The current financial woes of Carvana are not surprising to a Canadian dealer, who studied the concept of buying cars without actually seeing and driving them, and found it fundamentally flawed.
Michael Carmichael, President/CEO of UpAuto in Stratford, Ontario, said the recent financial struggles of Carvana, and similar online sales platforms, is proof that there aren’t a sufficient number of consumers who want to do this type of transaction. The U.S.-based Carvana, which buys and sells used cars online, is going through a massive restructuring plan after suffering a first-quarter loss of $506 million, and seeing the stock price tumble by more than 87 per cent in the past six months. It laid off 2,500 employees on Tuesday.
“The whole notion of buying a car on your sofa is nuts when you consider how material it is to your personal net worth and the risk you are taking on,” Carmichael told Canadian auto dealer, after expressing similar thoughts on his LinkedIn account. “It should not be as easy as ordering a pizza. So many in the tech space say it should be, and that becomes the narrative. I just think it’s wrong, because it will drive the wrong outcomes when we should be looking at how we can reduce friction in the (purchase) process.”
Carmichael said 16 years ago he presented a study that was approved by a Canadian national retail chain looking to sell and distribute used vehicles through their infrastructure. The study included online marketing, executing transactions and taking in trade-ins.
“It was an unbelievable business model and opportunity,” he said. “It was Carvana, more or less. What I learned from the research and due diligence I did before we ultimately got (to the conclusion), was there were private equity firms back then (already) blowing $500 million on reconditioning centres, distribution, and online retail backed with a warranty. Through my research it became evident there were many other chains with similar models burning hundreds of millions of cash. It raised the question of ‘why doesn’t this work?’.
“From my perspective, there wasn’t enough demand, and the excitement around the idea couldn’t create it. There aren’t enough customers that want to buy that way.”
He said he has friends that manage stock portfolios, and that Carvana was a big part of calling him asking for feedback. He said his gut instinct was that the whole concept was “smoke and mirrors.” He said the problem is a lack of understanding of the automotive industry.
“This theory of market share at all costs is perhaps faulty,” he said. “The other side of this, with my car dealer hat on, is we’ve had OEMs, suppliers, everybody in the tech space, calling dealers saying, ‘you have to go on-line. Look at Carvana.’ I tell them, ‘What about it? Look how many cars they’ve sold. Look how much money they’ve lost.’
“There’s so much about online retail – and by that I mean the drive to sell a car online – and it’s a solution in search of a problem.”