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Falling Used-Car Demand Puts Pressure on Carvana and Other Dealers


About a year ago, the used car business was a lively party. The coronavirus pandemic and global shortages of semiconductors have forced automakers to halt or slow down production of new cars and trucks, pushing consumers to new batches of cars. use. Used car prices have skyrocketed.

Now, the used car business is suffering from a devastating fever. Americans, especially those on a tight budget, are buying fewer cars as interest rates rise and fears of a recession grow. And improved auto production has eased the shortage of new cars.

As a result, used car sales and prices are falling and auto dealers that specialize in them are suffering.

Chris Frey, senior director of economic and industry insights at Cox Automotive, a market research firm, said: “After a massive run of growth in 2021, last year was a reality check. . “The used market now faces a challenging year as demand weakens.”

According to Cox, used car values ​​fell 14% in 2022 and are expected to drop more than 4% this year. That change means many dealers may have no choice but to sell some cars for less than they paid.

The industry’s difficulties have been exemplified by Carvana, which sells cars online and became known for building “vending machine” towers where cars can be picked up. The company recently reported a quarterly loss of more than $500 million and laid off 4,000 employees.

Over the past 12 months, Carvana has been heavily in debt. Its stock price has fallen more than 95% in the past 12 months, and three states have temporarily suspended its license to operate after consumer complaints.

Wedbush analyst Seth Basham said: “We think there is a good chance the company will have to file for bankruptcy protection. “They have too much debt relative to revenue and profit and cannot support that debt burden, and will likely need to restructure.”

In a statement to The New York Times, Carvana said it is confident it has enough money to turn its business around, noting that the company has $2 billion in cash and an additional $2 billion in “several investments.” other sources of liquidity” at the end of the year. third quarter.

It has also hired investment bank Moelis & Company and is working to reduce its inventory of vehicles and cut the cost of refurbishing them.

“Millions of satisfied customers have responded positively to Carvana’s e-commerce model of buying and selling cars,” the company said. “While the current environment and market has attracted attention in the near-term, we will continue to gain market share in the third quarter of 2022 and we remain focused on our profit-driven plan. .”

CarMax, another used car giant, is also being affected, although it is on a much more stable ground. In the three months ended November, its vehicle sales fell 21% to 180,000 units and net income fell 86% to $37.6 million.

The company’s CEO, Bill Nash, said CarMax is trying to avoid deep discounts to ensure monetization of every sale, even if it means overall sales for the company are falling. He added: “We are trying to strike a nice balance between making sure our cars are priced appropriately but also trying to maintain our profitability.

Nash said CarMax is being more cautious about buying cars and trucks until prices stop falling. In the most recent quarter, the company bought 238,000 cars from individuals and dealers, about 40% less than in the same period a year ago.

Buying and selling used cars is a huge business. Cox Automotive expects about 36 million used vehicles to be sold in the United States this year. Less than half of new cars and trucks are expected to be sold by 2023.

Many consumers turn to used cars to avoid paying the full price of a new car. For consumers with lower incomes or weak credit ratings, used cars with lots of miles on the odometer are often the only option.

The Federal Reserve’s campaign to raise interest rates to fight inflation has made buying cars more difficult and more expensive. In December, the average interest rate on used car loans was 12.37%, up from less than 10% a year earlier, according to Cox Automotive.

Mr Nash said CarMax is still drawing shoppers to its website, but many have now ended their search when they realize how much they can pay each month. “People click and see their payout and that’s where they falter,” he said.

The used car business consists of thousands of small shops, many of which are family businesses. CarMax is the largest player in the market but accounts for only a small portion of total sales.

Founded in 1993, CarMax tried to make the fragmented used car business more efficient in the same way that Blockbuster did with its video rental business. CarMax has been making steady profits for over a decade. It currently has about 240 locations and last year sold more than 900,000 vehicles to consumers.

“I think they will emerge from this downturn as one of the companies that are best positioned to capture more market share,” Mr.

Carvana is a much younger company. It was founded in 2012 by Ernest Garcia III, the company’s chief executive officer, and his father, Ernest Garcia II, the owner and founder of a separate used car business called DriveTime. Mr. Garcia III sought to create the Amazon of used cars, an entirely online retailer where shoppers could purchase cars on a website or app and have them delivered to their door.

To build its brand, Carvana built 75-foot-tall garages that could hold about two dozen cars and function as giant vending machines. Customers can choose to pick up their cars at one of the towers.

Last summer, Jerry Speers, a technology expert in Nashville, bought a 2021 Alfa Romeo Stelvio sport utility vehicle from Carvana for about $35,000. It was his third purchase from the company.

“I hate spending hours at the dealership, so I love the idea of ​​doing it all online,” he says. “I studied it at my own pace for a few weeks and then signed. A week or two later, a truck with cars came to my house.”

As the pandemic forced auto buyers to shop online, Carvana became a darling of Wall Street and its stock skyrocketed, reaching a high of around $345 a share in 2021.

But the commotion obscured some of the operational troubles. The company has never reported a profit for a full year in the nearly decade that its shares have been traded on the stock exchange. It spent a lot of money adding retail locations, building towers, and refining its online platform.

In some markets, it has struggled to thrive amid stiff competition. In Denver, Carvana’s vending machine tower has been empty for months. CarMax has four locations around Denver. Another competitor, AutoNation, opened two used car dealerships in the Denver area in 2021 and supplied them with inventory from cars traded at their 17 new auto dealerships in the area. area.

“The used business in Colorado faces some inventory challenges, so self-sufficiency vehicles are a significant strength for us,” said Marc Cannon, marketing director at AutoNation. me in this environment.

Carvana said it expects to open a location in Denver “in the near future.”

The logistics of delivering the car and handling all the paperwork proved difficult for Carvana. As a result, many consumers complained about the lengthy delays in getting the certificates of ownership for the cars they purchased from the company and other problems that prompted North Carolina to temporarily suspend the business license. of Carvana in 2021. Michigan and Illinois are taking similar steps in 2022.

The company said it has settled the state’s complaints with settlements that “allow us to continue to sell and buy cars.”

Carvana’s financial difficulties increased last May when it bought an auto auction company for $3.75 billion as new bonds just as interest rates began to rise. Carvana’s debt payments have skyrocketed, and many investors are worried about the company’s prospects. On January 25, the stock closed at about $6.50.

“They closed this acquisition at the worst time,” Mr. Basham said. “They added so much debt, it created an albatross around their necks.”

But Carvana has pushed back against the criticism, saying in its statement that the acquisition gives them scalability and gives customers a wider choice of vehicles and faster delivery times.

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