What the rise (and fall) of Carvana teaches us about digitizing physical businesses – TechNative | CarTailz

It’s easy to dismiss Carvana’s rapid decline, with shares down nearly 90% over the past year, as another casualty of the recent financial turmoil.

Carvana could be seen as the flagship of tech-enabled but still very physical companies — maybe a bit similar to WeWork. After all, the Arizona-based online used car dealer now moves almost half a million vehicle units a year, making it one of America’s top sellers. That means the economics of unit sales, or the costs and profits associated with each car sold, should also be solid to sustain growth.

Like co-working company WeWork in its early days, Carvana has proven the consumer demand for its products to be the ability to buy and sell used cars without visiting a physical dealership. While automakers and their dealerships have been embroiled in franchise wars (see Ford’s recent announcement that it would be enforcing stricter rules for its dealerships as electric vehicles moved in), Carvana’s customers flocked to the site — and revenue nearly soared between 2018 15 times and 2022.

But while customer demand for online auto shopping is solid, the economics of delivering on that promise are difficult. Put simply, Carvana makes its money from the spread between the acquisition cost of a used car and the sale price, while in the middle it also pays for the transport, refurbishment and insurance of its sold vehicles and significantly increases its income from financing (up to 50% of the gross profit per unit).

Buying a used car has always been a risky business. First, the market price needs to be identified, which moves quickly and is influenced by geographic supply and demand dynamics. Next, experienced buyers need to calculate the cost of repairs and preparation for sale. Carvana seemingly skipped those steps and decided to give customers a binding quote for their vehicles without even seeing them. In fact, the convenience of selling a car to Carvana is second to none: just fill in a few details, reveal any issues, and you’ll receive a guaranteed cash offer. With a few more steps, the transaction is approved and a pick-up is arranged. This is all great from a customer perspective, but it puts Carvana at greater risk. A more expensive one.

Like WeWork, which had to cancel its IPO in 2019 after its valuation fell, Carvana’s economics didn’t pan out. A closer look at Carvana’s finances suggests it likely overpaid for used cars. A Bloomberg report shows that Carvana lost $3,255 per vehicle sold. Meanwhile, industry leader Carmax posted a profit of more than $400 per vehicle. This is partly due to a mismatch between its buy and sell prices as the market moved down quickly, leaving Carvana with expensive inventory. However, the operating costs for handling their purchased vehicles also played a role.

Especially when Carvana buys an unseen vehicle, the potential to miss damage means it doesn’t consider the repairs needed to bring it back to a salable condition. Body damage, worn tires, and even a scratch on a leather seat can turn what appears to be a good vehicle into a pretty bad deal.

For experienced dealers, this is a fundamental 101 concept of used car trading. A vehicle’s book value is only a guide, but actual physical condition must be assessed to determine a potential selling price. In addition, as part of the final price negotiation, the customer “drives the car” in front of the customer – not a great experience for the customer. This is also why most of the industry’s instant cash offerings like Kelly Blue Book have attempted to mitigate risk with relatively conservative offerings. But in most of these cases, the dealer still calls the seller and asks them to bring their vehicle in for an inspection.

So how can we enjoy the best of both worlds? Are you offering an instant, competitive cash offer like Carvana, but still making money like a merchant?

Enter virtual inspections. Using artificial intelligence and cell phone cameras, it is possible to get sellers to “walk through” the car from the comfort and convenience of their own homes and uncover any physical damage that would need to be fixed before the vehicle is sold. This allows the buyer – often a dealer – to determine the exact price to pay. For sellers with cars in good condition, it helps demonstrate the quality of their vehicles and encourages buyers to compete for them, rather than going to the used car dealership and engaging in lengthy negotiations.

As Carvana’s rise and fall demonstrate, the inspection step can’t be skipped — or the economics won’t work out. But with virtual inspections, this previously time-consuming step can be integrated into a seamless customer experience. The industry is making strides in buying and selling online – but needs to make sure they’re using the right tools to make it all profitable. This is the only way to bring about real changes and revolutions in the industry.

Eliron Ekstein is the co-founder and CEO of Ravin AI. Ravin provides visibility into where vehicles are operating or changing hands by monitoring their conditionEveryday cameras and artificial intelligence.

Featured Image: ©Flashmovie

Leave a Comment