But is being customer-friendly a viable strategy?
The business of selling used cars, with its reputation for sneaky salespeople and poor customer satisfaction, can be anything but
customer-friendly. Richard Sharp and W. Austin Ligon, executives from
Circuit City, changed all that with the launch of their "big-box" car
retail concept, CarMax (NYSE: KMX), in 1993.
CarMax was the fix for everything that was wrong with buying used
vehicles. The company operates according to four core customer benefits:
- low, no-haggle prices
- a broad selection
- high-quality vehicles
- and a customer-friendly sales process
According to the company, 93% of its customers said they would recommend CarMax to a friend.
But would I recommend investing in CarMax?
Even as automakers Ford (NYSE: F) and General Motors (NYSE: GM)
have struggled, selling used vehicles has been big business. Used
vehicles account for nearly half of the U.S. auto retail market -- the
largest retail segment of the economy. It's a highly competitive and
fragmented business, with 39,000 independent used-car dealers and
millions of private individuals.
Hundreds of dealers -- both for new and used cars -- are expected to
go out of business by the end of the year. From the consolidated
competition, CarMax likely will pick up market share, especially if it
can convince Congress to include used cars in the pending "cash for
clunkers" legislation. Given that used-car sales outnumber new-car
sales 3 to 1, CEO Tom Folliard contends that including used vehicles
would better achieve the legislation's goals of promoting fuel
efficiency, saving jobs, and helping Americans afford a car.
However, CarMax might not be the only auto superstore positioned to capitalize on the industry's downfall. Competitor AutoNation (NYSE: AN)
-- the largest chain of dealers in the U.S. -- has already experienced
a significant increase in market share and stands to clean up from the
legislation, given that 60% of its revenue comes from new car sales.
Does it pay to be friendly?
A comparison
of CarMax's closest competitors suggests it does. CarMax has delivered
operating margins around 3.5% to 4% over the past few years, about on
par with AutoNation, but better than Penske Automotive (NYSE: PAG) and Group 1 Automotive (NYSE: GPI),
all three of whose bottom lines slipped into the red in 2008.
Meanwhile, CarMax still posted positive net income for the year.
Perhaps that strength has led Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) to take a stake in CarMax.
CarMax, which operates 100 stores, has aimed to grow its store base
by about 15% per year. To achieve this, it has focused on mid-size
markets, defined as those with television viewing populations of
600,000 to 2.5 million people. These regions have proven to be the
easiest markets to enter, with accessible advertising to build
awareness. However, because of the tough economy, the company has had
to temporarily halt its expansion plans.
With a difficult credit environment and lower consumer confidence,
CarMax will be a long-term bet on the automotive retail industry. But
the company will continue to prove that delivering to the customer
delivers results to the business.
Copyright © 2009 Universal Press Syndicate.
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