Carvana Case Study

Carvana is a U.S company that sells used cars online and delivers them to customers’ homes or nearby vending machines. Carvana aims to provide a convenient, transparent, and hassle-free car buying experience that eliminates the need for visiting dealerships. 

In the realm of online used car sales, Carvana embarked on a journey to revolutionize the car buying experience. With the allure of doorstep delivery and vending machine pick-ups, Carvana sought to redefine convenience and transparency. However, amidst the glitz of success, a shadowy underbelly reveals why some full-stack inventory-led used car e-commerce ventures find themselves at the crossroads of triumph and tragedy.

Envision a world where cars are not just commodities but visual stories waiting to be explored. Carvana, armed with patented 360-degree photo technology, invited buyers to traverse the virtual landscapes of each car, revealing both its features and imperfections. A seven-day, money-back guarantee offered a tangible reassurance, allowing buyers to test drive their purchases post-delivery. Trade-ins and financing options were seamlessly integrated, creating a one-stop-shop for automotive dreams.

In the labyrinth of success, Carvana turned to the compass of data science and visual analytics. This arsenal optimized inventory, pricing, logistics, and marketing strategies. Kaggle competitions became the arena for crowdsourcing innovative solutions to business challenges. Automation, through Harness orchestration, streamlined infrastructure processes, slashing time and engineering costs.

Yet, every tale of triumph has its tribulations. Carvana, once the rising star, now grapples with challenges that echo through the canyons of its stock market fortune.

The siren song of demand for used cars proved to be a double-edged sword. Carvana, unable to keep pace, faced the repercussions of low inventory levels, customer dissatisfaction, and missed sales opportunities. The once harmonious melody of profit turned discordant with high operating costs, debt obligations, and negative cash flows.

Competition emerged as a formidable opponent, as giants like AutoNation, Penske Automotive, and Tesla entered the arena, offering superior prices, services, and selections. The COVID-19 pandemic, a tempest that struck global shores, brought with it supply chain disruptions, labor shortages, regulatory uncertainties, and a tide of reduced consumer spending.

Investor confidence, once a steady wind in Carvana's sails, waned. Disappointing earnings, weak guidance, and a massive stock offering plunged the company into the stormy sea of market sentiment. Carvana's stock price, once soaring, plummeted by over 98% since its IPO in 2017. Now, the specter of bankruptcy looms, and the NYSE whispers of potential delisting.

As Carvana grapples with the aftermath of its meteoric rise and subsequent fall, the e-commerce saga unfolds—a tale of innovation, ambition, and the unpredictable currents that shape the destiny of modern business.

Here are some key points from various case studies of Carvana:

• Carvana uses patented 360-degree photo technology to showcase the features and imperfections of each car on its website or app, allowing customers to inspect the car virtually before buying it.

• Carvana offers a seven-day, money-back guarantee for customers who want to test drive the car after receiving it. Customers can also trade in their old cars and get financing options through Carvana’s platform.

• Carvana leverages data science and visual analytics to optimize its inventory, pricing, logistics, and marketing strategies. Carvana also participates in Kaggle competitions to crowdsource solutions for its business problems.

• Carvana uses Harness orchestration to automate its infrastructure provisioning process, reducing the time from 2-4 hours to 20 minutes and saving $1.4 million annually in engineering costs.

• Carvana has grown rapidly since its launch in 2012, becoming the fastest-growing online used car retailer in the U.S. and achieving record revenues and profitability in 2022.

Carvana has faced several challenges that have contributed to its failure and stock crash, such as:

• The company has been unable to cope with the rising demand for used cars, resulting in low inventory levels, customer dissatisfaction, and lost sales opportunities.

• The company has been struggling with high operating costs, debt obligations, and negative cash flows, which have eroded its profitability and liquidity.

• The company has been facing increased competition from other online and offline players in the used car market, such as AutoNation, Penske Automotive, and Tesla, who have been offering better prices, services, and selection.

• The company has been hit by the adverse effects of the COVID-19 pandemic, such as supply chain disruptions, labor shortages, regulatory uncertainties, and reduced consumer spending.

• The company has been suffering from a loss of investor confidence and market sentiment, as evidenced by its disappointing earnings results, weak guidance, and massive stock offering.

These factors have led to a sharp decline in Carvana’s stock price, which has fallen by more than 98% since its IPO in 2017. The company is now facing the risk of bankruptcy and delisting from the NYSE.

This says that the ecommerce industry for used cars is a growing and evolving sector that offers many advantages for both buyers and sellers, such as convenience, transparency, and variety. However, it also faces some challenges, such as supply chain disruptions, high competition, and changing customer preferences. According to Statista, e-commerce is expected to account for nearly 10 percent of used-car retail sales by 2025 in Europe, indicating the potential of this market. However, to succeed in this industry, online car retailers need to adapt to the changing demands of consumers and the environment, and leverage data and technology to optimize their operations and customer experience.

Carvana has never been profitable because it has been investing heavily in its growth and expansion, as well as facing various challenges in the used car market.

Some of the reasons for Carvana’s lack of profitability are:

• High operating costs: Carvana spends a lot of money on acquiring, reconditioning, transporting, and delivering cars, as well as building and maintaining its infrastructure, such as vending machines, inspection centers, and logistics network.

• High debt obligations: Carvana relies on debt financing to fund its operations and growth, which increases its interest expenses and reduces its cash flow.

