CarMax 2011 Annual Report Download - page 16

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Based on industry data, there were approximately 37 million used cars sold in the U.S. in calendar year 2010, 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 more than two times as many used vehicles as the next largest retailer in
calendar 2010, we still represented less than 3% 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 by virtue of 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; CAF; 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 2011, approximately 30%
of our vehicles sold were transferred at customer request. Our Certified Quality Inspection assures that every
vehicle we offer for sale meets our stringent standards. We back every vehicle with a 5-day, money-back guarantee
and at least a 30-day limited warranty. We maintain an ability to offer or arrange customer financing with
competitive terms. All of the finance offers by CAF and our third-party providers are backed by a 3-day free payoff
offer whereby a customer can refinance their loan within three business days at no charge. Additionally, we offer
comprehensive and competitively priced ESP and GAP products. We believe that we are competitive in all of these
areas and that we enjoy advantages over competitors that employ traditional high-pressure, negotiation-oriented
sales techniques.
Our sales consultants play a significant role in ensuring a customer-friendly sales process. A sales consultant is paid
a commission, generally based on a fixed dollars-per-unit standard, thereby earning the same dollar sales
commission regardless of the gross profit on the vehicle being sold. In addition, sales consultants do not receive
commissions based on the number of credit approvals or the amount a customer finances. This ensures that the sales
consultant’s primary objective is helping customers find the right vehicles for their needs at prices they can afford.
In contrast, sales and finance personnel at traditional dealerships typically receive higher commissions for
negotiating higher prices and interest rates, and for steering customers toward vehicles with higher gross profit.
In our wholesale auctions, we compete with other automotive auction houses. We believe our principal competitive
advantages include our high vehicle sales rate, our conditional announcement and arbitration policies, our broad
geographic distribution and our dealer-friendly practices. Because we own the cars that we auction, we generally
sell 97% of the vehicles offered, which is substantially higher than the sales rate at most other auto auctions. Our
policy of making conditional announcements, noting mechanical and other issues found during our appraisal
process, is also not a typical practice used at other auctions of older, higher mileage vehicles. Together, these
factors make our auctions attractive to dealers, resulting in a high dealer-to-car attendance ratio.
Marketing and Advertising. Our marketing strategies are focused on developing awareness of the advantages of
shopping at our stores and on attracting customers who are already considering buying or selling a vehicle. Our
marketing strategies are implemented primarily through television and radio broadcasts, carmax.com, Internet search
engines and online classified listings. Television and radio broadcast advertisements are designed to build consumer
awareness of the CarMax name, carmax.com and key components of the CarMax offer. Broadcast and Internet
advertisements are designed to drive customers to our stores and to carmax.com.
We continually adjust our marketing programs in response to the evolving media landscape. We have customized
our marketing program based on awareness levels in each market. We are building awareness and driving traffic to
our stores and carmax.com by listing retail vehicles on online classified sites, such as AutoTrader.com and cars.com.
We believe using these online classified services allows our vehicles to appear on sites that are visited by a majority
of buyers of late-model used vehicles who use the Internet in their shopping process. Our advertising on the Internet
also includes advertisements on search engines, such as Google and Yahoo!
Our website, carmax.com, is a marketing tool for communicating the CarMax consumer offer in detail, a
sophisticated search engine for finding the right vehicle and a sales channel for customers who prefer to complete a
part of the shopping and sales process online. The website offers complete inventory and pricing search capabilities.
Information on each of the thousands of cars available in our nationwide inventory is updated several times per day.
Carmax.com includes detailed information, such as vehicle photos, prices, features, specifications and store
locations, as well as advanced feature-based search capabilities, and sorting and comparison tools that allow
consumers to easily compare vehicles. The site also includes features such as detailed vehicle reviews, payment