CarMax 2011 Annual Report Download - page 15

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quality vehicles; and a customer-friendly sales process. Our strategy is to revolutionize the auto retailing market by
addressing the major sources of customer dissatisfaction with traditional auto retailers and to maximize operating
efficiencies through the use of standardized operating procedures and store formats enhanced by sophisticated,
proprietary management information systems.
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.
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 2011, approximately 85% 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 wholesale used vehicles. Vehicles purchased through our in-store appraisal process that do not meet our
retail standards are sold to licensed dealers through our on-site wholesale auctions. As of February 28, 2011, we
conducted weekly or bi-weekly auctions at 51 of our 103 used car superstores.
In addition, we sell new vehicles at five locations under franchise agreements with three new car manufacturers. In
fiscal 2011, new vehicles comprised only 2% of our total retail vehicle unit sales.
We provide customers financing alternatives through CarMax Auto Finance (“CAF”), our own finance operation,
and third-party financing providers. Our finance program provides access to credit for customers throughout the
credit spectrum. We believe that our processes and systems, the transparency of our pricing and our vehicle quality
provide a unique and ideal environment in which to originate and procure high quality auto loans. CAF focuses
solely on originating loans through CarMax stores, customizing its offers to meet the customer’s risk profile and
ensuring credit availability to support CarMax retail vehicle unit sales.
We provide customers with a full range of other related products and services, including the sale of extended service
plans (“ESP”), guaranteed asset protection (“GAP”) and accessories; the appraisal and purchase of vehicles directly
from consumers; and vehicle repair service.
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. We acquire a significant percentage of our
retail used vehicle inventory through this unique in-store appraisal process. We also acquire a large portion of our
used vehicle inventory through wholesale auctions and, to a lesser extent, directly from other sources, including
wholesalers, dealers and fleet owners.
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, 2010, there were approximately 17,700 franchised automotive dealerships,
which sell both new and used vehicles. In addition, used vehicles were sold by approximately 37,500 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 recent years due to a variety of factors, including the
recessionary environment; the sharp decline in automotive industry sales; and franchise terminations resulting from
the bankruptcy reorganizations of General Motors and Chrysler and the discontinuation of several brands by the
major auto manufacturers. Despite the recent acceleration in dealership closures, the automotive retail environment
remains highly fragmented.