CarMax 2009 Annual Report Download - page 11

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We purchase, recondition and sell used vehicles. All of the used vehicles we retail are thoroughly reconditioned to
meet high mechanical, electrical, safety and cosmetic standards, and each vehicle must pass a comprehensive
inspection before being offered for sale. Approximately 85% of the used vehicles we retail are 1 to 6 years old with
fewer than 60,000 miles. We also offer a selection of used vehicles at each superstore that are more than 6 years old
or have more than 60,000 miles, if they meet similar quality standards.
We also sell new vehicles at five locations under franchise agreements with four new car manufacturers (Chrysler,
General Motors, Nissan and Toyota). In fiscal 2009, new vehicles comprised 3% of our total retail vehicle unit
sales.
We provide customers with a full range of related products and services, including the financing of vehicle
purchases through CarMax Auto Finance (“CAF”), our own finance operation, and third-party financing providers;
the sale of extended service plans and accessories; the appraisal and purchase of vehicles directly from consumers;
and vehicle repair service.
The CarMax consumer offer enables customers to evaluate separately each component of the sales process and to
make informed decisions based on comprehensive information about the options, terms and associated prices of
each component. The customer can accept or decline any individual element of the offer without affecting the price
or terms of any other component of the offer. Our no-haggle pricing and our commission structure, which is
generally based on a fixed dollars-per-unit standard, allow sales consultants to focus solely on meeting customer
needs.
We have separated the practice of trading in a used vehicle in conjunction with the purchase of another vehicle into
two distinct and independent transactions. We will appraise a consumer’ s vehicle and make an offer to buy that
vehicle regardless of whether the owner is purchasing a vehicle from us. Historically, we have acquired the majority
of our retail used vehicle inventory through this unique in-store appraisal process. We also acquire a significant
portion of our used vehicle inventory through wholesale auctions and, to a lesser extent, directly from other sources,
including wholesalers, dealers and fleet owners. Vehicles purchased through our in-store appraisal process that do
not meet our retail standards are sold to licensed dealers through on-site wholesale auctions.
Our inventory management and pricing system tracks each vehicle throughout the sales process. Using the
information provided by this system and applying statistical modeling techniques, we are able to optimize our
inventory mix, anticipate future inventory needs at each store, evaluate sales consultant and buyer performance and
refine our vehicle pricing strategy. Because of the pricing discipline afforded by the inventory management and
pricing system, more than 99% of the entire used car inventory offered at retail is sold at retail.
Industry and Competition. The U.S. used car marketplace is highly fragmented and competitive. According to
industry sources, in December 2008 there were approximately 20,000 franchised automotive dealerships, who sell
both new and used vehicles. In addition, used vehicles were sold by approximately 39,000 independent used vehicle
dealers, as well as millions of private individuals. Our primary competitors are the franchised auto dealers, who sell
the majority of late-model used vehicles. Independent used car dealers predominantly sell older, higher mileage cars
than we do. During fiscal 2009, the recessionary environment reduced consumers' desire and ability to purchase
vehicles, and it also increased the rate of dealership closures. In the coming year, while the financial strains of the
current economy will likely cause additional dealerships to close or consolidate at a higher-than-average rate, we
expect the industry to remain highly fragmented.
Based on industry data, there were more than 36 million used cars sold in the U.S. in calendar year 2008, of which
approximately 16 million were estimated to be late-model, 1 to 6 year old vehicles. While we are the largest retailer
of used vehicles in the U.S., selling nearly twice as many used vehicles as the next largest retailer in calendar 2008,
we still represented only approximately 2% of the total late-model used units sold. Over the last several years,
competition has been affected by the increasing use of Internet-based marketing for both used vehicles and vehicle
financing. In both the used and new vehicle markets, we seek to distinguish ourselves from traditional dealerships
through our consumer offer, sales approach and other innovative operating strategies.
We believe that our principal competitive advantages in used vehicle retailing are our ability to provide a high
degree of customer satisfaction with the car-buying experience; our competitively low prices; our breadth of
selection of the most popular makes and models available both on site and via our website, carmax.com; the quality
of our vehicles; our proprietary information systems; and the locations of our retail stores. Upon request by a
customer, we will transfer virtually any used vehicle in our nationwide inventory to a local superstore. Transfer fees
may apply, depending on the distance the vehicle needs to travel. In fiscal 2009, nearly 25% of our vehicles sold