drive time is because carvana started as part of it though initially a very small part of it see in 2007 his son Ernie Garcia III started working for his father's company he had recently earned a degree from Stanford University and went on to apply his talents to various Financial roles eventually working his way up to vice president and Treasury over his five years with drive time he became knowledgeable about trends that were happening within the industry and notably the increasing role that the internet was having on the car buying process he learned that almost everybody was performing some kind of online research before ever even going to the dealership they were spending hours on a dozen different websites in many cases learning more that way than they were from the salesman it made him believe that the entire process could potentially be done online and that many customers wouldn't actually prefer it that way so in 2013 drive time provided 50 million dollars in funding to establish carvana as a subsidiary of theirs later that year they opened their first car vending machine in Atlanta as a way for customers to pick up the cars that they had bought online it was officially labeled as an automated parking system and was filled with cars that they bought at dealer auctions a big benefit of the system is Simplicity it completely takes car salesmen out of the picture because it turns out that a lot of people don't really want to deal with car salesman so many customers find the direct approach to be quicker and easier and less stressful plus with the money that they're saving on the simplified structure they're able to pass the savings onto the customer typically they have sold their cars at prices that have averaged well below the Kelly Blue Book prices hervana system can also lead to a better selection of cars available to the customer they use proprietary algorithms when acquiring the cars put them through their 150 point inspection process and then pull all of them together from across the country that approach does seem to provide more options when shopping at carvana over other dealerships I mean that is sounding pretty attractive right buying a used car for less money with a bigger selection and instead of talking to a salesperson you get to use a cool vending machine I'm sorry if some of that sounded like a commercial for carvana but those are the biggest things that separate them from a traditional dealership that a potential customer may find to be attractive one of the biggest issues though especially in the early years has been getting people to try something that's so intimidating dating because it's new and different they have done their best to address it by specifically advertising these benefits building a user-friendly website that shows off the cars properly and compares the prices and by offering a seven day money back guarantee you may be hesitant to buy a car that you haven't test driven or even seen in person so the fact that it could be refunded will make you feel safer about making the purchase and with all of this going for them carvana truly became a huge success aggressively scaling the business to serve over 300 markets across the country in 2015 they were on Forbes list of America's most promising companies in 2017 they had an initial public stock offering that raised over 200 million dollars to help them expand further and by 2022 they were selling over 1 000 cars a day making them a Fortune 500 company with over 10 billion dollars in sales so the big questions at this point are why is carvana believed to be on the verge of bankruptcy why have investors completely lost confidence in the company and just how is everything gone so so bad so fast there are a bunch of smaller reasons that are probably at least worth mentioning and they have had multiple legal issues where they allegedly violated state laws and lost some licenses to sell cars but as far as I could tell those issues have been isolated to Michigan and Illinois so not impacting most of their regions their marketing has been criticized and they have been spending a lot of money on it almost 500 million dollars a year including a big Super Bowl commercial in 2022 though as I said before it is the kind of thing where they do have to spread the word about the concept so I would say a high marketing budget is Justified plus I think that Super Bowl commercial was pretty funny with this customer proudly talking to everyone about her experience with carvana those are some of the smaller reasons and I believe that there are three main reasons behind their struggles the first one being a decline in the used car market during the pandemic I'm sure we all know there were supply chain issues that led to a chip shortage for car manufacturers it slowed down the production of new cars to where customers were being forced to wait extended periods of time to get one it motivated many people to buy a used car instead which of course was good for carvana if you look at any of the graphs I've been showing you maybe you've already noticed that they skyrocketed during the pandemic there were so many people trying to buy used cars from them and that they were having trouble keeping up when the prices were peaking carvana went out and bought a bunch of used cars at those high prices scaling the business has always been their big plan from the very beginning so they took this unusual demand as their opportunity to do that and to further complicate things interest rates have gone way up anyone looking to finance a used car now has to pay a higher percentage for that loan and making people more hesitant to do it and making the demand for them go down so when the chip shortage started getting better things started leveling off and getting back to normal they were left with this inventory that they paid way too much money for and have been having trouble selling it at a decent profit I know that all got a little complicated but in short for various reasons the used car market was way up during the pandemic and has since started to fall and that has reflected a rise and fall for carvana even if you look at a comparable used car company like CarMax they have also experienced a corresponding rise in fall but it was less dramatic for CarMax and part of that is because they are more in person while carvana of course is online and that's actually my second reason behind their decline of people returning to physical dealerships during the pandemic if people were staying at home shopping online more than ever before and when it ended people shifted a lot of their business back to the physical stores I'm sure you could see how that would contribute to the rise and fall of an online retailer like carvana my final reason behind the decline is their debts it's incredibly straightforward because companies filed for bankruptcy because they can't pay off their debts and carvana certainly has a lot of it in fact they have steadily been building up their debts since well before the pandemic that's just when everything started getting out of hand it's where most of their funding has come from over the years considering it they have never reported a yearly profit there's nothing to reinvest they've been absorbing the losses with hopes that once they're bigger the concept will be efficient enough to finally start making money it's a long-term plan that was accelerated during the pandemic but then dropped them lower than ever when it ended it's not like they were completely stable going into all of this so they have been particularly vulnerable consider that in 2022 they were forced to sell cars that they paid too much money for they had a Goodwill impairment of over 800 million dollars they made this two billion dollar acquisition that was intended to further scale things and reach more customers that doesn't seem to be paying off like they had hoped plus all of that debt forced them to pay almost half a billion dollars in interest that year I mean they weren't making any money before so they're certainly not going to make any money with all of this extra stuff bringing them down so unless there is a huge Resurgence in the used car market or someone out there with a lot of money that's still believes in the potential of carvana that would be willing to help them through until they figure something out or conditions improve things aren't looking good let me know in the comments what do you see for the future of carvana is the business model strong enough to keep them running or are there going to be a bunch of abandoned 10-foot vending machines on the side of the road visible from far away I don't know I told you it is a fascinating subject there were kind of ruined by the pandemic in an unusual way before that they at least appeared to be a promising company that was steadily growing so if nothing like that had happened I imagine they would still be in a decent condition also have you ever used carvana they've been known to have high referral rates low return rates indicating that customers tend to be happy with their experience so is that the case for you or are there some major downsides that have been mostly overlooked and any other thoughts you have about carvana leave them in the comments I'd like to hear what you have to say thank you for watching [Music] thank you

Channel: Company Man

Views: 536,728

Keywords: Carvana, Decline, Business, Company, Rise and Fall, Cars, Car Market

Id: 0dl6w5Lgja4

Length: 11min 14sec (674 seconds)

Published: Wed Mar 15 2023