CarMax (NYSE:KMX) has created a unique, customer-friendly model for selling used cars. Customers love it, and the company has grown into the largest used car dealer in the United States. But even as the market leader, the company still has a small share of the market. I expect that CarMax will take share in the used-car market for years to come, which should provide significant growth in profits over the long-term.
"The way car buying should be."
CarMax has a unique model in the used-car industry. Instead of high-pressure sales and sleazy tricks (the industry norm), the company actually tries to be fair with customers. Its goal is to make the traditionally onerous process of buying or selling a used car easy and pleasant. All of its prices are fixed -- no haggling. Salespeople receive the same commission, regardless of what car you buy. Its superstores are much larger than an average used-car-dealer lot, and the selection of cars is very good. It has a useful website. All of the cars that it sells are late-model, and the company has a rigorous process for inspecting and reconditioning its cars. Needless to say, this new way of selling used cars has caught on with consumers. The vast majority (93%) of people that shop at CarMax say they would recommend it to a friend.
The road to growth is wide open
CarMax started humbly in 1993 in Richmond, Va., with a single store. Today, it is the leading used-car dealer in the country, generating more than $12 billion in revenue with 123 locations. But even as the leader, the company is still operating in a highly fragmented market. CarMax's market share of late-model used-car sales is only 3% nationwide. In other words, the company has a huge opportunity to continue taking share in the market. Management plans to open 10 to 15 stores per year over the next several years, but in my opinion that is just the tip of the iceberg of potential growth. It will take time, perhaps a decade or more, but CarMax could easily double or triple its store base. And, even after doing that, the company would still have room to grow.
Foolish bottom line
Retail is a tough business, generally low-margin. But those rare retailers like CarMax that have a unique model and room to open more stores can be incredibly rewarding for shareholders. I own shares in CarMax that I hope to own for a decade or more.