Beepi and Vroom and Carvana - will they make a DENT?

[ruggles]

RE: "What keeps these startups from being successful?"

Actually, they ARE successful at bilking millions from stupid investors while the "founders" walk away with all kinds of loot. Its the Scott Painter MO.

In a macro sense, the market limits what people will pay for a vehicle. Lenders will only advance so much, consumers are mostly upside down in their trades, the Internet is the great leveling apparatus. The market also dictates real wholesale values. Yes, we know careful wholesale buyers can occasionally "steal" a used vehicle, but that isn't so common and the skills to accomplish that are on the wane as the new wave of so called "car guys" think data is the answer to everything. Actually, it is, but interpretive skills are even more important. Since the market limits gross profit, where will companies like Carvana find a way to be profitable? What are any dealer's expenses? Will the vehicles sell themselves? Will minimum wage employees be able to do what needs to be done? The answer is consistently, "No." Less recon? Cheaper recon? Will that make up for the horrendous storage and transportation costs? I don't think so?

What happens when interest rates, and corresponding floor plan rates return to historical norms? I'm betting Carvana won't be around when that happens.

Last I checked, Carvana has lost about $5500. per vehicle. I wouldn't need a fancy looking phony car vending machine to accomplish that.

 

[ruggles]

Sad to see what happened to Beepi and speculate that the same will fate will be Carvana's.

Frankly, I don't see what is sad about the failure of Beepi. Real dealers suffer when one of these hair brain start ups comes in to his/her market, at least until they fail. CarMax has proven to be a worthy competitor, based in real market fundamentals instead of capitalizing on the ignorance of stupid money investors.

 

[craigh]

You do have to view the losses in context - they're expanding geographically and budgeting for these losses.
The issue is they hit all their loss targets, without their expansion targets.

 

[Cullen C]

RE: "What keeps these startups from being successful?"

Actually, they ARE successful at bilking millions from stupid investors while the "founders" walk away with all kinds of loot. Its the Scott Painter MO.

In a macro sense, the market limits what people will pay for a vehicle. Lenders will only advance so much, consumers are mostly upside down in their trades, the Internet is the great leveling apparatus. The market also dictates real wholesale values. Yes, we know careful wholesale buyers can occasionally "steal" a used vehicle, but that isn't so common and the skills to accomplish that are on the wane as the new wave of so called "car guys" think data is the answer to everything. Actually, it is, but interpretive skills are even more important. Since the market limits gross profit, where will companies like Carvana find a way to be profitable? What are any dealer's expenses? Will the vehicles sell themselves? Will minimum wage employees be able to do what needs to be done? The answer is consistently, "No." Less recon? Cheaper recon? Will that make up for the horrendous storage and transportation costs? I don't think so?

What happens when interest rates, and corresponding floor plan rates return to historical norms? I'm betting Carvana won't be around when that happens.

Last I checked, Carvana has lost about $5500. per vehicle. I wouldn't need a fancy looking phony car vending machine to accomplish that.

Continue to pound the table David....

 

[Cullen C]

Sad to see what happened to Beepi and speculate that the same will fate will be Carvana's.

Frankly, I don't see what is sad about the failure of Beepi. Real dealers suffer when one of these hair brain start ups comes in to his/her market, at least until they fail. CarMax has proven to be a worthy competitor, based in real market fundamentals instead of capitalizing on the ignorance of stupid money investors.

Interesting that you choose to highlight CarMax as a very "worthy competitor" considering they sell more used cars than all of the major public dealer groups annually COMBINED.

It's interesting because if you know your history they had similar growing pains. They lost millions racing the old version of AutoNation across the country before Wayne Huizenga called the whole thing off. In 1997 the stock price was down to $4 per share. Once they were allowed to focus on existing markets they begin the slow climb to profitability. I expect Carvana will do the same.

