How Does CarMax Make Money? Business Model of CarMax


How Does CarMax Make Money

CarMax is a popular used-car retailer. It also offers auto loans with flexible credit requirements and affordable down payments.

CarMax primarily makes money via used vehicle sales. It also makes money from wholesale vehicle sales, extended protection plan (EPP) revenues, third-party finance fees, service revenues, and other revenues.

Founded in 1993 as a subsidiary of Circuit City, CarMax was created as a test platform to see if the big box retailer formula worked with used vehicles. The company didn’t make a profit until 1999 and split off from Circuit City in 2002.[1] By 2005, it had 65 stores across the country.

During a decade long span from 2006 to 2016, CarMax grew its revenue from $6.26 billion to $15 billion. It also expanded from 70 stores in 34 states to 160 stores in 37 states.[2] CarMax’s largest stores can have over 500 vehicles on their lots.

What is CarMax & How Does It Work?

CarMax is a used car retailer that also offers automobile financing. The company is one of the largest US automobile retailers both in terms of sales volume and revenue. In 2021, CarMax sold over 751,000 used vehicles to retail consumers.[3]

It has 238 stores nationwide, and boasts the largest used car inventory of any automotive retailer. In exchange for a one-time non-refundable fee, users can ship vehicles to their local CarMax dealership for a 24-hour test drive. If they aren’t satisfied with the experience, there is no obligation to buy the vehicle.

CarMax gives users access to vehicle stocks from all over the country. Hence, they can access a much wider range of makes and models compared to the local used card dealership. CarMax stocks every type of light vehicle from sedans to SUVs.

Every vehicle sold on CarMax comes with a basic 30-day money-back guarantee. There is also a 90-day limited warranty on every sale. CarMax checks every single vehicle with its unique 125+ point inspection process.

This inspection process includes checks for flood damage, crash damage, and vehicle history. Any vehicle that doesn’t meet CarMax’s rigorous quality standard gets sent to their wholesale auction catalog. Here, dealerships compete with each other to score the best prices on batches of used cars.

During the inspection process, vehicles are checked thoroughly- both internally and externally. Engine components, brake lines, tires, frames, electrical equipment, and all associated systems go through a comprehensive inspection process. Worn parts are replaced and CarMax spends an average of 15 hours reconditioning each vehicle before it is certified for sale at a retail location.

By the time a car is ready to be sold, it feels close to brand-new. Scratches, dents, discoloration, and dimples on the body are fixed. Interiors are cleaned, and CarMax even installs new upholstery if existing items are excessively damaged.

Since CarMax’s in-house refurbishing process is highly automated and supervised by experienced professionals, the defect rates are extremely low for vehicles sold to retail customers. CarMax provides a 90-day or 4,000 mile warranty on every one of its retail vehicles. That is a demonstration of the trust this company has in its refurbishing process.

Customers choose CarMax over traditional used car retailers because of its no-haggle policy, transparent pricing, integrated financing, and diverse inventory. Vehicles that are typically not popular within a certain state or county can be easily found on CarMax. Once a customer has found a vehicle that they like, they can have it shipped to their location.

CarMax also allows customers to reserve a vehicle up to seven days in advance for a test drive or appointment. If a customer visits their local CarMax dealership and finds a vehicle they like at the physical location, they can take it for a free 24-hour test drive.

If the vehicle is on the CarMax app but not in the local dealership, customers can choose to have it shipped over. CarMax is partnered with a third-party logistics company for this service, so it charges an upfront non-refundable fee to ship the vehicle. However, the customer isn’t obligated to purchase a vehicle even if they have it shipped from the other side of the country.

While customers can certainly complete the entire purchasing process through their app, they can also visit a local CarMax dealership. Processing times are extremely low, and typically get completed within one to two hours.

If a customer lives within 60 miles of a CarMax store, they can have the vehicle delivered to their home for free. CarMax offers financing solutions within the app. Customers can also obtain financing from their preferred lender or pay via cash.

CarMax’s financing is done via CarMax Auto Finance — which is a division of the main company. While the interest rates are slightly higher compared to traditional credit unions, CarMax offers loans to customers with poor credit. This makes the company’s in-house financing solution an excellent choice for buyers with low credit scores.

The approval process on CarMax’s auto finance is very quick. The company typically checks a customer’s credit and generates a finance plan within minutes. Like its vehicle pricing, the loans are also covered by a no-haggle policy.

This means that customers get exactly what they see. There are no hidden charges. Customers can also trade in their current car. When a customer approaches CarMax with a vehicle for sale, they receive an appraisal within an hour.

