How Car Dealers Help CarMax Buy Cars

July 2, 2009

I continuously encounter used car managers that scratch their head in bewilderment as they watch CarMax buy truckloads of vehicles for prices that seem absurdly high. Little do these used car managers know that it is their dealership’s practices that actually allow CarMax to thrive in the auction lanes. In order to understand how this works let’s clear up a large misconception. There is absolutely no shortage of used cars. I’m not aware of a single auction where they have run out of vehicles to sell while buyers are still in the lanes. In fact, conversion rates are up at the auction, but are no where near 100%. So why do traditional car dealers perceive a shortage of used cars? The answer is that they are not really experiencing a shortage, but rather difficulty in justifying the wholesale values that vehicles are bringing. More precisely, what traditional used car managers are experiencing is a shortage of used cars that they can buy for prices that allow them to make an acceptable profit. This reality should not be confused with a true shortage of used cars.

Only once we all understand what is the real problem, can we begin to address the route cause and its solution. It is CarMax’s ability to buy truckloads of vehicles at the auction for very high prices that holds the clue to the problem.

First, take note of the fact that your service department charges the used car department retail rates for reconditioning, and CarMax does not. More specifically, we should all recognize CarMax is a reconditioning machine capable of putting a car in front-line condition for a cost far less that its traditional dealer counterpart. Next, take note of the fact that your dealership’s policy is to place a pack on top of its actual cost, and CarMax does not. Finally, take note of the fact that when your dealership achieves a high gross profit on a vehicle, high 5’s are exchanged along with celebratory congratulations. At CarMax, when an extraordinary gross profit is achieved, management asks, “What went wrong”? It’s not that CarMax is against making respectable gross profits, but they understand when vehicles are priced and sold so as to make an unusually high gross profit, it probably means that it took longer for the vehicle to sell than it should have.

That’s right, the universally accepted practices of charging retail reconditioning rates, applying packs and “going for the big one” are all practices that make it very difficult for you to justify acquiring vehicles in the wholesale market for prices that you deem to be “worth it”. Sometimes it takes an unusual event like the lack of retail car trade-ins to expose the evils of our old ways. The old traditional practices described above have created an environment where CarMax and other progressive dealers like Bill Pearson at Finish Line Ford and Keith Kocourek at Kocourek Motor Cars, thrive. In fact, guys like these perceive no shortage and are experiencing the best used retail months in their histories. Huh? Maybe our old ways are actually helping create the success for the velocity dealers.