 

[Chris Cachor]

What exactly is the value add here? I just did a few searches on their site and the selection of vehicles doesn't match 1/10th of the scale I have in my area. The pricing to me isn't competitive; consumers are most sensitive about this whether they admit it or not. The delivery and return policy are something any dealer can implement if they haven't already.

I just don't see this as a valuable alternative. The only way I see these sort of operations being successful is if they can operate on a massive scale and withstand taking less profit to gain a bigger piece of the market. So really, we're talking about efficiency and this market is already competitive as you're all aware.

I work at a shared office space with a bunch of startups and one of them is very similar to Beepi/Vroom. It's a small operation and their website is ok, but it makes you wonder. Who is holding the bag?

 

[Cullen C]

What exactly is the value add here? I just did a few searches on their site and the selection of vehicles doesn't match 1/10th of the scale I have in my area. The pricing to me isn't competitive; consumers are most sensitive about this whether they admit it or not. The delivery and return policy are something any dealer can implement if they haven't already.

I just don't see this as a valuable alternative. The only way I see these sort of operations being successful is if they can operate on a massive scale and withstand taking less profit to gain a bigger piece of the market. So really, we're talking about efficiency and this market is already competitive as you're all aware.

I work at a shared office space with a bunch of startups and one of them is very similar to Beepi/Vroom. It's a small operation and their website is ok, but it makes you wonder. Who is holding the bag?

Chris, Carvana only recently launched in Chicago, the lack of inventory is easily explainable. They have over 7k cars in total, if they wanted to they could be the biggest dealer in Chicago tomorrow by shifting all of their inventory there on whatever 3rd party listing site you searched. The difficulty in balancing growth in expansion markets while not losing ground in existing markets is a difficult one. They have to buy more inventory to enter each market, this help create those mounting loses everyone wants to focus on.

The competitiveness on pricing surprises me, I know very well the team they have built around analytics and pricing is at the forefront of their focus. I trust that you were comparing apples to apples, cars without any accident history or title problems, cars reconditioning to CPO levels.

The last comment I will make is that if you are drawing a comparison to Beepi and Vroom I am not sure any of what I have typed will matter. They are not similar in any way. Beepi is also not similar to Carvana. I know they get thrown into the same discussion over and over because they are new and new things are sometimes hard to define but they couldn't be more different.

 

[jscole86]

They have to buy more inventory to enter each market, this help create those mounting loses everyone wants to focus on.

Buying inventory doesn't add to losses, that goes on the balance sheet and affects cash flow, not profit/loss.

 

[Cullen C]

Buying inventory doesn't add to losses, that goes on the balance sheet and affects cash flow, not profit/loss.

I was referencing the $5500 loss per unit that David had mentioned.

When you enter a new market you do have to choose to purchase and allocate inventory, many times in advance of sales to support such inventory levels. And yes there are numerous ancillary costs to associated to market expansion that are directly linked to inventory, building out a logistics network, advertising, listings, etc. The unit losses do not start to level off and reverse in new markets until sales pick up. I assure you the gross per unit story in Atlanta where they sold over 1000 cars in a month during the first quarter is much different.

 

[craigh]

Looking ahead: Carvana's guidance for the second quarter and full year
Carvana expects its second-quarter results to shape up as follows:

• Retail unit sales of 10,000 to 10,500.
• Total revenue between $193 million and $203 million.
• Total gross profit per unit of $1,375 to $1,425.
• EBITDA margin between (18%) and (18.5%).

For the full year, Carvana expects:

• Retail unit sales of 44,000 to 46,000 versus 18,761 in 2016.
• Revenue of $850 million to $910 million versus $365 million in 2016.
• Total gross profit per unit of $1,475 to $1,575 versus $1,023 in 2016.
• EBITDA margin of (14%) to (16%) versus (23.2%) in 2016.
• 16 to 18 new market openings, to a total of 37 to 39 at the end of 2017.

https://www.fool.com/investing/2017/06/07/cars-in-vending-machines-carvana-revenue-jumps-120.aspx

These seem like pretty lofty expectations.