CarMax opens smaller used-car outlet in Rockville

`Satellite' lot is cheaper way to enter new market

April 08, 1999|By Ted Shelsby | Ted Shelsby,SUN STAFF

ROCKVILLE -- CarMax, the auto retailing arm of Circuit City Stores Inc., celebrated the grand opening yesterday of its newest used-car outlet in Maryland. The smaller than usual CarMax lot is designed to increase the company's chances of doing something it has never accomplished -- posting a profit.

CarMax President W. Austin Ligon called the new outlet, on heavily traveled Frederick Road, "a satellite store," and said it cuts millions of dollars off the cost of tapping into a new market.

The store here is about a third the size of the CarMax in Savage, but shoppers aren't likely to notice any changes.

"The big difference is that we don't have 10 acres out back filled with cars waiting to be reconditioned," said Ligon as he leaned on the hood of a low-mileage, green Ford Explorer with a $21,598 price tag. "This is a selling location. It's supplied by our other stores in the region."

As opposed to the $15 million to $20 million that CarMax has been investing in setting up its used-car superstores around the country, the outlet here cost between $5 million and $10 million, said Ligon.

It will have between 80 and 100 employees.

The new lot here is on a 5-acre tract, compared to the 34 acres at the Savage used-car lot. The Rockville outlet stocks about 250 cars and light trucks, including pickups, vans and sport-utility vehicles, while the Savage store normally stocks about 800 vehicles and can handle as many as 1,000.

"CarMax has got to do something to lower their costs if they are going to be competitive and survive in the used-car business," said George E. Hoffer, an auto industry analyst and professor of economics at Virginia Commonwealth University in Richmond, Va.

Hoffer said that CarMax had an 11.5 percent gross profit on the cars it sold last year. "Their costs were 13.9 percent per car," he said. "They lost 2.2 percent on each car sold."

Hoffer said that CarMax's no-haggling approach to selling used cars has pleased customers but investors have not been thrilled by the firm's balance sheet.

"People love the CarMax concept, especially women who don't like to haggle over price and higher-income people who feel that their time is money," Hoffer said. "They like the one-stop shopping and fast transaction.

"Their problem is that their overhead is so high they have a difficult time competing with the used-car lots of new-car dealers."

Kenneth M. Gassman Jr., a retail analyst with Davenport & Co. in Richmond, said CarMax's latest move is taking a page out of the history of the U.S. airline industry. "They are going to a hub system like the airlines," he said. "They will have one central store, or hub, serving a number of satellite stores."

Gassman said CarMax is under increased pressure to post its first annual profit. "If they aren't profitable soon Circuit City might pull the plug on its used-car business or sell it off," he said.

He said that decision is probably two years away.

CarMax said Tuesday that it expects to break even or post a modest loss for the fiscal year that began March 1.

For the year that just ended, it reported a loss of $23.9 million, equal to 24 cents a share. This compares with a deficit of $34.2 million, or 35 cents a share, in the same part of 1998.

Sales rose 68 percent for fiscal 1999 to $1.47 billion.

Ligon said the company is looking for other locations closer to Baltimore. It would like to add two or three stores in the region over the next three to five years. He said the company would like a site west of Baltimore and another in the Glen Burnie or Annapolis areas.

Pub Date: 4/08/99

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