By: Steve Stauning

Click here to read Part 1 of this article.

Carvana is basically Beepi with a vending machine; though without the peer-to-peer, anti-establishment allure of the latter. Carvana will fail because they too are solving for the wrong issue. Carvana is helping consumers avoid the dealership experience by completely bypassing the dealership visit. They bring consumers one car at a time to “test-own” – pretty much like Beepi did.

Customers who live near a vending machine can pick up their vehicles themselves (saving Carvana the cost of delivery). In those instances where a customer lives too far from a vending machine, but still wants to enjoy this novel delivery experience, Carvana will pay up to $200 of their travel costs and “arrange white glove transportation” to pick them up at the airport and bring them to the vending machine. (Hmm, sounds like there are some unnecessary costs eating into that $132 profit.)

Moreover, Carvana will fail because they source their vehicles just like the rest of the dealer world. Then they have to inspect them, repair them, and recondition them just like the rest of the industry. While the current batch of startups may employ better processes than the average dealer that allow them to complete many of these tasks faster and more cheaply, they still need to market, sell, transact business, and pay for cool vending machines.

Oh, and for the Carvanas of the world who don’t understand what actually drives dealer profitability, they forgo offering parts, maintenance and repair— thus relinquishing those potential profit centers and the customer loyalty these can drive.  

But Carvana saves consumers $1,889 per vehicle versus a dealer, right?

Um, yeah, no.

Despite Carvana’s website touting a savings of $1,889 per vehicle over a traditional dealer, they apparently aren’t passing these “savings” on to their customers. (As one would expect from a benevolent tech startup hell-bent on revolutionizing the car buying experience, right?)

I randomly grabbed a dozen vehicles from the Carvana website and easily beat the price of each one of them within a few minutes just browsing dealer listings on sites like Autotrader, Cars.com, and CarGurus. Carvana’s price was always beaten by at least half of the comparable vehicles, including those with fewer miles (even after adding in the dealer fees).

Of course, they’re selling some cars, so this begs the question: will Carvana be able to continue to charge more for the same vehicles once the novelty of the car vending machine wears off? (I say no.)

How Carvana might succeed

If Carvana is able to take just half of their reported “savings” to their bottom line, they have a shot at surviving. (Does mere survival justify multi-billion dollar valuations? Probably not.)  Of course, their current process of requiring consumers to buy before they touch (even with a 7-day return policy) appeals to just a small percentage of the population. As eBay has discovered, a majority of consumers say they want to buy completely online, but only a small minority are willing (today) to do so. Add in the loss of impulse buyers and it’s definitely an uphill battle for them to expect anything more than to be acquired by a Berkshire or AutoNation in their current form. (When I was browsing their listings, Carvana promised to deliver the vehicles I was interested in to me in either five or seven days depending on the vehicle!)

Instead of trying to out-eBay eBay, Carvana stands a better chance of long-term success by trying to become a national Texas Direct Auto that includes some fixed operations.

That is, give customers a place to browse inventory live. Add a service lane or two. You know, become CARite with a cool car vending machine. Of course, in order to do that, Carvana needs to keep from trying to grow faster than their systems and people can adjust. They are selling an experience and they cannot deliver on that experience if they grow too fast or try to do too much at once.

The bad news for Carvana is it looks like that’s exactly what’s happening today. Based on their online reviews, Carvana is currently providing no better customer experience than a below-average dealer. (CARite, by comparison, seems focused on improving the dealership experience by improving the dealership visit – among other things – and their growth appears to be less about the founders cashing out for billions and more about actually changing the way consumers buy, sell, and service used vehicles.) Of course, with a multi-billion dollar IPO reported to be in the works, the founders of Carvana will likely “succeed” regardless of whether or not their creation proves sustainable for even the medium term.

Any dealer can and will sell cars online!

Venture capitalists can be an odd bunch, and they may continue to put hundreds of millions into Carvana thinking there is some multi-billion-dollar pot at the end of the rainbow. However, the reality is that any traditional dealer can already complete the entire deal online today – if they wanted to.

Moreover, when dealers actually add this technology to their websites from providers like AutoFi, and include it in their marketing messages, where does this leave Carvana? Can those vending machines be converted into small parking garages for downtown condo complexes?

Beepi never learned this lesson, but there is a flaw in the logic of everyone who tries to out-dealer the car dealer on a grand scale: You can’t. Dealers ultimately adjust and crush you (or buy you). They have the name, the facilities, the loyal customers and the brand. If all you have is a cool car vending machine, my money is on the dealer.

Good selling!

Steve Stauning is the host of Undeniable Advantage Live!, a monthly live video webcast and training provider for dealerships and other industries hosted at UndeniableAdvantage.com. He is also the founder of pladoogle, LLC, a leading training, mystery shop, ecommerce and automotive consulting firm providing cutting-edge products and in-store sales consultation to automotive dealers, industry vendors and media companies. Prior to his involvement with pladoogle, Stauning served in various automotive ecommerce leadership roles, including as the Asbury Automotive Group’s (NYSE: ABG) director of ecommerce, the director of the Web Solutions division of the Reynolds & Reynolds Company, and as general manager for Dealer Web Services at Dealer Specialties. Stauning is also an extremely popular leadership blogger (hosted at AskTheManager.com) and automotive industry speaker and writer; and he operates a free video training site at SteveStauning.com.