• Low gross margin: Carvana’s gross margin, which measures the difference between revenue and cost of goods sold, has been lower than its peers and industry average, indicating that it has not been able to price its cars competitively or efficiently.

• Competitive pressure: Carvana faces intense competition from other online and offline players in the used car market, who offer similar or better services, prices, and selection. Carvana also has to deal with changing customer preferences and expectations, as well as regulatory and legal issues.

• COVID-19 impact: The pandemic has negatively affected Carvana’s business, as it disrupted its supply chain, reduced its inventory, increased its costs, and lowered its demand. Carvana also had to suspend or limit some of its operations and services, such as vending machines and home delivery, to comply with health and safety guidelines.

The ‘Logical’ Solution: (if you ask a business expert):

Other similar companies that sell used cars online should adopt some cost-cutting strategies to avoid these huge running costs, such as:

• Streamlining their supply chain and distribution process, by using inventory management, integrated supply chain methods, and vendor managed inventory.

• Re-evaluating their vendor terms and contracts, by negotiating better deals, switching to cheaper or local suppliers, or outsourcing some tasks.

• Using cloud-based solutions, such as Harness orchestration, to automate their infrastructure provisioning process and reduce engineering costs.

• Cutting unnecessary expenses, such as internet, phone, cable, credit card fees, electricity, and utilities, by looking for cheaper packages, promotions, or alternatives.

• Automating their business processes, such as stock take, stock return, hours worked, best selling item, daily sales report, and more, by using business management and process solutions.

Why this ‘Logical’ Solution won't work (business experts in the Valuation game that Technology companies play won’t agree with this):

• Selling Used Cars is basically a traditional brick and mortar, inventory-led, fast turnaround business that is fundamentally structured around ‘flipping’ assets (used cars) that depreciate by the day.

• A used car is not an asset unless it is purchased under very optimum conditions and at a low price that is much lesser than its market value.

• ‘Lemons’ also make their way into the inventory somehow.

• Profits lie in the marginally low purchase-price of the used car, from end users or auctions. 

• Anything that adds to ‘Inventory Risk’ which includes Holding Costs, Reconditioning Costs, Maintenance Costs, Test Drive Costs, Upgrade Costs, and Marketing Costs, need to be reduced to a bare minimum, while retaining the Dealer’s competitive advantage and ultimately selling quality used cars. 

• Reducing any of the aforementioned costs, in practice, leads to lower quality of service as well as a lower competitive advantage, because the elephant in the room is ‘Inventory’.

• Anything that is done to a used car that is part of the inventory is something that eventually affects profitability and cash flow. This is why most used car eCommerce companies justify the non existence of profits, and the lack of a net positive cash flow with terms like ‘Gross Merchandize Value’, ‘User Base’, ‘Scalability’ and ‘Potential for Growth’, which are fine, as long as the business is backed by private equity or venture capital, and not a publicly listed company.

• Public listed companies need to have sustainable net-profit based business models, a net positive cash flow and a healthy balance sheet.

• Used Car eCommerce that is Inventory Led is therefore a self-defeating proposition, and when it comes to listing such businesses on public markets through an IPO, the fundamentals are too weak to stand the test of time and scrutiny by public investors and shareholders.

• In reality, Used Car eCommerce needs to be a Non-Inventory led Technology business, that if applied to an aggregator platform, should offer nothing more than Insights and the facilitation of the Supply-Chain aspects of car buying, testing and delivery. The holding costs of the inventory should be passed on, or left with the traditional used car dealers that have been playing the game for decades. 

Summary:

In essence, the 'logical' solution of employing a traditional brick-and-mortar, inventory-led model for selling used cars faces fundamental challenges that business experts in the valuation game of technology companies would likely dispute. Operating within this paradigm essentially entails a fast-turnaround business structure centered around 'flipping' depreciating assets—used cars. The profitability of a used car hinges on its acquisition under optimal conditions at a price significantly lower than its market value, and inherent risks, such as the inclusion of 'lemons' in the inventory, further complicate matters. The crux of success lies in minimizing Inventory Risk, encompassing holding, reconditioning, maintenance, test drive, upgrade, and marketing costs. However, any reduction in these costs invariably leads to compromised service quality and diminished competitive advantage, as the primary challenge remains the management of inventory.

Manipulating the inventory, in any way, impacts profitability and cash flow. Many used car eCommerce companies justify the absence of profits and the lack of positive cash flow by emphasizing metrics like 'Gross Merchandise Value,' 'User Base,' 'Scalability,' and 'Potential for Growth.' While these metrics may suffice for businesses backed by private equity or venture capital, publicly listed companies are required to exhibit sustainable net-profit-based models, positive cash flow, and healthy balance sheets.

The assertion emerges that Inventory-Led Used Car eCommerce is inherently self-defeating, especially when subjected to the rigors of public scrutiny through an IPO. The weak fundamentals fail to withstand the test of time and the discerning eye of public investors and shareholders. In a practical context, a more viable approach suggests that Used Car eCommerce should adopt a ‘Non-Inventory Led and Technology Based’ business model. When applied to an aggregator platform, it should focus on providing insights and facilitating the supply chain aspects of car buying, testing, and delivery. The holding costs of inventory should either be passed on or retained by traditional used car dealers with a longstanding presence in the industry. This strategic shift offers a more sustainable and resilient trajectory for navigating the complexities of the used car market.