Yahoo Autos Carvana Starts the Slow Climb Back Up to Recovery
From the March/April 2024 issue of Car and Driver.
Ernest "Ernie" Garcia III had a dream. Armed with a degree from Stanford and a $100 million investment courtesy of his father, Ernest Garcia II—the billionaire behind DriveTime, a major used-car dealership chain—Garcia III was uniquely well situated to give his audacious vision a shot. In 2012, he cofounded Carvana, an e-commerce platform for selling used cars. He hoped one day it would become the Amazon of secondhand-car sales, an online operation where you might buy a pre-owned vehicle with no in-store visit, hard sell, or haggling and have the new-to-you car or truck delivered to your home. Though supportive—Carvana began as a subsidiary of DriveTime before being spun off—Garcia the Elder was skeptical, according to his son, and, for years, he was not alone.
"Probably a different company would swing at [this idea] every couple of years until someone eventually cracked the nut. Until that happened, there would just be failures, and people would probably think, 'Oh, see, it doesn't work,' " Garcia III, Carvana's CEO, explains to Car and Driver. "When the reality was, it was just really hard to build something that was good enough to where consumers said, 'That was good, and I'm going to tell my friends.' "
Carvana set out to build that solution.
"What's funny in the story of 2013 through 2016," Garcia says, "was that [investors believed] we had no chance. We started out in Phoenix, and that was the wrong place to be building a startup. And we are a capital-intensive business at a time when the only businesses getting funded were marketplaces. We got to a spot where, basically, private capital dried up for us."
With more money needed for growth, in 2017, Garcia III (the CEO) and Garcia II (the privately held company's biggest shareholder) took the online retailer public. Recalls Garcia the Younger: "We barely made it out. We went public at $15 [a share], and we were trading at $8 over the first week. That was tough. We basically built up from there. By the time we got to 2019, people sort of believed in the business. It made sense. People thought maybe we were onto something."
The company spent significant funds carpet-bombing TV viewers and internet users with ads meant to make Carvana a household name. Then came 2020 and the COVID-19 pandemic, an intrusion like nothing anyone had experienced. However, as the axiom goes, in the middle of every difficulty lies opportunity. And so it was that a global pandemic, at first supposed to be a ruinous development for the automobile industry, enriched many of its corners mightily. Carvana, the online retailer that could sell, title, and deliver your used car without getting near you, was among them.
The buying and selling of used cars online made newfound sense. The virus drove millions to abandon public transportation, and with stimulus cash floating around and a supply-starved new-car market, the used-car market experienced unprecedented demand.
Also working in Carvana's favor, the constrained new-car supply had the effect of boosting used-car values, which allowed the company to transact sales at higher prices, which enabled it to pay more for people's used cars, which in turn permitted it to grow its inventory faster than its competitors. When things shut down between March and June 2020, Carvana was "almost the only place that could actually purchase or sell a car" without human contact, per independent industry analyst Mel Yu.
Moreover, because Carvana found that people would pay more for cars bought on its platform, it could pay more for trade-ins. "They were only gaining power," Yu says. "Used-car prices and all the revenue they created for Carvana made it look very healthy and very appealing to the financial sector."
Garcia, an agreeable sort with a light, self-deprecating touch who wears the chip of Carvana's roller-coaster reception on his shoulder like a regimental ornament, recalls that the story among investors started to change in mid-2021. "It turned into, 'You're an incredible business on an incredible trajectory,' " he says. "That was kind of wild, the way the narrative can get compressed. All of a sudden, all the trouble we had in the past was forgotten."
You could say that again. Like many modern startups—think Amazon, Lyft, and other tech-dependent ventures—Carvana hadn't recorded a profit in its early years and didn't expect to anytime soon. But its first profitable quarter came in spring 2021. By August, Carvana was trading at over $370 a share. With more than 425,000 sales in 2021, Carvana ranked No. 2 in the Automotive News list of top 100 used-car dealership groups for the year, and at one point, the company was worth $60 billion on paper. Annual gross profit for the year closed in on $2 billion on sales of $12.814 billion, a nearly 143 percent increase over 2020, which itself increased 57 percent from 2019. Sensing that its time had come sooner than expected—it sold its one-millionth car in 2021—the company doubled down on spending to prepare for more growth.
"You get to a place where everyone thinks it's now easy," Garcia says. "Instead of being David, you're Goliath. And people are kind of rooting against you. And you don't even know how that happened. Your head spins, trying to figure out exactly why that happened so quickly."
