Carmax Hbr Case Analysis

Industry Analysis

Used car market was a huge market with attractive growth opportunities during 1980s. It was estimated worth $ 375 billion market. Competition was so deeply fragmented that no single dealership could claim more than a few percentage points share of the used car market in any locale. New car dealerships were the largest sellers of used cars. 65 % of late model, used vehicles were sold by 21,800 new car dealers through out United States. However most of these new car dealers considered used cars a secondary business. The remaining 35 % was a mix of independent used car dealers and private sales. Between 1985 and 2001, the year over year change in used units sold averaged less than two percent up or down.

Several market trends in the early 1990s were encouraging used car buyers.

* First, the quality of new cars was improving; 'A three year old car was considered old'. In 1994, U.S. had 46 million registered vehicles 12 years old or older, up from 18.9 million such cars and trucks in 1980. This indicates about 150 % increased during that 15 years span.

* New car prices were accelerating faster than income per capita, driving many potential new car buyers into the used car market. Between 1989 and 1993, the average price of U.S. made luxury car increased nearly $ 2000 each year.

The threat of new Entrant

The threat of entry is low in this industry. There is an economy of scale since the major player in this industry, CarMax, superstore sold 400 vehicles per month while the other car dealers sold 45 used car per month. This large sales volume by CarMax create economies of scale since the total cost will be divided over large number of cars which will reduce the cost and make it difficult to any new firm to enter the market. One of the barriers is the high setup cost since any company thinking to enter the market needs to have large number of stores/inventories to start its business with. It is not easy to differentiate in this market since it is easy to copy by other businesses. AutoNation, copied CarMax's model, stores, consumers offers and entered its market. CarMax is trying to spread nationally which will raise the barrier of entry to any new entrant. On the other hand, there is attractiveness to enter this market since it is a huge market with attractive growth opportunities, unmet needs and fragmented competition.

The power of buyers

There is moderate buyer power in this industry. There are a large number of undifferentiated small car dealers. There are two large purely used cars companies. The switching cost is very low. Therefore, the customers can move from one dealer to another easily without bearing any significant cost. Typical used cars customers are less specific about make, model, than new car buyers.

The power of suppliers

The power of suppliers is low in this industry. The main suppliers are the used car auctions, individuals and the cars leasing companies. The availability of a large number of high quality off-lease vehicles created an oversupply of used cars and thus lower prices of these vehicles and increased the demand of used cars. The switching cost is low since the car dealer can change the suppliers easily.

The threat of substitutes

The threat of substitute is moderate in this industry. The major substitute is the new cars. There are differences between the used cars customers and the new cars one. The used car customers are people who have young children, short on time, live in the suburbs and generally have above average income and education. Therefore, it is difficult for these people to think to buy new cars. The financing incentives offered by the new car dealers can harm the used car market since the used car users will not face difficulties in financing their new cars purchase.

Competitive Rivalry

The competitive rivalry is low. The market is full of small new cars dealers and two big used cars dealers. The largest sellers of the new cars were new cars dealership. Most of these dealerships consider the used cars as a second market. Competition was so deeply fragmented that no one single dealership could claim more than a few percentage points share of the used car market in any locale. Autonation, the major competitor of CarMax, copied CarMax's model, stores, consumers' offers, and entered the same market and were the first to enter other markets. This forced CarMax to grow more quickly than they originally intended. New car dealer incentives and the low financing rates some times increased demand for new cars among buyers who would otherwise be looking to buy a low mileage, late model used cars. The competitors in this industry are like the ants army. They are large in number but small in size.

Company Analysis

Before CarMax, public image of stereo salesperson was extremely poor in the used car Industry and people were unhappy with their used car buying experiences. Consumers did not want to play games while shopping for used cars. They wanted to know the price of every component of the sales transaction such as the price of the car, the price of the extended service plan, the price of financing and accessories. Consumer did not want to drive all over town to find the car they wanted. They simply wanted a trustworthy car, not 'someone else's lemon.'

Keeping these factors in mind, CarMax was established in 1991 as a subsidiary of Circuit City as an attempt to extend Circuit City's business activities in more profitable sectors. The used car market at that point of time was a huge market with attractive growth opportunities, competition was fragmented, and it was an area where the firm's retail information systems and management skills could offer a competitive advantage. CarMax's goal initially was to successfully change the buyer's perception of typical used car salesmen.

CarMax focused on selling late model used cars in three different size stores:

1. Standard format stores, with an average inventory of 300-500 cars.

2. Mega-stores, with an average inventory of 800-1000 cars.

3. Satellite stores, with an average inventory of 250-400 cars.

* Between 1993-1999 CarMax opened six stores, and all of them proved to be profitable at store