I'm sure it happens to all investors at some point. There's that company they like, but for whatever reason, they just can't pull the trigger and buy its shares, only to watch its stock price go up, and up, and up some more.
For me, that company is CarMax
But did I do anything? No. I was concerned about an up-and-down ride as the company set forth an aggressive growth strategy. It then became an Inside Value selection in January 2006, and I still sat on the sidelines and watched. Do you understand how foolish I feel? It was considered a value after I thought it had merit, and I still stood idly by. I ended up missing out on a stock that has raced to a gain of more than 60% and seems destined to continue on its upward trajectory.
That's why I was eager to hear what CarMax representatives had to say at last week's investors' meeting hosted by Lehman Brothers. Speaking for CarMax was Joe Kunkel, senior vice president of marketing and strategy. Kunkel discussed what makes CarMax unique, how it has been so successful in the past, and how it plans to continue that success into the future. He covered four areas that he considers key to the success at CarMax: its unique consumer offering, its proprietary processes and systems, its people, and its creation of a more diversified profit base.
A car salesman you can trust
Ever the clever strategist, Kunkel begins the discussion by pointing out that he is an advertiser working for what is essentially a used-car retailer, and that you should therefore not believe anything he says. He references a Gallup study that places car salesmen and advertisers near the bottom of the list when the public is asked to rate professions based on honesty and integrity. Naturally, his forthrightness leaves listeners no alternative other than to believe every word he says.
Of course, his message is clear. CarMax has had to overcome the typical view of car salesmen as sleazy crooks. One method for overcoming this perception was to make the car-buying process as transparent as possible. CarMax incorporated no-haggle pricing, not only for the price of the car but also throughout the entire car-buying process. This includes providing the consumer with a written offer for trade-ins, offering financing options, and detailing costs for extras, including extended warranties and any fees, up front. This approach enables the customer to make an informed decision when deciding on a car purchase.
The approach has certainly been a success. Kunkel referred to 25 different consumer awards CarMax has been awarded in the past two years. The award CarMax is most proud of is its Better Business Bureau award for business ethics, which it has won in several of its markets.
It's the process, stupid
We can see that customers are happy with CarMax, but how does that translate to CarMax's ability to make a profit, particularly when it presents customers with written offers that are good for seven days? This gives customers the opportunity to take those offers and shop around at other car dealerships to try to find a better deal. Based on its results, this doesn't happen very often. Obviously, CarMax has control over its prices, and it's easy enough to set them at a level where it makes a profit. But, remember, it's not operating in a vacuum. It has to be careful that the profit isn't so great that customers take the CarMax offer and get a better price elsewhere. That's not as easy as it may appear. CarMax has to know what the competition is offering and present a more attractive offer to its customers.
The key to CarMax's ability to remain profitable under such tight restrictions is in the processes it has spent the past 14 years perfecting. CarMax has the systems in place to capture data and track everything happening in its stores. It also has processes developed to put that data to use. This enables the company to adjust its prices according to how models are selling throughout its stores. It also allows CarMax to enter new markets and repeat its processes to hit the ground running.
We have great people
Again, buying a car is something most people consider a stressful ordeal, and they have to rely upon the sales staff to provide them with reliable information. As we noted, that is not something customers can typically count on. To help provide a pleasant car-buying experience, CarMax has the goal of hiring "people that don't look like car dealers." I'm not sure what a car dealer looks like exactly, but I think Kunkel is speaking more to the attitude of the stereotypical car salesman -- a cocky fast-talker who acts as if he's doing you a favor by offering you a great deal on undercoating.
To attract its diverse group of people, CarMax focused on building a special and unique culture and providing formal training across all areas of its business. Once again, CarMax succeeded, as demonstrated by being recognized three years in a row as one of the "100 Best Companies to Work For," according to Fortune.
Finding ways to make more
We already pointed out that CarMax has a limited amount of profit it can expect from selling new and used cars. Therefore, it has explored other ways to increase profits. It gets about 12% from its extended warranty plans and 14% from its finance division and agreements with external banks.
The one area that's really grown in the past few years is its wholesale business. CarMax will sell only the vehicles that meet its strict guidelines based on the vehicle's age, mileage, and good condition. However, it will buy nearly any car a customer is looking to sell and needs an avenue to get rid of those vehicles. To do that, it incorporates its wholesale business through which it auctions off these vehicles. Once again, CarMax claims to have perfected this process to maximize profitability.
The road ahead
Kunkel sees no reason why CarMax can't take its processes and expand into other markets; CarMax is currently located in just 40% of U.S. markets and only 23 states, leaving plenty of expansion opportunities. He expects to be able to continue opening stores at a rate of 15% to 20% per year for several years. He actually makes it sound easy, stating that CarMax simply has to do what it's been doing in the 80 stores it has already opened.
There you have it. Optimistic words from a marketer. What a surprise. I'll leave it up to you to decide whether he can be trusted or not. If he can, will you be Foolish enough to place an order, or will you be like your humble writer and watch CarMax leave you behind?
For more on the CarMax growth process, check out: