CarMax Looks to Continue Growth Strategy, Capture More Market Share

RICHMOND, Va. — CarMax recently released its annual report, which discusses all aspects of business, including the president's forecast that the company could double its footprint in the next five years.

As the company's primary focus is selling used vehicles to customers with all types of credit history, including subprime, SubPrime Auto Finance News culled through the report to share some of its highlights.

Tom Folliard, president and chief executive officer of the company, characterized fiscal 2007 as an "exceptionally strong year" for CarMax.

"A number of factors contributed to our continued success last year, including steady improvement in our operational initiatives and increased traffic in our stores and on carmax.com. As a result, we reported growth in sales and gross margins for both retail and wholesale vehicle sales and CarMax Auto Finance," he explained.

"Although we reported $7.5 billion in revenues in fiscal 2007 and are the largest retailer of used cars in the United States, we still had only 77 used-car superstores open at the year end, and represented only about 2 percent of the estimated $290 billion market for one- to six-year-old used cars," he continued.

"We opened 10 stores in fiscal 2007, growing our store base by 15 percent, consistent with our long-term objective of 15 to 20 percent annual store growth. We expect to open an additional 13 stores in fiscal 2008, a 17-percent store growth rate. This rate of growth suggests that we could double our store base in the next five years, and have consistent, sustainable growth over the next decade. We believe this significant growth trajectory distinguishes CarMax from most U.S. retailers."

Associate Recognition

When looking to the future, Folliard quickly pointed out that despite the market potential, as with most businesses, CarMax depends on strong associates to keep the business moving in the right direction.

"Most fundamental to our past success, however, and key to our future growth, are our associates," he highlighted. "Our associate selection process, ongoing development and training programs, and focus on associate engagement benefit both the company and our associates.

"I'd like to also take this opportunity to thank all of our 13,700 associates for their hard work and dedication," he continued. "I am continually impressed by the consistent commitment to teamwork and customer service evidenced in every CarMax store from our very first in Richmond, Va., to our most recent store opened in Milwaukee, Wis."

One way the company recognizes associates that excel is through its Above & Beyond award program.

"Outstanding customer service is one of CarMax's founding principles," officials explained in the report. "Many of our associates demonstrate commitment to customers that goes well beyond our own high standards. We celebrate these special associates with our Above & Beyond award program. Their stories of care and concern are what help us identify our monthly winners, who receive company-wide recognition."

Although the company was recognized for the third consecutive year on Fortune's "100 Best Places to Work For" list, officials said they don't want to stop there.

"We're not content to rest on our laurels. While we're proud of the culture we've created, we constantly look for opportunities for improvement," executives said.

"With the assistance of the Gallup organization, we've instituted an annual associate engagement benchmarking process, and we've set an ambitious goal to achieve world-class associate engagement, as defined by the Gallup organization, within the next five years," officials reported.

To make sure that that the company's sales consultants are focused on getting the customer into the right vehicle rather than on making highest commission possible, officials said these associates are paid a commission based on a fixed dollars-per-unit standard. Moreover, they pointed out that the sales consultant receives no commission on the finance process.

"This ensures that the sales consultant's primary objective is helping customers find the right vehicles for customers needs at the prices they can afford," officials explained. "In contrast, sales and finance personnel at traditional dealerships often receive higher commissions for negotiating higher prices and for steering customers toward vehicles with higher gross margins."

For new associates, training is a must, officials stressed.

"Store associates receive structured, self-paced training programs that introduce them to company policies and their specific job responsibilities through KMX University - our proprietary intranet-based testing and tracking system," executives said.

Furthermore, the majority of new associates are also teamed-up with mentors to provide on-the-job guidance and support

"We also provide comprehensive, facilitated classroom training courses to sales consultants, buyers, automotive technicians and managers," officials added. "Buyers-in-training undergo a 6- to 18-month apprenticeship under the supervision of experienced buyers, and they generally will assist with the appraisal of more than 1,000 cars before making their first independent purchase."

Marketing and Advertising

Briefly discussing their marketing and advertising initiatives, officials said their ad spending covers the vast area of mediums, such as TV, radio, carmax.com, the Internet and newspaper. However, they noted that advertising tends to vary by market.

"The media landscape is changing rapidly and we are changing our marketing programs in response," executives said. "We are customizing our marketing program based on awareness levels in each market.

"In selected markets, we have expanded our use of Internet-based advertising while curtailing our use of newspaper advertising," they continued.

Moreover, in order to drive more traffic to the company's site and stores, officials said they list every retail unit on AutoTrader.com and Cars.com. Furthermore, the company spends money on banners and keywords on search engines such as Google and Yahoo.

Buying Centers

In 2006, officials said they opened and began testing a center in Atlanta that's sole focus is purchasing vehicles.

"Our goal for the car-buying center is to increase appraisal traffic and generate incremental vehicle purchases from individual consumers," executives said. "We plan to expand this test by opening three additional car-buying centers in fiscal 2008"

Business

In fiscal 2007, CarMax retailed 337,021 used vehicles and had 77 stores in 36 metropolitan markets. Moreover, the company said it sold 208,959 wholesale units via its on-site auctions for the year.

About 85 percent of the used vehicles the store retails are 1 to 6 years old, with less than 60,000 miles, according to executives. These units usually fall into the price range of $11,500 to $30,000.

Additionally, the stores also provide used vehicles more than 6 years old or have more than 60,000 miles. Officials said these vehicles generally cost $8,000 to $22,000.

In order to save money, the company said it does most of its reconditioning in-house.

"Over the past several years, we have performed an increasing percentage of reconditioning services in-house, and based on the cost savings realized, we expect this trend to continue," executives highlighted. "Satellite superstores depend upon nearby mega or standard superstores for reconditioning, which increases efficiency and reduces overhead."

As of the end of February, executives said 46 of the company's 77 superstores conduct on-site auctions.

"The typical wholesale vehicle is approximately 10 years old and has more than 100,000 miles," officials noted. "Participation in our wholesale auctions is restricted to licensed automobile dealers, the majority of whom are independent dealers."

Generally, the auction sales rate is 95 to 100 percent, executives pointed out. 

Discussing their new-car business, officials said, "In fiscal 2007, new vehicles comprised 5 percent of our total retail vehicle unit sales. As planned, new-car sales have become a smaller part of our business mix over the past several fiscal years as we have divested 14 new-car franchises, while aggressively growing our used-car business. We may divest additional new-car franchises in the future."

CarMax Auto Finance

Calculating the rate prior to the impact of three-day payoffs and vehicle returns, CarMax Auto Finance reported that it financed more than 40 percent of the company's used-vehicle sales for fiscal 2007. On average, response time for CarMax Auto Finance and Bank of America is 15 minutes, the company reported.

"Customer credit applications are initially reviewed by CAF and may also be reviewed by Bank of America," according to executives. "Customers who are not approved by either CAF or Bank of America are evaluated by our core second-tier finance partners, including AmeriCredit Financial Services, Capital One Auto Finance, CitiFinancial Auto and Wells Fargo Auto Finance.

"Customers who are not approved by any of these finance partners are evaluated by our third-tier lenders, which include Triad Financial and Drive Financial Services," officials said. "Having a wide array of lenders not only expands the choices for our customers, but also increases discrete approvals. To this end, we have tested and will continue to test other third-party finance companies."

Comparing fiscal 2007 results to 2006, executives noted that sales financed by Drive Financial Services decreased to less than 1 percent of the company's used sales from about 3 percent in fiscal 2006.

"In the fourth quarter of fiscal 2006, this lender implemented program changes in certain states, narrowing the selection of vehicles it would finance, and making this business less economically attractive to us," the company said.

"We chose to curtail our business with Drive in these states to preserve margins and profits," officials said. "The decline in Drive-financed sales in fiscal 2007 was substantially offset, however, by incremental sales financed by additional lenders added to our third-party lender group in the second half of fiscal 2006."

Focus on Growth

Folliard pointed out that while CarMax currently has no competitors with similar business models, the company must strive to continually improve to maintain and grow its market share.

"Concept innovation, including ongoing analysis and operational initiatives, is an important focus for CarMax," he stated. "We constantly look for ways to improve our processes and grow our market share, which we believe is the best way to maintain our competitive advantage.

"We utilized this kind of innovative analysis in the development of our small-format stores and car-buying centers, concepts that we are currently testing," he explained.

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