CarMax 2010 Annual Report Download - page 15

5
We purchase, recondition and sell used vehicles. All of the used vehicles we retail are thoroughly reconditioned to
meet our high standards, and each vehicle must pass a comprehensive inspection before being offered for sale. In
fiscal 2010, approximately 90% of the used vehicles we retailed were 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 2010, new vehicles comprised 2% 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, guaranteed asset protection 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 proprietary 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, generally 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, as of December 31, 2009, there were approximately 18,600 franchised automotive dealerships,
who sell both new and used vehicles. In addition, used vehicles were sold by approximately 36,500 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. The number of franchised and independent auto dealers has gradually declined over
the last decade. The rate of dealership closures accelerated in 2008 and 2009 due to the recessionary environment,
the sharp decline in industry sales, the challenging credit conditions and the bankruptcies of General Motors and
Chrysler. Despite the recent acceleration in dealership closures, the automotive retail environment remains highly
fragmented.
Based on industry data, there were approximately 35 million used cars sold in the U.S. in calendar year 2009, of
which approximately 15 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 more than two times as many used vehicles as the next largest retailer in
calendar 2009, 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