The offer given by CarMax is valid for seven days. CarMax also accepts leased cars, and contacts the leasing company to provide a payoff quote. Customers can get an online offer, but the final value of their car is decided at a physical location through appraisal by a certified technician.

 

Business Model of CarMax

CarMax functions like a supermarket for vehicles with an in-house logistics network. The proprietary software used by CarMax generates optimal prices for vehicles sold by customers. The company’s comprehensive refurbishing program allows it to sell vehicles at higher prices compared to traditional used car dealerships.

Because there is no haggling or hidden fees, customers often prefer CarMax over traditional used car retailers. Even if the price is higher, they get a much more streamlined buying experience. There is no arguing over the price, since it is fixed, customers get exactly what they see on the app.

The car comes with an official certification from CarMax that guarantees zero issues with critical systems such as the engine, brakes, tires, and frame. If a customer is not satisfied with their purchase, CarMax offers a full refund up to a period of 30 days from the date of purchase. Since the paperwork is completed within one to two hours, customers spend minimal time interacting with sales executives and managers.

CarMax also offers a much wider range of vehicles compared to traditional dealerships, because it operates an interconnected national marketplace. The company gets its vehicles from rental services, auction houses, individual customers, and various other sources. Its business model relies on a constant stream of vehicles into the platform to provide more options for potential buyers.

To maximize turnover, CarMax uses an AI-powered algorithm that decides which makes and models the company needs based on market dynamics in specific locations. This algorithm also decides on the best payoff price for cars that are purchased by CarMax. Because there is no lengthy appraisal process, customers prefer selling their old vehicles to CarMax.

Sellers are given a quote within minutes when they apply through the online app. An on-site appraisal usually results in a price that is similar to what they were quoted through the online application. This transparent selling process strengthens customer trust, resulting in repeat transactions from the same CarMax user over a period of several years.

CarMax also sells to wholesale buyers such as dealerships. A proprietary software assesses the cost of repair for each car. Any unit that is deemed too expensive for repairs is usually auctioned off through the company’s online auction platform.

To minimize refurbishing costs, CarMax operates its own centralized repair centers. Through the use of automation and smart logistics, the company reduces operational costs and generates higher profit margins on each car it sells. Local car dealerships struggle to provide a similar level of quality and consistency, since they don’t have the same scale or technological base.

By offering in-house financing solutions via CarMax Auto Finance, the company adds further value to its business model. These loans typically have a slightly higher rate of interest compared to loans offered by banks. Customers use this service for its flexible credit requirements which allows them to get quick approval for a loan despite poor credit.

Through its loan services, CarMax turns visitors into buyers. It builds a long-term relationship with each customer, encouraging them to make future vehicle purchases through CarMax. Even during periods of economic stagnation or volatility in the automotive market, CarMax manages to make steady revenue thanks to its financing services.

CarMax operates in the middle market of used vehicles. It focuses on vehicles that are between 0 to 10 years old. And the pricing for these ranges between $11,000 on the low end, to $37,000 on the high end.[4] CarMax also sells more luxury products.

These include sports cars such as Camaros, Mustangs, and even Porsches. CarMax makes big profits on these rare items since it pays less than the fair market price to the seller.

Sports cars are a bigger liability, and less likely to sell. But when they do, the margins are very large. CarMax is one of the only used car retailers that allows a customer to view and order a sports or luxury car from any corner of the country.

In 2021, the average selling price of a used vehicle within the United States was $26,700.[5] CarMax capitalizes on the middle and upper segments of the market, maximizing its profit margins.

CarMax’s biggest rival is Carvana as they offer similar services. Carvana is more focused on the online aspect of buying and selling used cars. The company has fewer physical locations compared to CarMax, and boasts a 100% automated car buying experience.

Carvana is also famous for its unique car vending machines. These available at a few select locations. Customers can visit these vending machines, insert a special token, and watch their car get delivered in real-time. Carvana is for people who want a unique, futuristic buying experience.

With CarMax, customers get to drive in their vehicle before they buy it. In comparison, Carvana offers 3D virtual tours of each vehicle on its online app. CarMax is better for customers who want a more traditional buying experience.

CarMax has significant operating costs. These include costs of sales, administrative expenses, interest expenses, advertising expenses, and salaries. In 2021, the company spent $2.7 billion on operating expenses.[6]

Most of this was selling, general, and administrative (SG&A) expenses, which amounted to $1.9 billion. Interest expenses made up $860 million.[7] CarMax aggregates employee compensation and benefits, store occupancy costs, advertising, and overhead costs into the SG&A category.

Compensation and benefits cost the company $1 billion in 2021. Store occupancy costs were $399 million. Advertising costs were $217 million while overhead costs accounted for $260 million.[8]

 

How Does CarMax Make Money?

