CarMax is on a roll

Survivor: CarMax has emerged as the sole survivor of the boom in used-car megastores.

November 04, 2001|By Ted Shelsby | Ted Shelsby,SUN STAFF

GLEN ALLEN, Va. - When Circuit City Stores Inc. opened its first CarMax used-car superstore here in 1993, the company called it an experiment.

Even its creators weren't sure it would last.

Nobody, after all, had ever before tried selling used cars the way Circuit City sold consumer electronics and appliances.

But CarMax Auto Superstores Inc. was out to revolutionize the way used cars were sold. It opened large showrooms, brightly painted in shades of blue, yellow and gray. The conference rooms were spacious with comfortable furniture and a play area for the kids.

The company established a no-haggling policy - the price on the tag is the price you pay. Sales commissions are based on the number of cars sold, rather than the price of the car.

CarMax offered a big selection of cars and trucks, on-site financing, a 30-day warranty and a five-day, 250-mile money-back guarantee.

It took longer than expected, but CarMax - the lone survivor in the used-car superstore war it sparked -has learned to make money selling used cars.

In addition to turning a profit, the company has revolutionized the used-car buying experience.

"They have actually made buying a used car fun," said George E. Hoffer, a professor of automotive economics at Virginia Commonwealth University and a consultant to the auto industry.

CarMax's president, W. Austin Ligon, said the key to the company's success is simple: "Consumers told us how they wanted to buy used cars, and we gave them what they wanted."

The concept may sound obvious, but making it work was not. All the other publicly owned competitors, including AutoNation Inc., the giant auto retailer founded by H. Wayne Huizenga, have abandoned the used-car megastore concept after racking up huge losses.

Even employees at its store here ran an office pool to pick the day when Circuit City would pull the plug on its used-car venture, which was wallowing in a sea of red ink.

Now, CarMax is on a roll.

It posted its first profit, $1 million, in the fiscal year that ended in February 2000. That jumped to $45 million in fiscal 2001. In the first half of this fiscal year, it has earned $54 million, and recently raised its earning projection for its third quarter.

Sales have been steadily climbing at a robust pace and totaled $2.5 billion during the past fiscal year. In the first half of this year, sales at stores open at least a year have jumped 27 percent.

The road to profitability has not been smooth, Ligon said in a recent interview.

"We made mistakes," he said, "and it took us a while to learn that."

The success of the company's big Laurel store, for instance, misled the company, leading it to pursue a strategy that it ultimately had to abandon.

When it opened in August 1997, the Laurel outlet - CarMax's 11th - was nearly 100,000 square feet, bigger than any other. The complex sprawled over 35 acres and was designed to stock more than 1,000 cars and trucks. It had its own auto-reconditioning center, which accounted for a big chunk of the land.

"It worked in Laurel," Ligon said. "Laurel is still our best store. It is the No. 1 used-car store in the country. Laurel sells well over 10,000 cars a year."

But that concept didn't work nearly as well in other cities such as Dallas, Houston, Miami and Chicago, and expansion costs were mounting.

The company shifted gears, slowing expansion and switching its format to smaller stores and a hub-and-satellite system; White Marsh, which opened in 1998, is a prime example.

Originally planned to be as large as the Laurel operation, the White Marsh store ended up being about half the size, covering 15 acres and stocking 500 to 600 vehicles.

Instead of costing $30 million to $35 million, like the Laurel store, the Baltimore County location was built for about $20 million.

Laurel and White Marsh "will be our biggest stores," said Joseph S. Kunkel, senior vice president of marketing and strategy.

Other stores will be more along the scale of the company store in Rockville, on heavily traveled Frederick Road.

Satellite stores

Rockville is what Ligon calls a satellite store. It has no costly vehicle-reconditioning center, requires less land - 6 acres - and can be built at a cost of $10 million to $15 million.

The Rockville showroom is about a third the size of Laurel's and the store stocks about 250 cars and trucks.

Ligon said that by going to smaller stores and satellite stores, the company was able to cut its land and building costs by 50 percent to 70 percent. It cut total operating costs in half.

"The satellite stores are much smaller, but the customer doesn't notice much difference," Ligon said. "It has everything up front that the other stores have, but it doesn't have the reconditioning center in the back."

Over the past 2 1/2 years, CarMax has built or converted 10 outlets to satellite stores. Ten more satellites are in the planning phase.

Kunkel said that between one and three additional satellite stores could be opened in the Baltimore and Washington market.

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