Auto superstore CarMax faces troubles

RICHMOND, Va. -- The idea of used car superstores sounds great: Huge lots with hundreds of used cars, no-haggle pricing and no high- pressure salesmen in shiny polyester suits.

While the idea may be a winner, one of the leading companies is floundering. CarMax Group, based in Richmond, lost $34 million in its fiscal year, which ended in February.

For one thing, auto superstores have been battling a reputation for high prices. CarMax prices its cars below book value but savvy hagglers can usually hammer out a better deal at a traditional dealer. "It's going to take longer and cost more to get this concept profitable than anyone believes, including CarMax officials," said Kenneth M. Gassman Jr., a retail analyst with Davenport & Co. in Richmond. CarMax is expected to break even this year, thanks in part to people like Gassman. That's because he's more than just an analyst, he's also a customer with two CarMax cars parked in his driveway. Gassman said a couple of hundred dollars more per car is not enough to scare away many buyers seduced by the easy-to-understand upfront pricing, extensive warranties and the knowledge they will not get stuck with a lemon. "You may pay a little more, but you get peace of mind," Gassman said. "For those consumers who do not like to bargain, that's a great place to shop." CarMax opened its first superstore in Richmond in 1993. It now has 27 stores and plans to have 80 or 90 by 2001. Although it hasn't turned a profit yet, sales in the past fiscal year jumped 71 percent over the previous year, to $874.2 million. But CarMax's troubles have hurt it on the stock market. The stock was priced at $20 a share in its initial public offering on the New York Stock Exchange in February 1997, but it has since dropped as low as $6.50 per share. On Tuesday it closed at $8.25. Both CarMax and analysts attributed the rocky start to several missteps by the company. "Their biggest mistake was not opening a critical mass of stores in some of the markets they've gone into," said Tom Thomson, an analyst with Richmond-based Wheat First Union. He said that when CarMax went into Dallas, Houston and south Florida, the company only opened a few stores and didn't advertise enough. "They were reluctant to spend so much on advertising and that hurt image-building and it hurt sales," Thomson said. CarMax has rethought its approach. It recently opened three stores in Chicago to create enough capacity to deal with the large market. It has also delayed its Los Angeles opening to make sure it can open several stores at the same time. The company also relied too strongly on the sales of used cars, while more traditional dealers also make money from selling new cars and from repair shops. Thomson said old-style dealers get about 12 percent of their revenue from service and parts, while CarMax gets less than 1 percent from service and parts. "It's the proverbial three-legged stool: new cars, used cars and auto service," said Gassman. "Up until now, CarMax had used cars." But CarMax is addressing those weaknesses. In the last year, all its stores have added their own reconditioning and repair shops, said Ann Collier, a spokeswoman for CarMax's parent, Circuit City Stores. CarMax is also moving into the new car market. On May 6, CarMax struck a deal with the Japanese auto maker Nissan that allows it to sell new Nissans at its stores or to open or buy stand-alone Nissan franchises. It has been selling new Chryslers at two Georgia dealerships for the last year. "To me, that went about as far as you can go to clinch the success of CarMax," Gassman said. "Talking with some other auto dealers, they have concluded that CarMax has the right mix of business to succeed. Now it's up to management."

Copyright 1998
Provided by ProQuest Information and Learning Company. All rights Reserved.