CarMax makes money from six different revenue streams. These are the company’s used vehicle sales, wholesale vehicle sales, Extended Protection Plan (EPP) revenues, third-party finance fees, service revenues, and other revenues.

In 2021, CarMax earned $18.9 billion in total revenue.

Used Vehicle Sales

This is the primary business and revenue stream of CarMax. The company buys used cars from individuals, and sells them back through after refurbishing. CarMax charges slightly more money for used cars compared to local dealerships.

However, customers are willing to pay this price in exchange for convenience and quality assurance. In 2021, CarMax made $15.7 billion from the sales of used cars.[9]

 

Wholesale Vehicle Sales

If a car doesn’t meet CarMax’s quality standards for retail sales, it is transferred to its wholesale auction program. After registering for the auction, dealerships place their bids through an online process.

CarMax offers free shipping for the cars sold through their auction. In 2021, the company made $2.6 billion from the sales of wholesale vehicles.[10]

 

EPP Revenues

Extended protection plans include service plans and guaranteed asset protection (GAP) coverage. In the event of a crash or theft, GAP covers the difference between the value of the car and the amount owed in the loan. Extended service plans offered by CarMax last up to five years.

These plans cover essential components like the engine, transmission, electronics, suspension, and cooling system. CarMax also includes emergency roadside assistance. In 2021, CarMax made $412.8 million from EPP revenues.[11]

 

Third-Party Finance Fees

CarMax is partnered with third-party finance providers who evaluate customers applying for auto loans. Providers pay a fee to CarMax on a per-contract basis.

CarMax also pays the providers a fixed fee. In 2021, CarMax lost $39.6 million on third-party finance fees.[12] However, this has been a source of revenue for the company in the past.

 

Service Revenues

The extended service plans offered by CarMax don’t cover every component. Regular maintenance parts like batteries, brakes, wheels, and wiper blades must be purchased separately by the customer. Tire replacement costs during emergency roadside services are also paid for by the customer.

Service revenues refer to the money made by CarMax from parts sales and labor charges. In 2021, the company made $92 million from this revenue stream.[13]

 

Other Revenues

Apart from used vehicle sales to retail consumers and dealerships, CarMax also had a franchise business for new vehicles. It shut down this business segment in 2021. The company made $102.6 million from the sales of new vehicles and accessories in 2021.[14]

 

CarMax Funding, Valuation & Revenue

CarMax (KMX) is currently a public company trading on the New York Stock Exchange (NYSE). It made its debut on the NYSE in February of 1997 with an introductory stock price of $20.[15] As of October 2022, the company’s stock traded for just over $63 at a valuation of $10.1 billion.

The company raised $98.2 million through a post-equity funding round in 2021.[16] Since then, CarMax hasn’t gone through any public funding rounds. This indicates that the company is likely making more than enough money to sustain its growth and development for the foreseeable future.

CarMax has been profitable for a long time. In 2021, the company made $18.9 billion in revenue. It also had a net income of $746.9 million.[17]

YearTotal RevenueNet Income
2019$18.1 billion$842.4 million
2020$20.3 billion$888.4 million
2021$18.9 billion$746.9 million

 

Is CarMax Profitable?

CarMax is profitable and has been for a long time. It made $18.9 billion in revenue in 2021 with a net income of $746.9 million. The company sold over 750,000 cars to retail customers in the fiscal year of 2021, which was a 9.7% increase compared to 2020.[18]

However, in 2021, gross profit per unit dropped by 3.3% to $2,113 due to an increase in delinquencies and the closure of retail locations.[19] Despite this, the company managed to stay profitable due to its efficient logistics and proprietary pricing algorithms. With used car sales volumes trending upwards, CarMax is likely to increase its profits in the near future.

 

Conclusion

So there you have it! CarMax is a company that has mastered the art of both buying and selling used cars, and they do it with a “no-haggle” policy that ensures all customers are treated fairly.

CarMax has been able to expand rapidly over the years and has been able to do so because it has focused on providing customers with high-quality used vehicles at fair prices. This strategy has worked well for them thus far and will continue to be successful as long as they maintain their focus on providing customers with great experiences when buying cars from them.

CarMax has proven that it can be a successful business model, but it’s not the only one out there. There are other companies that offer similar services to CarMax, and they’re proving just as successful. This means that you have options when you’re considering investing in a used car retailer business.

If you’re interested in investing in a used car retailer like CarMax, we recommend doing your research and learning as much as you can about how these businesses work before making any decisions. We also recommend speaking with an investment professional who can help you find the right investment opportunity for you and your goals.

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