CarMax 2012 Annual Report Download - page 11

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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 2012, 90% of the used vehicles we retailed
were 0 to 6 years old.
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. Unlike many other auto
auctions, we own all the vehicles that we sell in our auctions, which allows us to maintain a high auction sales rate.
This high sales rate, combined with dealer-friendly practices, makes our auctions an attractive source of vehicles for
independent used car dealers. As of February 29, 2012, we conducted weekly or bi-weekly auctions at 52 of our 108
used car superstores.
In addition, we sell new vehicles at four locations under franchise agreements with three new car manufacturers. In
fiscal 2012, new vehicles comprised only 2% of our total retail vehicle unit sales.
Our finance program provides customers financing alternatives through CarMax Auto Finance (“CAF”), our own
finance operation, and third-party financing providers. This 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 appraisal and purchase
of vehicles directly from consumers; the sale of extended service plans (“ESP”), guaranteed asset protection
(“GAP”) and accessories; 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, 2011, there were approximately 17,900 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 retail 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 due to a variety of factors, including 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.