CarMax 2012 Annual Report Download - page 12

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Based on industry data, there were approximately 39 million used cars sold in the U.S. in calendar year 2011, of
which between 15 million and 16 million were estimated to be late-model, 0- 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 2011, 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 include our ability to provide a high
degree of customer satisfaction with the car-buying experience by virtue of our competitively low, no-haggle prices
and our customer-friendly sales process; 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. In addition, we believe our willingness to appraise and purchase a customer’s
vehicle, whether or not the customer is buying a car from us, provides us a competitive sourcing advantage for retail
vehicles. Our large volume of appraisal purchases supplies not only a large portion of our retail inventory, but also
provides the scale that enables us to conduct our own wholesale auctions to dispose of vehicles that don’t meet our
retail standards. 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 2012,
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 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 pay structure aligns
our sales associates’ interests with those of our customers, in contrast to other dealerships where sales and finance
personnel may receive higher commissions for negotiating higher prices and interest rates or steering customers to
vehicles with higher gross profits.
In our wholesale auctions, we compete with other automotive auction houses. In contrast with the highly
fragmented used vehicle market, the automotive auction market has two primary competitors representing an
estimated two-thirds of the U.S. whole car auction market. These competitors auction vehicles of all ages, while
CarMax predominately sells older, higher mileage vehicles. We believe our principal competitive advantages
include our high vehicle sales rate, our vehicle condition disclosures and arbitration policies, our broad geographic
distribution and our dealer-friendly practices. Because we own the cars that we auction, we generally sell more than
95% of the vehicles offered, which is substantially higher than the sales rate at most other auto auctions. Our policy
of making vehicle condition disclosures, 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. We also reach out to customers and potential customers to build awareness
and loyalty through Facebook, Twitter and other social media. Television and radio 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. Beginning in fiscal 2012, we began to transition a
portion of our television and radio advertising to national cable network and national radio programming. In
addition to providing cost savings, this transition allows us to build awareness of CarMax prior to our entrance into
new markets. We are also 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